Calculating Distributor or Dealer ROI

This is a post that is written on gyaanokplease.blogspot.com and the link to the original article is here. I just cannot emphasize enough about how well this article has been written and hence I’ve included even some of the comments. Thanks to gyaanokplease for this post.

So probably the first thing that your distributor/dealer/stockist is going to tell you when you go to him for the first time is “Sirjee, ROI nahin baith raha hai”. What this simply means is that he is challenging you to calculate his return on investment.

This is sort of a monthly exercise – he knows that he is getting an ROI, else he would not be in the business. What he simply needs is some ego massage so that he gets an ILLUSION that he is in control of something when he is not – your rates are fixed, your schemes are fixed, and so are your claims. While ROI is something that they teach us in first day of B-School, calculating dealer ROI might be a different ball game altogether as he is a weasel who is going to try different permutations and combinations to get the better of you. Do this properly with him, and he (and you BDE/TSO who is twice your age but earns half as much) will respect you forever.

The equation is simple – Return/Investment, Return = (Earnings – Expenses).

The trick lies in realizing what earnings, expenses and investment involve & it is here where the dealer uses his tricks.

Let’s put down the formulae first:

  1. RoI or Return on Investment = Returns/ Net Investment
  1. Returns = Earnings – Expenses
  1. Earnings = Gross Margin that the dealer enjoys (Usually 6% – 8% in FMCG companies)
  1. Expenses = Direct Expenses + Indirect Expenses
  1. Here is where the first trick lies, Calculating Expenses:

This arises from the fact that the dealer in question is not dealing with just 1 company, he instead has 4-5 or even more number of companies that he is dealing with. Hence there are some resources that he is exclusively using for a particular company for eg. Sales Man and similarly many resources that he is sharing among the companies eg. His godown space, accountant, supply units etc.

Please note there is no thumb rule to it as there might be (and more often than not, will be) cases where even salesmen are being shared among 2 or more companies, and there will be one guy who would be the accountant-cum-manager-cum-supply wala etc. This is where the concept of direct and indirect expenses comes in.

Hence his expenses are split in to 2 parts i.e. Direct & Indirect Expenses

Direct Expenses are those that the dealer incurs exclusively for the company concerned.

And Indirect Expenses are those that the dealer incurs in totality for the companies for whom the resource/s is/are being shared.

The only rule in calculating expenses is that you need to take into account the part of expenses that he is incurring for your company alone. We will see how we do it below.

  1. Similarly the second trick lies in properly calculating the denominator, i.e Net Investment.

A dealer’s investment comprises of 3 parts : Average Stock that lies in his godown, Average Market Credit that he extends & Average Claims Outstanding,

Hence,

Investment = Avg Closing Stock + Avg Market Credit + Avg. Claims Outstanding

Here the usual suspect where one may go wrong in calculating Investment is the first variable i.e. Average Closing Stock of the dealer.

A layman would take the month-end closing stock as the average closing stock for the dealer, or worse if you do the mistake of asking the dealer what his closing stock is, the beast would tell you a figure which will be his all time high closing stock in a month.

The typical trend in FMCG is that majority of Pushing, also known colloquially as “thokna” (Primary) and Pulling (Secondary) happens in the last week and therefore the last week is not a true indicator of the entire month’s activity then why consider last week’s closing stock as his month’s closing stock. (To clarify, primary is what your company bills to the dealer and secondary is what your dealer bills to the retailer)

Confused?, we will deal with it with simplicity. Consider this as the trend of Primary & Secondary for a dealer in a 4-week cycle of a month

WEEK OPENING STOCK PRIMARY SECONDARY CLOSING STOCK
    1 5, 00,000 50,000 1,00,000 4,50,000
    2 4,50,000 1,00,000 2,00,000 3,50,000
    3 3,50,000 2,50,000 2,50,000 3,50,000
    4 3,50,000 5,50,000 4,00,000 5,00,000

The above table is how a dealer’s inventory in a typical FMCG set-up would behave like, i.e. majority of activity happening in the last week and hence one would be wrong in taking 5,00,000 (Week-4 Closing Stock) as the average closing stock for that dealer in that month.

The better way to do it is to take an average of all 4 weeks’ closing stocks. In this case it would come out to be as : ( 4,50,000 + 3,50,000 + 3,50,000 + 5,00,000) / 4 which equals to 4,12,500 which is lesser than the previous  result and hence his investment goes down and RoI goes up.

