Friday, July 6, 2012

Understanding Price Calculation & Trade Schemes in FMCG


Time to absorb some basics on FMCG Pricing and Trade Schemes – something that prominently differentiates FMCG from other sectors and yet something that was unfortunately left out in our B-School Curriculum.

Before we get into the mathematics part of it, let us re-visit the flow of goods from one layer to the other in the FMCG framework - This will be explained in detail in the next blog post

From Company->Dealers/Distributors/Stockists->Whole-Salers/Retailers->Customer

Please read this post before you read any further.

Now before exploring the above mentioned transitions, we need to clarify ‘Trade Schemes’. Trade Schemes are usually additional support in terms of Sales Promotion or Trade Promotion or Temporary Price Reduction extended to the trade considering quite a many factors like Competitor’s Activities, Seasonality, Company’s own agenda etc. etc.
Trade Schemes are of 2 types: Primary Scheme & Secondary Scheme (Not to be confused with the Primary Sale & Secondary Sale mentioned above). You can read more about them here
.
These schemes vary from brand to brand (of a company) and change on a monthly sometimes fortnightly basis. Just one more thing before we finally explore the pricing aspect mathematically, there are generally 2 methods by which pricing of products is done within a company: Mark-Up or Mark-Down and on that basis, the schemes, margins etc. are arrived at for its trade. The only difference between the 2 is the reference which they use; Mark-Up would use cost price as the reference and Mark-Down would use Selling Price as the reference.

 Now let us consider a company ‘XYZ India Pvt. Ltd.’ Which owns a brand ‘X’. We shall see how we arrive at the various price-changes this brand X undergoes as its ownership changes from layer to layer.

Assuming MRP of 1 unit of X is Rs 150/-. 1 Case of X comprises of 24 units of X and hence 1 case of X is valued at Rs 3600/- (at MRP).
(MRP is the Maximum Retail Price at which the product can be sold to the customer)

The company decides to roll-out a primary scheme of 4% and runs a Secondary Scheme in the form of QPS. The QPS is designed for whole-sale and high volume retail outlets and is as follows:
12 pcs to 1 case – Additional Discount of 8%;
1 case to 2 cases – Additional Discount of 9%;
3 Cases and above – Additional Discount of 10%

Assuming the Distributor Margin of the company is 6%; Retailer Margin for Product X is 15% and the company follows a Mark-Up Pricing:

We shall first see the pricing dynamics of 1 unit of X so assume a retailer who purchases just 1 unit of X:
MRP of 1 Unit of X is Rs 165. So we will arrive backwards at all the price-points from the MRP (Which is known as Reverse Calculation)

Since the retailer gets 15% margin and its mark-up pricing hence putting it in equation, we would arrive at RLP (Retailer Landing Price)
RLP = MRP- Retailer Margin (RM) – Primary Scheme – Secondary Scheme
DLP (Distributor Landing Price) = Retailer Landing Price (RLP) - Distributor Margin (DM)

Therefore in this example since the company follows Mark-Up Pricing:
RLP = 165 – 15% of RLP – 4% of RLP – 0     (Secondary Scheme would be 0 for purchase of 1 unit)
 RLP + 15% of RLP + 4% of RLP = 165
Hence RLP = 165/(1.19) = 138.65
Similarly, DLP = 138.65 – DM
 DLP + 6% of DLP = 143.47
 DLP = 143.47/(1.06) = 130.8
Similarly when you go to a wholesaler and request him to purchase 4 cases of X, he would ask kya rate hai: you would say:
“165 MRP hai, aapko padega (165/1.29 = 127.9) 128/- mein. (Since he is entitled to 10% Secondary Scheme as per the slab above)”

We are not explaining Mark Down pricing (Forward calculation) as most companies follow Mark Up - if you want us to explain this, let us know.

The only catch here is in the first look, you would say the DLP itself is 130.8 then how come the RLP in the above case is 128 so does that mean that the retailer is getting at a lower price than distributor??
The answer is No. The distributor has extended a 10% of Secondary Scheme to the retailer which has not been factored in his invoice from the company and so he claims those 10% back from the company and keeps his margin intact. And therefore this is the distributor’s investment that he is making for the company and hence The Average Claims Outstanding is factored while calculating his RoI.



