Many times, you will come across this line with your distributor/retailer/sales officer saying “Sir, aap ke maal mein rate ka lafda hai”. What this basically means is that your stock is available at a lower rate in the market – this could be another wholesaler, another distributor or anyone else.
A product that has a rate problem means that it is a top selling item in the market, which is good news for your brand team, but VERY bad news for you. When you start creating rate differences, you start playing a price war and there is no end to that - so our advice to you is stay away from it, even if it means a couple of extra gaalis :)
To explain better, let us look at the following scenarios:
You are selling Parle G biscuits. Your distributor is called ABC Traders, and there is a distributor in an adjoining area not too far away called XYZ Traders – however XYZ is not under your jurisdiction.
I will explain landing rates in another blog post, but to quickly explain:
MRP-Retailer Margin = Retailer Landing Price (RLP)
RLP - Distributor Margin = DLP
RLP - Distributor Margin = DLP
DLP –VAT = Company Landing Price (CLP)
For further information on rate calculation please read this.
For further information on rate calculation please read this.
VAT cannot be escaped, hence there is only one way till now where your product can be sold at a lower rate – if the distributor decides to forego some of his margin, which is a rarity.
So effectively the lowest price you can sell at (legally) is the DLP, and illegally is the CLP or at a margin that is lowered so that your distributor gets volumes and you meet your numbers (not recommended, will explain this later); right?
Let me introduce you to this necessary evil called “Trade Schemes”. From time to time, every company will have a scheme which looks as such:
144 pcs – 6% discount
72 pcs – 4% discount
24 pcs – 2% discount
Then it is possible that Mr. Agarwal, a wholesaler may buy 144 pcs from ABC Traders for a 6% discount, and then sell it to the retailers at the same price again, even if they buy one piece. This is called rate undercutting. What effectively happens is that since wholesalers work on volume and not value, they don’t give a shit if they’re undercutting you, as long as they are getting the volumes and their regular margin.
I will explain this pictorially like a true MBA:
But then why bother, because irrespective of where the retailers buy from, your distributor is getting the business right?
The sales planning team in your company will be undoubtedly smart, but Mr. Agarwal in the market is smarter. Many a times, you will have schemes running in an adjoining state and/or you will have schemes running in the metros. And metros will have one big wholesaler, XYZ traders who will sell at a miniscule margin but with high volumes to these little wholesalers in your town. So what will effectively happen is that it is your company’s business that is growing, but will not show in your numbers and show in your metro/adjoining state counterparts numbers. Which would mean that your boss will call you the same night and abuse the hell out of you and will make you think that your MBA education was as useful as learning trigonometry in the 9th grade. Which would mean that your “Stock flow diagram” would look like this.
And hence you will be fucked and the ASM in the metro will have a life AND complete his numbers. So please kindly avoid as far as possible – whatever it takes, as long as there’s no undercutting happening. Once it starts, it doesn’t stop so beware.
Another way of rate undercutting is this: Your wholesalers will wait for your company to come out with a huge scheme (usually company year ending or slack period) and will stock up like there is no tomorrow. And then, he will fuck you over. Because he will hoard the same stock and sell it at the same discount later to your very own retailers – you can’t do anything about it, because company schemes are for a one month period only, but wholesalers can bill it at a discount anytime they like.
Scenario 2: When the company’s own sales personnel undercut in order to achieve their targets:
However unviable this may seem, this is a practical phenomenon almost everywhere. Imagine Mr X is the Sales Officer of a company which sells Click Shampoo which is one of its major selling items in the market. The company has rolled out a slab-scheme in the market which looks something like this:
Slab 1 : On purchasing 0-25 Cases, a silver coin worth 1500/-
Slab 2: On purchasing 26-50 Cases, a gold coin worth 4000/-
Slab 3: On purchasing 51-100 Cases, a gold coin worth 10,000/-
A smart Sales officer will first break the slabs down to nett rates which basically means:
On Slab-1, there is an additional discount of Rs 60/- per case
On Slab -2, there is an additional discount of Rs 80/- per case
On Slab-3, there is an additional discount of Rs 100/- per case.