Enough of this gyaan now, let us get straight down to calculating a sample ROI

Premise:

Mr. Atul Mittal is the proud owner of his distribution firm M/S Bhagat Ram Jwala Prasad. His firm deals with distributing 4 companies in total of which ABC Pvt. Ltd. Is one for which we need to calculate the RoI. The firm has 1 dedicated (exclusive) salesmen working for ABC Pvt. LTd. with a monthly salary of INR 6,000/- per month per salesman. Apart from this, the firm also has an accountant-cum-manager with a monthly salary of INR 5,000/- per month, pays a monthly rent for the godown which comes to INR 5,000/- per month, incurs electricity & miscellaneous costs (supply units, chai-paani etc.) to the tune of INR 5,000/- per month. Other expenses such as his son’s education and his daughters marriage which your dealer would want to include are not to be included.

All figures are assumptions

Monthly Business (Turnover) inclusive of all 4 companies: 20,00,000/-;

Monthly Business (Turnover) of ABC Pvt. Ltd. : 8,00,000/-

ABC Pvt. Ltd.’s Company Margin: 8%

Average Market Credit for ABC Pvt Ltd. Is 10,000/- INR

Average Closing Stock for ABC Pvt. Ltd is worth 2,50,000/- INR

Average Claims Outstanding in ABC Pvt. Ltd. Is worth 10,000/- INR.

Hence going by the formula:

RoI or Return on Investment = Returns/ Net Investment

Returns = Earnings – Expenses

Earnings = Gross Margin that the dealer enjoys (Usually 6% – 8% in FMCG companies)

Expenses = Direct Expenses + Indirect Expenses

Let’s calculate each element one by one:

Earnings = Gross Margin = 8% of monthly turnover of ABC Pvt. Ltd. which is = 64,000/-

Expenses = Direct Expenses + Indirect Expenses

Direct Expenses = Salary of Exclusive Salesmen = 1*6000 = 6000 per month

Indirect Expenses  for ABC Pvt. Ltd.=( Contribution of ABC Pvt. Ltd’s Turnover to Total Turnover) * Total Indirect Expenses

Total Indirect Expenses = Godown Rent + Manager’s Salary + Miscellaneous Expenses = 5,000 + 5,000 + 5,000 = 15,000/-

Contribution of ABC Pvt. Ltd’s Turnover to Total Turnover = 8,00,000/20,00,000=40%

Hence, Indirect Expenses for ABC Pvt. Ltd. = 40% of 15,000/- = 6,000/-

Therefore Total Expenses = 6,000 + 6,000 = 12,000

Hence Returns = Earnings – Expenses = 64,000 – 12,000 = 52,000

Net Investment = Avg. Closing Stock + Avg. Market Credit + Avg. Claims Outstanding = 2,50,000 + 10,000 + 10,000 = 2,70,000

Therefore RoI = Returns/Net Investment = 52,000/2,70,000  = .1925 or 19.25%

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39 comments:

    1. AnupriyaJune 14, 2012 at 8:50 PMReply
    2. Just a point here….when you look at his investment in stock – one should always check whether he has taken bank loan. if he has then his actual capital investment is actually only to the extent of his own money. rest is interest which is part of expenses. a lot of dsitributors conveniently miss out this part of the equation. and for big distributors this makes a big difference in ROI.Similarly, if the distributor has a good overdraft facility then he actually pays for the stocks to the company from that and not his actual investment. here again interest should be added into his expenses and the investment reduced by the overdraft amount.