21 comments:

  1. I joined as a Sales Trainee in Gorakhpur n frankly i am not able to get lot of stuff, specially because my senior / mentor is too busy with his numbers.
    would really be grateful if you can have post on these issues -

    1. What is Reconciliation ? My senior was doing for the month end and he was taking stock datas for all SKUs. Why was he doing this and what it is?
    Also, one more term i heard is 'Distributor Holding', can you throw light on this?

    2. I have heard so many times dwhere in RSM will be saying, this scheme we will be given through Head Office and some other scheme is through our budget.

    And how is HO budget different from ASM scheme budget ? Does ASM gets some separate money or he takes from distributor?

    3. Also, we often have scheme 3+1, 10+2 on pcs.
    wherein 2 pcs are free with 10. How do we calculate what is additional margin retailer

    4. Can you please tell me how can he make a new distributor within 10-15 days? Is the process so simple? Why will a new person agree to become distributor and how to find such people? Recently my senior made ready 2 distributors within 3 days of my ASM telling him... but i was wondering how he did it?

    5. What is this Super stockist? I understand this is to get more margin, but how does he works? and how his margin is calculated?

    Similarly, Who is this Re-Distributor? How is he different from Distributor?

    6. Also, why there is so much hassle in month end? Often, there is overload of stocks even those that are slow moving? How will a SO get those stocks moved in market? Would really appreciate if you can put a post about the challenges of month closing and the after effects.

    7. My friend gave the promotion stock to one modern trade chain and finished the stock for him. He was happy but the ASM told him why you gave one person all stock, be intelligent don't like fool.

    What did he meant by that. my friend finished his stock even then ASM not happy?

    8. Also, please please please explain this WHOLESALE group ?

    I do my normal beat and these retailers take only as much as they need. My remaining targets are being done by my Mentor who just calls his salesman and say some words, and MAGIC... the salesman gives it out to wholesalers...for some deals...

    what are these deals and who are these wholesalers... Please explain WHOLESALE margins in details and about these WHOLESALERS?

    and what are SEMI WHOLESALERS....

    9. Finally,
    Will really appreciate if you can come up with seperate section like -

    MONTH IN A LIFE OF AN ASM
    MONTH IN A LIFE OF A DISTRIBUTOR
    MONTH IN A LIFE OF A SALES OFFICER

    will be interesting to need what these people do in a month, what tricks they do to be ahead in game and what situations or pressures these people face and how they overcome them

    I hope you would find time to post answers for my queries.

    Your blog is wonderful, and really helpful in understanding fmcg sales... please please keep continuing and dont stop.



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  2. Hi Ravi,
    Really sorry for the late reply, but I shall try and answer your questions to the best of my knowledge:

    1. Reconciliation: The tallying between system stock and ground stock. Ideally, this should always tally but due to certain factors such as leakage, sometimes it doesn't.

    2. Difference in budgets: To the best of my understanding, there are pan-India budgets that are given out to boost sales of a certain franchise - these are through HO. However, sometimes ASM's might get budgets depending on various factors - increased investment of competitors, certain brand activations in their territory etc. These are given out locally.

    3. Rate Calculation: This is explained in a separate blog post.

    4. Appointing new distributors: It is easy to get new distributors if you represent a respected company. However, it is something that needs to be thought through carefully - you can create a new one and 'thoko' primary to complete your monthly numbers but it is not a sustainable solution: Anyone who has had to shut down a distributor and attend a trade association meeting shall vouch for that :)

    5. Super stockist: Thanks for this one, this creature merits and shall be explained in a separate blog post.

    6. Stock management and month end: Noted, there shall be another blog post (keep the ideas coming!)

    7. Stock distribution: Promo stocks are meant for all - if you pump in to MT, your GT will get pissed off and vice versa (unless there are special channel wise promos). So always distribute as evenly as possible - your ASM is a smart man

    8. Wholesale: This demon shall be explained with super stockists

    9. Noted

    Thank you very much for your feedback, hope this helps you! Do spread the word - will continue writing and getting guest writers to write!


