Understand FMCG Pricing

The Journey of a ₹175 MRP Product

Take, for instance, our chosen ready-to-eat curry, marked at an MRP of ₹175. Deciphering its trajectory from the retail shelf back to its birthplace sheds light on why manufacturers must affix the price at ₹100 to uphold the financial well-being of the supply chain. This fascinating journey underscores the indispensable role each link plays within the arena of FMCG sales, emphasizing the significance of cost efficiency.

Step 1: The Retailer's Economics

At your neighborhood kirana, the curry stands proudly marked at its MRP of ₹175. However, its acquisition price for retailers is roughly ₹140, translating to a 20% margin. This margin bridges the gap to cover operational costs like rent, staff salaries, and essential upkeep. The mathematical journey reveals that ₹35 is set aside as a margin from the final price, so retailers pay ₹140 when procuring this product.

Step 2: The Distributor's Role

As we peel another layer, we encounter the distributor or substockist, who purchases the product at ₹125 from the superstockist and offers it to retailers at ₹140. This intricate dance involves a 12% margin to cater to their operational needs. Embedded within this margin are costs arising from rent, delivery, sales personnel, and mishandling, ranging from ₹2 to ₹5 per piece suited to specific duties.

Step 3: The Superstockist's Expenses

Superstockists play a pivotal role by buying direct from the company at ₹100 and passing it on to distributors at ₹125. It's crucial to note that superstockists typically project a margin inclusive of handling costs at 5-7%, exclusive of primary logistics. Primary logistics generally cost between ₹6 and ₹7 per piece, including the expenditure of traversing goods worth roughly ₹12 lakhs across lengthy distances at a hefty transportation expense of ₹80,000 to ₹90,000.

Step 4: Company's Direct Costs

The manufacturer anchors its price at ₹100, accounting for various unavoidable inputs. The cost of sustaining a direct sales force oscillates between ₹8 and ₹10 per piece, covering salaries, sales incentives, and mobility. Marketing initiatives and trade promotions pile on costs between ₹5 and ₹7 per unit. Additionally, providing credit to nurture the sales cycle costs an extra ₹4 to ₹5, with a financial cushion of ₹3 to ₹4 reserved for confronting market unpredictability.

Price Build-up Summary

Starting from the factory price of ₹100, logistics and superstockist and sales team costs escalate this to ₹125. The additional distributor margin lifts the price to ₹140, concluding at ₹175 with the retailer's markup factored in.

Alternative Models and Their Challenges

The Udaan Model

Udaan exhibits a novel approach by connecting the factory directly with retailers, theoretically promising savings of 10% to 15%. Nonetheless, this model grapples with setbacks like restricted reach and elevated credit risks, undermining its potential efficacy.

Modern Trade Comparison

Contrastingly, within modern trade settings, distribution costs are characteristically lower. Yet, any cost advantages are largely neutralized by heightened expenses linked to shelf positioning and promotional activities, leading to parallel margin observations.

Final Tips for Manufacturers

• Strategic Price Positioning: Initiate with an envisioned MRP, working backward through each segment of the value chain while embedding appropriate allowances for market variances.

• Cost-effective Management: Evaluate logistical routes for optimal efficiency, balance between credit facilitation and cash dealings while maintaining distributor health with pragmatic profit margins.

• Choosing to have a C&F: is a strategic decision where a company operating without a C&F can save a healthy margin (3-4%) for marketing and production.

Conclusion

For manufacturers figuring out their pricing, it's important to acknowledge both visible and invisible costs while upholding sustainable tier-specific margins and equipping for inevitable market ups and downs. By comprehending these pricing dynamics, businesses can create more informed, resilient growth strategies, to navigate the multifaceted web of FMCG distribution within India.

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Note: All costs mentioned are representative of mid-sized FMCG companies (₹100-200 crore revenue) in the ready-to-eat food segment. Actual costs may vary based on specific products, geographies, and scale of operations.