The market of FMCG works in a very productive manner and the schemes based on this industry vary from brand to brand (of a company). The schemes often change on a monthly basis or as required. Before exploring the scheme calculation aspect we must know that there are typically two methods by which pricing of products is done within a company and those are Mark-Up and Mark-Down.
If you need to understand how schemes are calculated in FMCG, you need to understand mark-up and mark-down margin. On that basis, using either of the methods, the schemes, margins, etc. are calculated for its trade.
Before exploring further, let us understand the differences and calculation strategies of markup and markdown
To simplify, here is an example-
If you buy a pen for Rupees 5/- and sell for Rupees 7/- then you earn Rupees 2/-
That ₹2 is your profit or margin and if you want to know what percentage of profit you make, then the calculations are as follows-
Markup calculation: If you divide ₹2 on purchasing cost ₹8, you earned a 25% margin.
Mark Down Calculation: If you divide ₹2 on selling cost ₹10, you earned a 20% profit margin.
Although basically, the absolute profit amount is ₹2 there are two ways to arrive at the profit percentage.
Suppose you have a product for ₹50 and there is any scheme of 10% then the effective cost of the product is 50 – (50*10%) = 40
The only difference between the two 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.
By this example, the significance of markup is very simple and it is that the amount of mark-up allowed the retailer to decide the earning he gets from selling each unit of the product.
The higher the markup is, the greater the price to the consumer, and the greater the money the retailer makes. In case of FMCG products, usually, the MRP is low and the retailer is allowed a lower mark-up scheme structure, it may be between 5% and 8%. However, low margins determine that a retailer makes less money on every unit. But typically, the number of units sold is very high in quantity in FMCG. So largely, the amount of money made gets flattened.
Trade schemes in the market are used to increase sales, time and again. Trade Schemes are designed for implementing trade i.e. retailing purpose/Whole-Sale business and the distributor is expected to act by them and extend the business or sale to the trade. The company’s sales force is supposed to use it in the right spirit to ensure market hygiene.
Trade schemes can be utilized in terms of the number of discounts on the bill or in terms of the number of goods that may be inviting for the retailer/distributor. As an example company can offer a free washing machine on the purchase of a specific value of goods, or a free of cost holiday package on accomplishing the target that is provided.
The trading scheme is an additional financial benefit that is provided to the trade partners. This bonus margin is typically designed around a few days to a year.
A few forms of a trading scheme are as follow:
- Free items – Giving products without an extra cost spent on the same bill.
- Progressive discount – A large amount of deduction for a large number of purchases that encourages partners to sell larger volumes of products.
- Flat discount – Reduction in buying cost leading to higher profit per sale.
- Lucky draw – A few lucky retailers take the chance of earning big rewards
- Slab based rewards – This is similar to progressive discount but in this scheme, rewards are provided instead of a discount.
Trade schemes are of two types:
- Quantity purchase scheme (QPS) – This scheme works in a manner where consumers get attracted by discounts offered on buying a definite quantity of products as mentioned.
Buy A, get B free. In this case, a salesman in the market will tell the retailer that e.g. on the purchase of 12 packs, he will get 1 pack free. The scheme calculation will be 1/ (12+1) and thus it will give a markdown calculation.
Though there can be Mark-up calculation which can work for accounting purposes it’s taken as markdown.
- 24 pieces – 2% discount
- 48 pieces – 4% discount
- 72 pieces – 6% discount
- 144 pieces – 8% discount
2. Value Purchase Schemes (VPS) – Much like QPS, this way of scheme calculation is based on a predefined value. Here also consumers are attracted based on the “discount with minimum purchase” scheme, only the minimum amount is based on the value of products whereas, in the case of QPS, the minimum amount is based on the number of products. By this, the consumer can get a discount on spending a minimum particular amount.
- Purchase of 4,000 – 2% discount
- Purchase of 6,000– 4% discount
- Purchase of 8,000 – 6% discount
- Purchase of 10,000 – 8% discount
However, the Trade schemes are further calculated depending on who they are offered to:
Primary Schemes: These are the schemes that are deducted during invoice generation to the distributor from the company’s end. This scheme gives the distributor an additional margin.
Secondary Schemes: In the case of this scheme, the distributor is supposed to initially extend the trade scheme as per declared by the company to the market and then get it reimbursed from the company. Today, FMCG companies spend up to 15% of their revenues in trade promotions. Their distributors earn a large portion of their margins from these deals. The distributor gives the said stock to retailers at a discounted price. Though distributor margins go down temporarily, he can claim these discounts from the company.
Distributor Retailer Margin Calculation
How to determine the distributor margin or retailer margin?
Initially, it is necessary to calculate and notice what margin is available and which part of the margin should go to the distributor.
The method begins with calculating the cost of your products. Make sure you are aware about the units in which you sell your products.
After that, it is time for building an MSRP (Manufacturer Suggested Retail Price). You must shape your MSRP while considering the profit earned through all your sales channels and the competition over other products in the market.
Distributors and retailers generally get discounts on the MSRP in exchange for making it easy to sell your products on behalf of you.
Distributors typically grab huge amounts of discounts due to the bulk order, and the number of retailers ordering from them. Except for notifications of new promotions and progression on product pricing, they do not need additional support.
Hidden costs need to be estimated. These are the costs that may involve the damages or loss of products that could occur during shipments. This can be avoided with the application of quality containers which would again require extra cost. These costs need to be included while calculating unit sales to adjust the margins.
Distributors and Retailers would ask for samples, in fact as many as possible. Reasonable margins for the distributors must be calculated after ensuring all of these costs.
The second step–
In this step, it is necessary to divide the margins among the distribution chain, e.g. between the brand or company, the distributor, and the retailer. It should be remembered that each party has to do their share of work and take risks. Generally, the probability of making a profit out of a product is lower for the distributor than for the retailer but distributors have more sales because of the bulk orders that they deal with.
Let us look at some of the FMCG products that deal with different trade schemes-
1. Biscuits: The trade schemes for this product works in the form of a discount if they clear the bill on time. This is called CD – Cash Discount. Normally companies give 1% CD. But it’s very necessary to know that it’s more of a consumer pull category. Trade push doesn’t work for this product.
2. Atta: QPS structure strictly works here. This will have different slabs (pieces of product packaging depending on weightage) and will have a higher incentive for higher slabs. Eg. On buy of 10Kg of Atta for 2 months, a 5 % additional discount will be given. For 10 tonnes of Atta, there will be a 5% discount and a washing machine as well, etc.
2. Salt: this product comes more in the wholesale driven category, where pricing is a crucial aspect. Only by deducting 30 paise on a Kg of Salt, the companies can boost their sales.
4. Soft Drinks: Quantity Purchase Scheme works here as well.
However, there is not one strategy or technique for scheming that fits all in the field of FMCG. Using an innovative scheming structure helps to uncover hidden margins for both your distributors and retailers and also your own company. The scheme should not become too complicated for your channel partners, so care must be taken to ensure it is simple enough for every party to understand
One can plan for some innovative ideas, which will lure the retail trade and increase participation. The ideas may vary on the product to product basis whether regular food supplies or dairy products etc. Hopefully, this article clarifies any FMCG scheming calculation doubts and it may further help you to design an innovative FMCG scheme.
If you are interested in other FMCG articles and knowledge materials, then you can visit our blog to read more insightful articles.