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

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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.