Introduction
Here's the reality - pricing can be tough, even for the most seasoned business owner. Knowing how to value your products and meet the need of your customer base is an ongoing challenge.
Throw in an ever-evolving marketplace, and it's easy to see why pricing strategies can be challenging to nail down.
Fortunately, one approach that businesses have been relying on for years is RRP (Recommended Retail Price) pricing. It's a strategy that allows you to remain competitive while taking advantage of existing market prices and volatility.
But what is RRP price exactly - and how can eCommerce sellers utilise it to their advantage?
What is a recommended retail price (RRP)?
As an eCommerce seller, what goes into your overall pricing strategy? Do you set prices based on competitor costs, or do you take a more active, smart pricing approach? Knowing where to set the bar in your pricing can be challenging, especially if you are launching a new product to market.
Enter RRP - or Recommended Retail Price. This pricing strategy takes into account the actual market value of a product and allows businesses to competitively price their products without sacrificing profitability.
In essence, RRP is the price at which suppliers suggest you should sell the products they provide. This figure is typically calculated from the cost price and other factors, such as market trends and competition.
In the EU, suppliers can't fix prices at the RRP - as the price is simply a recommendation to the retail. In the US, suppliers can set a floor at the MAP (Minimum Advertised Pricing) price. However, RRP can help create a sense of value and guide sellers toward competitive pricing.
Why is the RRP important to know?
RRP plays an essential role in eCommerce because it allows businesses to remain competitive in pricing. By considering industry standards and market conditions, RRP can help sellers price at a level that won't undervalue their products but isn't too high to drive away customers.
But RRP offers a bit more than just competitive pricing. Knowing how to calculate and analyse RRP prices, sellers can take advantage of:
1. A standardised starting point:
RRP helps you create a standardised starting point for pricing products. Without it, sellers are left to their own devices when determining the price of items - leaving them vulnerable to overpricing or undercutting competitors.
Rather than relying on guesswork or market trends, you can use RRP to set a starting point for pricing products.
2. A better understanding of the competitors in the digital market:
It's important to understand your competitors and their pricing strategies in the digital market. Thus, the rise in the number of solutions that help in tracking competitor pricing.
Knowing your RRP gives you helpful insight into consumer expectations and behaviors, allowing you to adjust your prices accordingly. And when it comes to optimising prices, RRP can be a great starting point.
3. A benchmark for customer loyalty and brand reputation:
Customers who understand your recommended retail prices are more likely to trust the value you provide. This helps build a loyal customer base and strengthen your brand reputation.
Plus, when shoppers know that your RRP pricing is fair, they are less likely to be influenced by competitor prices and more likely to remain loyal to your business.
4. A clearer understanding of your cost structure:
Knowing the RRP for a product allows you to consider your costs and overhead when setting prices. This eliminates guesswork, allowing you to set profitable and competitive prices. And when you have thousands of products in your inventory, accurate RRP pricing helps ensure you make the best business decisions.
What is the difference between RRP and MRP?
You’ve likely heard the terms RRP and MRP (Manufacturer’s Recommended Price) used interchangeably - as they are often the same figure. However, they differ in that RRP is a recommended price point set by suppliers, while MRP is a recommended price point set by manufacturers.
The MRP method is often used by larger companies with many products in their portfolio. But even eCommerce companies with a few hundred products can benefit from the MRP method. By setting a price based on the cost of production and supplier-recommended prices, you can ensure your prices are competitive in the market while giving yourself an adequate profit margin.
Both are recommendations - meaning that businesses can't be forced to use them - but they should be considered when setting prices.
How to calculate RRP from cost price
Typically, RRP is offered by suppliers or manufacturers. But what if you need to calculate an RRP for your own products?
While there isn't a one-size-fits-all formula, a standard method involves marking the cost price by a certain percentage to account for overheads and profit margins. Here's a general guideline on how you could calculate the RRP:
- Calculate the total cost: Understand the cost of production or purchase, shipping, taxes, and other direct expenses associated.
