How Do Manufacturers Establish Retail Pricing?

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Manufacturers can establish retail pricing based on the cost of production, focus group information on products or supply and demand for the product. Learn how retailers can get in trouble for selling a product below the established retail price with information from a small business owner in this free video on retail pricing.

Part of the Video Series: Small Business Basics
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Video Transcript

Hi, my name is Justin, with Justin Paul Management, and I'm going to be talking with you today, about how do manufacturers establish retail pricing? This question has come up a lot in the last few years, with some of my clients, because of the 2007 Supreme Court Case, and it was Leegin Creative Leather Products Inc, versus PSKS Inc. I believe that's the name of the case, and in that case, the Supreme Court ruled that a manufacturer can establish retail pricing, and enforce that retail pricing, and they can enforce it through a number of methods, including not selling products to a retailer, and the point being, that there are some cases where that can be considered anti-competitive, but that would usually only be with a very large manufacturer, forcing prices to be so low that it drives out competition, or a large retailer, forcing manufacturers to drop their prices. In both cases, that can be considered anti-competitive, but the Supreme Court did rule that they can, that medium, large, or small manufacturers, can enforce retail pricing, so you can get in trouble in certain cases, if you try to sell your products below what that manufacturer's suggested retail pricing, or just suggested retail pricing, depending on your industry. A key to remember though, a key point to understand, is that manufacturers actually establish retail pricing, in all different manners. It's a bit of a black box. No one really knows exactly how it's done. The manufacturers in some cases, will explain how that's done. It can be as simple as 30% above their cost for production. It can be through focus groups, where they would sit down with customers, and actually talk to them about what they'd be willing to pay, and their perceptions of cheap prices versus expensive prices, market research, competitive analysis, and what their competitors may be selling those same products for. Other examples include, just supply and demand analysis. Can they bring the price down, for the purpose of selling more, or drive the price up, because they can only produce so many at a time? so again, it's a bit of a black box. There's no real good answer, to say this is exactly how it's done. I can't point you to a specific industry, or publication, just understand, that because of the 2007 Supreme Court ruling, that manufacturers can establish retail pricing, they can enforce it, and how that they come up with that, is going to be on a manufacturer by manufacturer basis.

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