The retail margin is the difference between your book's selling price at a retail store and the price that store paid to acquire the book (either from you, the publisher, or the wholesaler). For example, a book with a selling price of $10 which the store purchased from Ingram for $6, has a retail margin of 40% - which is the most common industry standard.
Retail price is often the same as cover price or selling price, but it doesn't have to be. Most publishers do not allow you to set your pricing, but some do, like Outskirts Press. If you or the publisher set a price, you are setting the suggested retail price. The retailer can take it as a suggestion. They may, however, sell your book for whatever price they want, which is the list price, or selling price. If the list price is lower than the suggested retail price, the retailer is usually absorbing the difference in their portion of the margin.
Physical offline retailers typically expect a margin of at least 40%. This gives them the flexibility of offering the book for sale (selling it below the suggested retail price) and still making money on the book. A retailer's margin is determined by the price they sell the book compared with the price they paid for the book (usually by buying it from a wholesaler like Ingram). Ingram usually takes anywhere from 10% - 25% for their services. The rest of the distribution discount (aka trade discount) is left for the retailer.
The trade discount is the percentage off the retail price that a wholesaler or distributor pays for your book. Since the retail margin is a portion of the trade discount, the trade discount always exceeds the retail margin. Because distributors typically take 10%-25%, they typically expect between 50% - 70% in order to provide an acceptable margin to the retailer.
As you can see, retail margin, distribution discount, and retail price are interconnected. By having two figures, the third can be calculated.
MAKING DISTRIBUTION WORK FOR YOU
It should come as no surprise that the amount of distribution your book enjoys rests largely upon its trade discount. Generally, the higher the discount, the greater the distribution.
Think about it - distributors want to make money, too. So do retailers. Pretend your book is a pizza. Its retail price indicates the size of the pizza. Now cut it into pieces to divide among all the people involved (the retailer, the wholesaler, the publisher, and the author). This is why it is easier for a book with a higher retail price to accommodate higher distribution discounts -- a bigger pizza is easier to cut into bigger pieces.
While your book's trade discount is only a slice of your pizza (albeit a big slice), it is the entire meal for distributors and retailers, who together must split their piece. The larger their slice (the higher their trade discount, in other words), the greater incentive they have to distribute your book, sell your book, and market your book, etc.
The proper trade discount depends upon each author's intentions, and can vary from author to author just as readily as from book to book. Usually, the higher the retail margin, the higher the cover price, so authors interested in maintaining the lowest cover price possible will often opt for a lower retail margin. For some authors, mainly those planning on selling online, this used to be an acceptable plan -- although nowadays, even online retailers like Amazon are finding creative ways to "penalize" short-discounted books, by artifically delaying shipping, or delaying restocking orders from Ingram. For authors planning on selling offline, lowering a trade discount may end up crippling the book's chances for success.
In other words, authors who long for the best distribution possible both online and off are best served selecting a higher trade discount, even though their cover price will increase accordingly (or their profit will decrease accordingly). Non-fiction or niche-markets are less affected by higher retail prices; and greater distribution is often advantageous in finding those markets.
While some publishers, like Outskirts Press, allow the author to set their own trade discount (we call it a "Price Plan"), all publishers have little control over the resulting retail margin - it will be whatever the wholesalers (Ingram, in most cases) designates. But since Ingram takes a typical cut, the author can play a role in the retail margin by setting an appropriate trade discount.
The "safest" course of action is always to accommodate the distributor's and retailers' wishes, and that means setting a trade discount high enough for them to make money, too. For this reason, we almost always recommend Price Plan 50 to our authors.