Many products change hands multiple times before getting into the hands of their end users. They may go from a manufacturer to a distributor to a retailer. They may even be handled by multiple distributors on their journey through the supply chain. Each link in the chain charges a marked-up price to the next link in the chain, and the retail price is the amount charged to the final — or retail — customer.
TL;DR (Too Long; Didn't Read)
Retail price is the price charged to a retail customer, who will use the product rather than selling it to another party.
Retail Price vs. Wholesale Price
- Amount. A retail price is almost always higher than a wholesale price unless a retailer lowers a price to the point of incurring a loss either to sell off inventory or for promotional purposes. Consumers are accustomed to paying retail, and likely don't even know the wholesale price, so they don't tend to see the higher price tag as an issue.
- Purpose. The purpose of a wholesale price is to provide retailers or other wholesalers with a product whose cost can accommodate enough of a viable markup, allowing each vendor along the supply chain to earn a living. Wholesalers typically earn their livings by selling in volume. The purpose of a retail price is to entice the customer to buy while also providing the retailer with a livelihood.
- Margins. A margin is the percentage of profit that one party earns by selling a product to another. Wholesalers tend to have relatively slim margins, and they earn their livings by selling enough units to cover their costs and make a profit. Retailers tend to have larger margins, taking a larger cut of the retail price of each item in profit, although they usually sell fewer units overall.
Calculating Retail Price
Retailers calculate their retail prices by multiplying the wholesale prices they pay their suppliers by a standard markup expressed in decimals. For example, a retailer using a 50% markup would charge $9 for a product purchased wholesale for $6. There are industry conventions for the appropriate markup to charge on different kinds of products. These are guidelines rather than requirements, but they are based on calculations and observations specific to your industry, so they are a good place to start when calculating retail price.
You may even find that it makes sense to use different markups in different parts of your retail store. For example, in a small grocery store, you might use a 50% markup for shelf-stable products, a 200% markup for spices sold in bulk that customers buy in very small quantities and a 10% markup on toilet paper to keep that price competitive with other nearby options.
Determining the right retail price is both an art and a science. You should study what comparable retailers are charging for the same products, but if you offer something unique and special, you can often get away with charging more for it. Similarly, it sometimes makes sense to charge less if a lower price can offer other benefits, like drawing customers into your store.
Examples of Retail
A retail example is a clothing store in a mall that charges retail prices, as is a farmers' market stand where you buy directly from a grower and bypass the wholesale middleman. Although many business-to-business transactions take place at the wholesale level, businesses make retail purchases as well.
For example, most businesses buy office supplies at the retail level. Even if you buy your paper and pens from a warehouse supplier, if you intend to use them rather than resell them, they fall under the retail meaning of the term.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.