- Account for Overheads: These are indirect expenses like rent, utilities, salaries, and marketing that are vital for business operations. While they're not tied to any specific product, they must be factored in. Divide total overhead costs by the number of products sold to calculate the cost per product.
- Determine Desired Profit Margin: To calculate profit margin, determine your profit percentage in the final retail price. This may vary based on industry, product, and strategy (20%, 30%, 50%, or more.)
A standard formula for calculating the RRP could look something like this:
RRP = Total Cost + Overheads + Desired Profit Margin
It's important to note that your RRP is the starting point, and retailers are free to set their prices based on demand, competition, or other factors.
How is the RRP price used?
Let's consider a common scenario many sellers face: launching a new product. When the product is ready to be sold, the seller must decide on a price point that covers their costs and is attractive enough for customers.
In this scenario, the RRP can provide a helpful baseline. The seller can use the recommended retail price as a guide and adjust it accordingly depending on their target market and what they want to achieve. Not only does this make it easier to decide on a price, but it also ensures that the product's pricing is still competitive.
And when it comes to promotions and discounts, the RRP can help sellers to protect their margins. For example, by offering products at a discounted price that is still above the recommended retail price, sellers are upholding the perceived value of their products and protecting their profits.
RRP can also be put to great use by an eCommerce company, as a pricing safeguard, during an automated pricing strategy that is considering competitor prices. If your competitor makes a mistake, and incorrectly prices their own products significantly above RRP, you most likely won’t want to allow your price to follow their price in this situation. Therefore, adding RRP as a price ceiling (maximum price), in your own automated pricing rules, is a good and very easy way, of mitigating the risk of your competitor's pricing mistake becoming your pricing mistake.
Can suppliers enforce an RRP?
No - and it's essential that sellers understand that if they're going to use RRP as a pricing strategy.
Suppliers can make recommendations and suggest prices, but it's ultimately up to sellers to decide what value they want to assign to their products. It is illegal for suppliers to enforce an RRP, as this could be considered price fixing.
To avoid ending up in a sticky situation, always document your negotiations with suppliers. This will help you protect your business in the long run - and prevent any accidental violations of competition law.
The rules for RRP pricing
When it comes to setting and using a recommended retail price, there are some crucial rules that eCommerce businesses need to be aware of.
1. Know How to Navigate Comparative Pricing and RRP
The concept of "anchoring" is an essential part of RRP pricing. This means that it's important to compare the prices of your products to those of competitors to ensure you're hitting the right price point.
Anchoring allows customers to understand the value of a product by providing them with comparison points - and makes it easier for them to decide if it's worth purchasing.
It's legal to show a discount from the RRP, but ensuring that your RRP accurately represents what other products are going for is essential. Misleading the consumer regarding RRP could lead to fines or other legal repercussions.
2. Stay Compliant with Competition Law
EU Competition Law primarily prevents anti-competitive practices that could harm consumers and stifle innovation.
When using RRP, sellers must be careful not to participate in practices that could be seen as price fixing. This means a manufacturer cannot enforce an RRP and punish retailers for selling at a different price. The RRP is merely a recommendation, and retailers should be free to set their own prices.
3. Avoid Misleading Practices
Under the Unfair Commercial Practices Directive (UCPD), businesses in the EU are prohibited from engaging in misleading practices. This includes falsely inflating the RRP to give the illusion of a discount or a bargain, a practice known as 'fictitious pricing.'
Any use of RRP should be transparent. Customers should not be misled about what the RRP represents. If a business uses RRP, it must be clear that this is the manufacturer's suggested price, not necessarily the market price.
4. Follow the Free Market Principle
Ultimately, the EU operates under the principle of a free market economy, which extends to pricing.
While a manufacturer can suggest a retail price, it cannot enforce it. Each retailer can set prices based on their strategies and market conditions - so long as these do not violate competition law.
Will there be a time to go below the RRP?