Replies

Reply

    1. KaushikJune 14, 2012 at 8:53 PMReply
    2. Thanks Anupriya! Duly noted 🙂
    3. KiranJune 14, 2012 at 11:19 PMReply
    4. Alternatively, if a distributor rotates his investment say, 10 times a year, multiply that by net profit percentage per rotation.
      For eg:The company gives a margin of 5% on its products to a distributor. After all his distribution expenses, the net profit % is 2.1, and his investment is 20L with an annual turnover of 200L, ROI is easily calculated as under.
      No:of rotations = annual turnover/investment = 200/20 = 10 rotations/year
      Investment = 20 Lakhs
      This means he rotates his investment of 20lakhs, 10 times a year, each time making say 2.1%. So his ROI is 10*2.1 = 21%
    5. KaushikJune 14, 2012 at 11:33 PMReply
    6. Thanks Kiran! Duly noted. Please feel free to contribute in the further posts also!
    7. Sambhav JainJune 14, 2012 at 11:48 PMReply
    8. Very Well Explained.!Thanks
    9. Ashish ShahJune 15, 2012 at 12:05 AMReply
    10. Very helpful. A much needed initiative. Thanks Kaushik! 🙂
    11. Tirthadeep DharJune 15, 2012 at 7:02 AMReply
    12. Brilliantly explained – Subbu and Nishit! I remember looking for somebody or something to teach me this, about a year back. That my dist. ridiculed me abt not knowing my ROI calculation was the ‘push comes to shove’ part.However, lets not forget a very important parameter of credit given by the company to the distributor which can range from 0 to anything.So if Credit = 7 days, 7 days of closing stock is deducted from the distributor’s investment. Also a distributor gives a cash discount to wholesale or even retail, so that too has to be accounted for. I would urge you to simplify this and put it up as ur article is crisp and clear and this could prove useful too.

      Recommendation:

      1) Teach them how to calculate a Super Stockist ROI as well. Far simpler than direct.

      2) Also, in your next article you could explain how to get back an uninterested distributor on track based on key parameters. (Kaushik you had aced that, Nishit you could share too… btw sup with you?)

      3)All distributors are swines with hair coming out of all their holes.. jusayin….they might not squeal but they do grunt a lot. Somebody has got to tell these kids that… Nishit you could elaborate I guess (this inference from ur fb statuses)

      And excellent explanation Kiran… was thinking abt that while reading the article.

      Cheers,
      TiTo

    13. Capt.KrunchJune 15, 2012 at 8:52 AMReply
    14. hey TiTo,hw u doing man….points noted dude….the upcoming posts will only highlight the point number 3 that u ve mentioned.

      may be we could come up with a post about how to tinker RoI to get back distributor’s interest provided he is sitting on a lesser RoI…

      would urge you also to contribute…and about explaining credit, wholesale discount, we intentionally didn’t go into the detail to avoid it from getting complicated…

      nevertheless thanks for the feedback.

      Cheers
      nishit

    15. Tirthadeep DharJune 15, 2012 at 10:47 AMReply
    16. Sure would love to contribute… but I would rather start by trying and provide some comic relief between intense FMCG sessions 😛
    17. Amber VermaSeptember 26, 2012 at 7:15 PMReply
    18. Thanks All of you.re,
      amber verma
    19. Kapil GuptaFebruary 8, 2013 at 4:26 AMReply
    20. Realy good explained ….Thanxxxx
    21. Robin Godara BishnoiFebruary 21, 2013 at 9:46 AMReply
    22. thanks dear
    23. vibhor srivastavMarch 4, 2013 at 12:06 AMReply
    24. very helpful…..thanks….for explanation of ROI insuch a way….
      thanks………….
    25. avik dasMarch 20, 2013 at 10:51 AMReply
    26. Can anybody exactly explain following-
      per month
      Sales: 10 Lac
      Margin: 3%
      Inventory: 2.5 lac
      Market credit: 2.5 lacCase 1: No credit from company to distributor
      Case 2: 7 days credit from company to distributor
      Case 3: 30 days credit from company to distributorPls explain the concept also

      Thnx

    27. Ankit DwivediApril 12, 2013 at 6:14 AMReply
    28. GOOD explanation……… but one doubt is there in example. ROI is 19.25%, as per calculation this is monthly ROI but monthly ROI would be 1.5-2.5%

Replies

Reply

    1. Ankit DwivediApril 12, 2013 at 6:27 AMReply
    2. avik das……
      if no expenses are there then
      case 1: roi is 6%
      case 2: roi is 7.2%
      case 3: roi can’t calculate……. because there are no investment.