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  3. Dude nice blog, i always wanted to start one myself.

    Just to add little information to your blog, that is faintly relevant to the topic.

    Retail Schemes.. are often given by the company to boost sales..

    However, there is a term 'Market Bigaad di' ...

    This means that as a good brand, you should put your budget evenly between Brand Building and Trade Schemes.

    Because if you ignore brand building (aka advertising) and give all money to Retailers as discount, freebies and schemes... then later on if you want to invest in ATL, you would like to cut down on your Trade expenses, and retailers will refuse to take a cut in that.

    Hence, don't spoil the market by relying on just schemes. (specially if you have a good distribution, then schemes should not be your only way to stay in market)

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  4. Dear Sir

    I just joined company as Asst. Brand Manager. I have no Sales experience and was in Advertising firm before.

    Need 2 help from you sir -

    1. My company follows Mark Down pricing. The product MRP is 35 Rs.

    The margins are like 28% (Retailer) , 6% distributor & also scheme of 4+1 for retailer.

    How to arrive at landing price for retailer and distributor in such case?

    2. When i go for Market Visit i see if the salesman has put posters in shop or not. But my boss wants me to do more.

    What all things i can do or ask salesman when i go to market visit with him, since i dont know much about sales.

    3. In Wholesale / Retailer the shopkeeper is saying your rate is too high others give lower rate. My brand also does not have much pull. What can i do in such case to make retailer put the product?

    4. Also, with gift article scheme. Suppose i give a wall clock worth 200 rs with 1 box of my product worth 1000 Rs. (my product is 50 rs.)

    for 18% retail margin, 4+1 scheme, how is final margin / landing price calculated for retailer?

    hope u answer these questions... this mark down pricing so difficult :(

    ReplyDelete
    Replies
    1. Hi Harinder,

      Let me help on this,

      1. My company follows Mark Down pricing. The product MRP is 35 Rs. The margins are like 28% (Retailer) , 6% distributor & also scheme of 4+1 for retailer.

      How to arrive at landing price for retailer and distributor in such case?

      A: First and Foremost thing, trade scheme of B4G1 shall not be passed on per pc to retailer/Distributor it should go on purchase of multiples of 3, now lets look at retailer margin(35/1.28=27.34), Distibutor Margin(25.79/1.06=25.79). For your company Distributor billing will be @25.79 per pc and trade scheme cost will be seperate per pc, or to arrive at net DLP it will be 25% lesser since offer is B4G1(1/4=0.25) so it becomes(25.79/1.25=20.63)
      2. When i go for Market Visit i see if the salesman has put posters in shop or not. But my boss wants me to do more.

      What all things i can do or ask salesman when i go to market visit with him, since i dont know much about sales.
      A: Check his TC(Total Call)-PC(Productive Calls), Check Days of Inventory at store to know the hygiene and understand accordingly frequency of supply required. Check SKU Distribution in each store, there are many things to do, try starting with these.

      3. In Wholesale / Retailer the shopkeeper is saying your rate is too high others give lower rate. My brand also does not have much pull. What can i do in such case to make retailer put the product?
      A: If you are late entrant and your company product is no special to competition brand, you should try penetration strategy at start, try with lower price and better service, good credit period compared to competitors, do some investment in terms of visibility or stock display. If your product is of high quality and unique roll off to consumer engagement activity rather than pushing it to retailer.

      4. Also, with gift article scheme. Suppose i give a wall clock worth 200 rs with 1 box of my product worth 1000 Rs. (my product is 50 rs.)

      for 18% retail margin, 4+1 scheme, how is final margin / landing price calculated for retailer?
      A: you are giving 10 Rs per pc scheme, so (retailer landing=42.37) and if he buys a box he would get wall clock free of Rs. 200, or per pc at 42.37-10=32.37/-

      hope u answer these questions... this mark down pricing so difficult :(

      Delete
  5. Dear Blogger

    I just joined in marketing and would like to know one thing, in my company no. of Superstockist is more than no. of distributors... is it possible ?

    e.g for Bihar we have 5 distributors and 150 superstockist. we are small company.

    i thought distributors are always more in number and super stockist is 1 or 2 for a state

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  6. Dear Sir currently I am working with one of the Liqueur company. Now I am looking for a change as I am interested to work with FMCG sector could you give some suggestion. As I looking a channel sales job.

