# 5.7: Calculating Suggested Retail Price (SRP)

- Page ID
- 17835

\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\)

## Calculating the Suggested Retail Price (SRP) for your product will be done using a model.

- While the model generally does a reasonable job estimating the SRP, note that some calculations may need to be adjusted for your product SRP to be realistic.
- Adjustments are common for products with inexpensive ingredients and expensive packaging or possibly for products with intricate processing steps.

- Calculating ingredient costs for your product should be done based on your package size.
- Make sure to do one calculation at a time and check your work.

## Ingredient Pricing

- The first step to determining your product’s suggested retail price
- Submit your ingredient list to faculty for pricing
- A Google Sheet is provided for your team to submit your ingredient list.
- Make sure to include all of the details (product name, code number, descriptors for grocery ingredients)
- Faculty will contact suppliers for ingredient pricing (and will fill in the price per unit in the Google Sheet)
- Watch the units and details with pricing.

- Method for Supplier Pricing
- Request ingredient pricing for small to medium-size production amounts – this equates to pallet size for gums, truckload quantities for flour, sugar, etc.
- Pricing is typically given as f.o.b., so some transportation cost is added to the base price. Transportation costs can vary widely, so an estimate is used.

- Method for Grocery Store Prices (Secondary Option)
- Generally, take 60-70% of the grocery store price to get an ingredient cost
- Sometimes ~90% of bulk online/restaurant pricing is used

## Estimated SRP Calculations

- Start with your formula in percent by weight.
- Calculate the weight of each ingredient in pounds (or gallons for a few fluid ingredients) per package amount.
- Calculate the price of each ingredient in one package. Water (as long as it is not specially filtered) is considered part of the overhead cost and does not need to be part of the calculation.
- Add ingredient costs to get the total cost of all of the ingredients in one package.
- Calculate manufacturing costs by starting with a 55% base of the ingredient cost for manufacturing costs. Additional costs that may need to be added include:
- 5% for each unit operation that the plant considers beyond “typical processing”, i.e. special equipment, additional processing steps, etc.
- NOTE: Please check with faculty for processes that require an additional 5%.

- Add 2% for each of the following: if you have refrigerated ingredients, refrigerated products, frozen ingredients, and/or a frozen product.
- Add 15% for packaging costs, add 20% for unique or complex packaging (generally considered anything more than a bottle, bag, or bag in box)

- 5% for each unit operation that the plant considers beyond “typical processing”, i.e. special equipment, additional processing steps, etc.
- Add together ingredient costs and manufacturing costs. Then calculate an additional 4% for marketing and advertising costs.
- Calculate company cost to stores by adding 40% for company profit of the ingredient + manufacturing + marketing & advertising costs.
- Calculate SPR per package by adding 35% for store markup.

## Example Calculations (note that is it helpful to wait and round values at the end of the calculations)

Cocoa Dry Mix | Batch Wt. | % by wt. | Weight/Box (8 – 26 gram servings) | Weight/Box in pounds. | $/pound | $/Box |

Sugar | 288 | 41.9 | 87.0688 | 0.19178150 | 0.41 | 0.07863041 |

Cocoa | 80 | 11.6 | 24.1904 | 0.05328282 | 0.89 | 0.04742171 |

Non-fat Dry Milk | 225 | 32.7 | 68.0160 | 0.14981498 | 0.99 | 0.14831683 |

Vanilla Powder | 20 | 2.9 | 6.0528 | 0.01333216 | 20.00 | 0.26664317 |

Marshmallows | 75 | 10.9 | 22.6720 | 0.04993833 | 0.85 | 0.04244758 |

688 | 100.0 | 208.0000 | 0.45814978 | 0.58345970 |

Ingredient Cost per Box | $0.583 | ||
---|---|---|---|

Manufacturing Cost | $0.583 x 70% = $0.408 | + $0.583 = | $0.991 |

Marketing & Advertising | $0.991 x 4% = $0.0396 | + $0.991 = | $1.031 |

Company Profit | $1.031 x 40% = $0.412 | + $1.031 = | $1.443 |

Store Markup | $1.443 x 35% = $0.505 | + $1.443 = | $1.948 |

The model shows a suggested retail price of $1.95 per box of 8 servings of hot cocoa mix. That seems about right based on current grocery store prices. The SRP will likely fluctuate based on ingredient and transportation costs.

## After Calculating Your Suggested Retail Price (SRP)

- Check your work and ask yourself, does your cost make sense?
- Compare your SRP to competing products
- Let faculty know your SRP
- If your SRP is lower than expected, what is the reason why?
- May need to adjust costing to account for model weaknesses

- If your SRP is higher than expected, what are the contributing factors, and could you adjust your ingredients/process/company profit to reduce your SRP?