Absolutely! There can be instances where going below the Recommended Retail Price (RRP) may be beneficial or even necessary for your business. Here are a few situations where you may find going below the RRP price is an effective method:
- Competitive Marketplaces: In competitive sectors, pricing below RRP can give an edge. A lower price can attract more buyers but ensure profitability isn't sacrificed.
- Inventory Clearance: If you're overstocked or have inventory that isn't selling, you may sell below the RRP to free up warehouse space and improve cash flow. This is a common strategy during clearance sales or end-of-season sales.
- Promotional Events: Discounting below RRP as a sales promotion can attract new customers, boost sales volume, and increase brand awareness. Plan the timing of price changes carefully.
- Customer Loyalty Programs: Offering products below RRP to loyal customers can effectively reward them for their loyalty and incentivize repeat purchases.
- Product Lifecycle Management: If a product is at the end of its lifecycle or being replaced by a newer model, selling below RRP can help to clear out the remaining stock.
Will there be a time to go above the RRP?
Just as there are instances where going below the RRP can be beneficial, there are also times when you may want to go above it. Here are a few potential scenarios:
- Limited Availability or Exclusivity: High demand + short supply = higher prices. Basic economics - and RRP isn't always a good measure here.
- Value-Added Services: If you provide significant value-added services alongside the product, you might justify a higher price than the RRP. This could be anything from superior customer service, faster shipping, extended warranties, or bundling with other desirable products or services.
- Premium Branding: If your e-commerce business is positioned as a premium or luxury brand, your customer base might be less price-sensitive. In such cases, pricing above RRP can enhance your products' perceived quality and desirability.
- Geographic Considerations: Sometimes, geographic factors may allow pricing above the RRP. If you're selling a product in a market that is hard to find or where import costs are high, customers may be willing to pay a premium.
Remember that consistently pricing above the RRP can potentially alienate some customers, particularly those who are price sensitive or those who comparison shop.
It's crucial to understand your customer base, their purchasing power, and their willingness to pay, as well as the competitive landscape of your market.
Should you use it in your pricing strategy?
At the end of the day, should the RRP price play into your overall pricing strategy? The answer, like many pricing elements, is "it depends."
While you should always consider any pricing recommendation alongside the needs of your customers and the economic conditions of your market, it may not be necessary to adhere strictly to the RRP pricing model for all products and services.
The key is understanding your customers, their buying power, and what they are willing to pay for the product or service you are offering.
Combine that with the tried-and-true pricing strategy of supply and demand, and you can create a pricing model that meets the needs of both your customers and your business.
FAQ
Does RRP price include VAT?
A common question is whether the RRP price includes VAT or not. The answer depends on the country where the product or service is sold.
In Europe, VAT is included in the RRP for pricing transparency and maintaining consumer trust. Not including VAT may cause confusion or frustration when the final price is higher at checkout.
However, when communicating with retailers or wholesalers about RRP, businesses might sometimes refer to a price before VAT, especially if the recipients are VAT-registered and can reclaim the tax.
Do retailers have to sell at RRP?
No - retailers are not obligated to sell at RRP.
It is illegal to enforce a minimum or maximum price in the EU, so if the retailer chooses to sell the product for less than the RRP, this is their prerogative.
Learn RRP and more with BlackCurve
As an online seller, maximising profits means finding effective pricing strategies for your products and services. An RRP (Recommended Retail Price) is the ideal starting point for setting prices and ensuring customers are getting fair deals. Armed with this knowledge, you can confidently adjust your pricing strategy to create the perfect balance between profitability and customer satisfaction.
Sellers should approach RRP with caution - considering their customer base, the competitive landscape of their market, and other indicators that will help inform their decision on whether or not to use an RRP pricing strategy.
Want to learn more about how to price your products and grow your business? BlackCurve provides robust digital solutions to help European sellers maximise their profitability. Our insightful analytics and feature-rich platform make it easy to adjust pricing strategies on the fly, stay ahead of the competition, and improve profits.
Get in touch with us today to learn more about how we can help you grow your business!