    Thank you..

    ReplyDelete
  7. Hi Kaushik,

    Quick question - you mentioned various margins at different levels (dealer/retailer etc.) Are these usually gross or net margins? I am trying to come up with a pricing model and am not sure if dealers charge retailers for freight etc. and if it's included in their rate or if it is net of all expenses. Would be great if you could let me know.

    Regards
    Gokul

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  8. Dear Kaushik,

    Just one confusion why have you deducted primary scheme from RLP . Primary scheme is for Distributor. It is up to distibutor whether he tranfers any part of it (fully or partially) to the retailers to enhance its volume but it cant be considered in RLP calculation by the company.
    Perhaps this has reflected in calculation as well ( as 143.47= 165/1.15) and created confusion ... please correct the equation and also the figure of 138.65

    ReplyDelete
  9. Dear Kaushik,
    it would be great if you can tell me what are the basic profit margin in percentage is charged by manufacturer,wholesaler and retailers with respect to consumer products like pens,watches etc

    thank you
    Aditya
    Reply

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  10. sir I want to know about margin, why should calculating /1.15 ,, for example product price 50rs retailer margin 15%, so why should calculate like 50/1.15 plzz help me i am confused................

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  11. Thanks for sharing this Informative content. Well explained. Got to learn new things from your Blog on SAP SD

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  12. Thanks for sharing this Information, Got to learn new things from your Blog on SAP

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  13. On what amount, VAT is calculated?
    Does the company pay whole VAT and gives the net profit margin or the retailer has to give VAT From his 10% margin ?

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  14. SIMPLY GREAT...FINALLY SOMEONE WHO ACTUALLY EXPLAINS REAL WORLD FMCG WORKINGS & SALES TERMS. THANKS A MILLION FMCG GYAAN !! REALLY BENEFICIAL TO NEW COMERS.

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  15. MANY A TIMES CLAIMS FROM SECONDARY SCHEMES ARE WRONGLY DONE I.E. CHEATING ON THE PART OF THE DISTRIBUTOR. THIS HAS TO BE ACCOUNTED FOR AND IT WILL HAPPEN. ALL THE COMPANY CAN DO IS MANAGE SECONDARY CLAIMS IN THE BEST POSSIBLE WAY. DISTRIBUTORS ARE AN ASSET TO THE COMPANY SPECIALLY ONES THAT ARE PERFORMING SO A COMPANY MAY OVERLOOK SLIGHT CHEATING IN SECONDARY CLAIMS AS THEY ARE WELL AWARE THAT THESE THINGS HAPPEN. MOSTLY THE AREA SALES MANAGER IS IN GOOD BOOKS WITH THE DISTRIBUTOR & RETAILERS. EVEN IF THERE IS A COMPANY AUDIT, THE AREA SALES MANAGER WILL SOMEHOW MATCH UP THINGS BETWEEN RETAILER & DISTRIBUTOR SO AS TO MINIMIZE DOUBT & SAVE HIS JOB.

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  16. Hey There,
    Really like the effort you have put in to explaining stuff here. Much appreciated! Could you please help me out with how mark down works. Would really help me get some clarity.
    Look forward to hearing soon.
    Thank you!

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  17. I want to do backward calculation for CP from MRP.
    An x company buys a products with 40% margin having an MRP of 700. CST is 2% and Vat is 13.5%. Please advise what will be their CP?

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  18. Deat Sir,
    I just came across your blogs. They are great and you have explained everything in so much details that it makes it much easier to understand. Thank you so much. Keep posting more. Cleared a lot of confusion that I had about the FMCG sector.

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