Replies

Reply

    1. Davidraja J E SamJune 15, 2013 at 10:32 PMReply
    2. hi Ankit could you please explain the second case..David
    3. Rhishabh SuritJune 28, 2013 at 11:32 PMReply
    4. davidraja….if market credit is given for 7 days.. then average market credit would be 75% of inventory, thus total invenstment wud turn out to be 4.2lac.. hence ROI wud turn out to be 7.1% (guys plz correct if im wrong .. not from fmcg background)
    5. jjkljljJuly 23, 2013 at 1:45 PMReply
    6. This comment has been removed by the author.
    7. Munish KaulJuly 23, 2013 at 1:52 PMReply
    8. aa you are very close to being right if market credit = 2.5 lacfor 7 days market credit = 75% of inventory
      = 75/100*2,50000 = 1,87500total investment would be = 2,50000+1,87500 =4,37500

      margin is 3% of sale of 10,0000 = 30000

      so, Return on investment is = returns/total investment

      ie : 30000/437500 which comes out to be 6.8 % or you can say 7%

      but how come you came to conclusion that average market credit for 7 days = 75% of inventory cost ???

Replies

  • MadhavAugust 11, 2013 at 2:46 PM
  • I believe, he has not taken it as 75%..but..for 30 days..stock is 2.5 lacks..so for 7 days it’s 2.5 lacs* 7/30~=58300….So net investment in inventory=2,50000-58300=191700…..So,
    roi comes to be 6.7%..I think so…
  • chandan kumar balSeptember 10, 2013 at 1:24 AM
  • Hi what is the healthy ROI for FMCG Distributors(as u told margin is between 6%-8%)? Is it between 14%-24%?
  • AyushNovember 19, 2013 at 8:08 AM
  • 30 days inventory is 2.5 Lakhs
    so we can calculate inventory for 23 days which comes out to be (250,000/30)*23=191,667
    then final investment= 191,667+250,000= 441,667
    ROI= Earning/Net Investment
    =(30000/441,667)*100
    =6.7%

Reply

  1. vickyNovember 13, 2013 at 2:39 AMReply
  2. HI can any one confirm the standard norms for the ROI & Investment.If some one having please share @ vikasmendi@gmail.com
  3. Bipin BhanushaliFebruary 7, 2014 at 9:14 AMReply
  4. can anyone clear my following doubt
    Investment include Avg Closing Stock + Avg Market Credit + Avg. Claims Outstanding OK…. but what about deposit given for taking godown on rent and down payment done for purchasing vehicle do these investments are consider for calculation of net investment and if not then what would be consideration for them
  5. pranoy paulApril 10, 2014 at 12:05 AMReply
  6. thanks dear
  7. KapsMay 11, 2014 at 2:51 AMReply
  8. This comment has been removed by the author.
  9. KapsMay 18, 2014 at 11:42 PMReply
  10. Hi..Can someone help me crack this..
    Distributor does a 20Lac business per month. Earns Gross Margin of 10%, Exp per months comes to around 2%. Avg Inventory: One month, Avg Market Outstanding of 45 days. No claims outstanding. No company outstanding. Funding purely from internal resources. Doesn’t have any other co’s distributorship.
    I get two different ROIs with different approaches. Turnover/Inv method and Standard Method of Net Earnings/Investment.
  11. himanshuOctober 14, 2014 at 1:24 AMReply
  12. In both case it will be 38.4 % annual Roi1st method 160000 *100/ 500000 = 3.2 monthly Roi or 38.4 annual Roi2nd method 2400000/5000000 = 4.8 rotations , Earning per rotation 8 % hence annual Roi will be (8*4.8) = 38.4% only
  13. himanshuOctober 14, 2014 at 1:25 AMReply
  14. in first case read denominator as 50 lac and not 5 lac
  15. Ramaswamy VenkataramanApril 18, 2015 at 1:20 AMReply
  16. in the second case shouldn’t the numerator be the annual turnover ?
  17. qamar khanJune 7, 2015 at 1:36 PMReply
  18. thanks
  19. AdarshSeptember 12, 2015 at 12:40 AMReply
  20. Was going through the comment section and found someone mentioning interest charges on CC or OD being part of the expenses. This is a valid point of discussion and I have personally faced such scenarios.
    Humbly request the author to give a verdict on this. My understanding and opinion from many with whom I have shared is…Is a dealer who continuously needs CC or OD to fulfill his billing commitment, a sound dealer/distributor?
  21. UnknownMarch 14, 2016 at 9:43 AMReply
  22. Can anybody explain the followingAbc is a fmcg companyxxx is the product name

    Margin of the product for stockist is 10%
    Margin of the product for retailer is 20%

    Mrp of the product is 25000

    cost of stockist is 19120
    Retail cost is 20830

    What is the method of calculating the margin

  23. biswa nayakApril 12, 2016 at 10:24 AMReply
  24. ANYONE KNOW THE Healthy ROI for the FMCG channel partner??

