Posted by Rick Denney on August 19, 2001 at 11:22:23:
In Reply to: Re: "Retail Value" posted by Bill on August 19, 2001 at 10:34:46:
During my failed attempt in a previous life to publish tuba music, I had one highly respected music-store operator and industry insider tell me that I should set the retail price at ten times my production cost. Yes, ten times (1000% markup). Why? Let's look at how that retail price got split up, assuming a price of $10. The engraving and printing (if I sold all my stock, which I never did) cost me $1. The composer got another $1 or $1.50. The rent on my office, the telephone, and so on, got $2 (if I accounted it fairly, which most folks who do business as a hobby don't). The interest I would have earned putting the money in the bank instead of investing it in a slow-moving inventory cost me another buck (this is called the opportunity cost). So, I've spent $5 already--five times my production cost. And that's the price I sell it to a distributor (he gets a 50% discount off retail). The distributor lists it in his catalog, and acts as my agent selling it to retail stores. The stores get it for $6, which means the distributor gets about 10% for doing a service I could not do on my own. The stores may sell it for retail, but they will likely have some left at the end of the year that they blow out in a big sale, and so on, and may make $3 on the thing. But they have endured high costs, because they operate a storefront, pay employees, and maintain an inventory.
You'll notice that the one person in the analysis above who doesn't make any money is me. That's why I don't do it anymore.
It's a wonder things cost as little as they do.
The short answer to the original poster: A very high retail value allows the final sale to go to the highest bidder, which finds the price that the market will bear. If the retail price is set too low, it may be constrained to produce less revenue than it might have. You can always discount something if a good buyer balks at the price, but you can never recover the money a buyer might have been willing to pay but didn't have to.
Rick "thinking folks keep confusing price and cost" Denney