Relationships Matter – specially between Consumer Price, Retailer Margin and Brand Gross Profit


so what is the relationship between
consumer price retailer margin and brand gross profit we explain this with a
simple exercise we are trying to set the regular price retailer margin and the
gross profit of an orange beverage product called Ola let us understand
this table in the first row is the Ola selling price to a retailer which is
also the retailer’s landed or buying price the next three rows in blue are
related to how the retailer makes its money first is the everyday or regular
consumer price where we have three options of five dollars five dollars and
fifty cents and six dollars the price at which the consumer buys the product does not get banked by the retailer. The retailer has to pay sales tax or GST or
VAT depending on where you are in the world. In this case we have assumed 15%
tax which once removed is the retailer’s net sales
next is the retailer margin which in this case we have kept at 30%. That is
30% of the retailer’s net sales. In this spreadsheet we keep adjusting the Ola
selling price to ensure the retailer gets 30% margin based on various regular
consumer prices. Obviously the higher the regular consumer price the higher the
dollar margin the retailer makes as you can see here. Next is the product cost
and we have simply assumed this to be $2. This does not change across any of the
regular consumer price scenarios. Then we calculate the gross profit for Ola which
is simply the Ola selling price minus the product cost and as you can see it
keeps increasing as the regular consumer price increases. We calculate the gross
profit percentage by dividing the dollar gross profit by the Ola selling price
again the profit percentage increases as we increase the regular consumer price
now let us understand the relationships there are three interdependent parties
in this simple P&L : Ola, the retailer and the consumer. the Ola marketing team has conducted research and competitive analysis and recommended that the Ola
consumer price should be $5 sales has recommended the retailer will
take about 30% margin and based on that Ola makes a 34% gross profit. Now let’s
assume a situation which many brand managers or owners confront in FMCG businesses. The management does not want to launch a new
product unless it makes a 40% gross profit which is what they make when the
consumer prices move to five dollars and 50 cents which is 10% higher than the
recommended regular price. Marketing believes that Ola may not be able to
attract enough consumers at the higher price and therefore will not be able to
meet volume and market share objectives Let’s assume product cost is fixed and
cannot be changed, that leaves the retailer margin as the
only other factor that can positively influence our gross profit percentage
let us say we move the retailer margin to 28% and you can see our profit rises
to 36%, still short of the 40 percent so let’s play around with a few retailer
margin numbers to get our gross profit to 40% while maintaining the regular
price at $5. As you can see by reducing the retailer’s margin from 30% to 23.3%
while maintaining a regular price at $5 we can deliver the required 40% gross
profit. Now for the difficult task of convincing the retailer to accept the
lower margin that is unfortunately outside the scope of this micro video.
clearly as you can see it is a zero-sum game between the consumer retailer and
Ola, so decision now is either convince the retailer to accept a lower margin or
sell the product at the higher consumer price of five dollars and fifty cents
I hope this explains the simple relationship between consumer price
retailer margin and brand profit

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4 thoughts on “Relationships Matter – specially between Consumer Price, Retailer Margin and Brand Gross Profit

  1. Sir
    Is'nt it the retail sales margin should come different if you deduct 15% Vat/gst/sales tax from everyday consumer price which is 5$. A s 15% of 5 is 0.75. SO (5 – 0.75) comes to 4.25 ??

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