Now imagine 1 case of Click Shampoo’s nett rate (after deducting margins and primary schemes and excluding this additional QPS) is Rs 1100 per Case
Now Mr. X (being onto his last week of the Sales cycle and realizing that he is way behind his brand target for Click Shampoo) will slog his ass out in the market and find out that the rate prevailing in the market is to the tune of 1070-1080 per case.
He will convince a particular wholesaler who has the capacity to buy 20 cases saying, ‘Aap 30 peti loge to rate laga doonga’. Similarly he will go to 2 more wholesalers and say the same thing for 30 and 40 cases respectively.
By the company’s rule book, these whole salers had to be sold at 1020 per case respectively (fitting into slab-2). Instead, what Mr.X has done is, he has shown 1 bill-cut from the distributor’s end (obviously to a fictitious wholesaler) of 100 Cases and given the rate of 1000/- per case to all the 3 wholesalers.
What this means is, the scheme which was intended to run in the market in a certain way, has been defeated in its purpose for the target achievement of its own sales guys. This is a never ending cycle because once you show the way to a wholesaler, you can never get out of it….Worse if in the future you attain the path of righteousness and deny twisting schemes and rates, he would buy it from a near-by (read another SO’s territory) and keep selling at a lower rate and you are doomed.
Scenario 3: When the distributor cuts rates in order to garner his volumes:
Generally in many FMCG companies, there are 2 channels of distribution for Urban & Rural respectively which work as mentioned below:
Typically the Urban Distributor’s margin would be 6% which while the Rural Super-Stockist’s margin would be 8% of which 3% is for him to keep and 5% to be passed on to the Rural Sub-Stockist.
Now imagine there is a Distributor sitting in Jalandhar who earns 6% margin and will therefore at best give a 2-3% margin to whole-sale (urban) and sell his stock.
However, a Super Stockist in Phagwara, who has no business in Jalandhar as far a Click Shampoo is concerned, but still supplies his Coal-gate stocks in Jalandhar, will typically have a couple of ‘Mota-Wholesalers’ whom he sells Click Shampoo at the rate he would sell to a sub-stockist i.e. by passing on 5% Margin and will very easily show in his books that he sold it to some god-foresaken sub-stockist in a god-foresaken village of Punjab.
This would generally happen without the knowledge of the company sales guy (if the sales guy is responsible for both the territories i.e. Jalandhar & Phagwara) and also if there are different people (Sales Officers) looking after the mentioned territories then this will generally be aided by them.
Scenario 4: Cross-Geography Under-Cutting due to difference in VAT rates:
Assume that there is a distributor of Click Shampoo in Ambala in Haryana (VAT Rate-12.5%)
Similarly there is another distributor for the same product in Saharanpur in Uttarakhand (VAT Rate – 10% and just a 40 odd kilometers away from Ambala.
Therefore the Distributor Landing Price in Saharanpur will be lesser owing to the 2.5% VAT difference as compared to the DLP in Ambala.
Hence every opportunity for the distributor in Saharanpur to go and sell Click Shampoo in Ambala at a lower rate without foregoing his margin.
This procedure, though is illegal and is done only through ‘setting and jugaad’, but is very common.
Similarly, these are just some of the common ways of under-cutting prevailing in the market. There are many more, and the wicked mind in the market keeps exploring even more ways to under-cut. Just the other day, on a table of drinks, I got to know about a Sales Officer, who during his early days claimed to have undercut in the following way:
(For that you need to know this, 1 Case of Click shampoo = 72 strips (also called ‘ladi’) and 1 strip = 20 sachets)
‘Sir, mera 1 tagda wholesaler tha. Woh 150-200 peti ek saath uthata tha. Maine company ki jo tape lagti hai peti mein, waisi tape jugaad ki. Peti ko neeche se khol ke 1 ladi nikal kar, wapis tape laga deta tha.Kaam dhyaan se karna padta tha. Lekin usko aaj tak pata nahi chala. Is tarah rate bhi 12-15 rs per peti kam ho jata tha’
Improbable as it may seem….but who knows.
Have you had any experiences in which your territory has been undercut in a different way? Please share in the comments!