– See more at: http://gyaanokplease.blogspot.in/2012/06/calculating-dealer-roi.html#sthash.8n84hH77.dpuf

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Economic value to the customer (EVC)

Economic value to the customer is simply the purchase price that customers should be willing to pay for your product, given the price they are currently paying for the reference product and the added functionality and diminished costs provided by your product. Start with the purchase price of the reference product and then add improvements in functionality and cost savings to the customer. You are left with the amount you should be able to charge customers for your product and still take their business away from the maker of the reference product.

Example below

chart_deva00_02.gif

The reference product—the one that the customer already uses—costs $300. By switching to your product, the customer gains an extra $350 worth of functionality (yellow arrow). This $350 often shows up in increased profit because your product works faster, works better, appeals more to consumers, and so forth.

By switching from the reference product to yours, the customer will therefore gain $350 worth of functionality improvements (which may or may not mean $350 in profit improvements), plus $100 in lower start-up costs, plus $200 in lower postpurchase costs. (These last two obviously do mean straightforward profit improvements for the customer.) The customer, then, will enjoy a total of $350 + $100 + $200, or $650, in added benefits. A customer who is willing to pay $300 for the reference product should be willing to pay $300 + $650, or $950, for your product. That is the “economic value to the customer” for which the model is named. The EVC is exactly $950, as shown in Exhibit 2—and, in rough terms, that is what you could charge the customer if you wished. In reality, in the example shown in the figure, charging the full $950 for your product would leave the customer perfectly indifferent between the reference product and yours. Therefore, you might want to charge somewhat less than $950—say, $825 or $850. In other words, you want to cede only enough value to customers to make them switch to your product, but not much more. EVC can help you do just that.

This article is directly lifted from http://www.mckinsey.com/insights/strategy/delivering_value_to_customers.

Overview of the Marketing Budget of a Brand

Marketing Budget

The marketing budget of an FMCG brand typically comprises of the following elements:

1. Above The Line (ATL) budget

2. Below The Line (BTL) budget

The ATL budget broadly comprises of two components: the media budget and the production budget. Media budget is the actual money that is spent on advertising the brand in conventional media such as print, TV, radio, cinema, outdoor, social, and mobile. Production budget is the cost that is incurred to produce the creative units that are used in the communication process. Usually the costs for production are not very high (relative to the budget), except for TV advertising, which has high production costs depending on the kind of brand ambassador or model, location, post-production work, creative and production team, etc.

The BTL budget comprises of two components: the trade budget and the promotions budget. Trade budget is the budget kept aside for offers and promotions for the trade schemes. This is more important for certain categories and brands that are in a more mature stage of the product life cycle (PLC) or that are more dependent on trade ‘push’ than on consumer ‘pull’. On the other hand, the promotions budget is the budget set aside for consumer promotions, for e.g. volume or value offers, and any on ground activations and in-shop advertising.

So, the budget is partitioned mainly across advertising, trade schemes, and consumer promotions. Marketers try to craft the right mix of these tools and its sub-components in order to achieve sales and market share goals, but they are always torn between the long term brand plans and the pressure to deliver results in the short term. For example, consumer promotions generally result in an immediate peak in the sales offtakes, and hence promotions may seem more attractive compared to advertising. But, excess promotions can bring down the profitability of the brand, make the brand more promotions dependent, and cause loss of market share in the long term. Similarly, sometimes internal pressure from trade and sales teams may force more investment into trade schemes.

In summary, marketers and planners make budget and media-mix decisions based on many qualitative and quantitative factors (e.g. marketing and financial goals, past spends, clutter, competition spends, market priority, cost per rating point, media isolatability, etc.) and use tools like optimizers and market modelling to optimize their investments for maximum return.

As an after thought, here is a Forbes article on the emerging trend of how brands are shifting their budgets from TV to online video?

Thank you.

Importance of question sequence in MR questionnaire design

One of the most important aspects in designing a market research (MR) questionnaire is the sequence of the questions. Each question that you ask poses a potential danger to sensitize or condition the respondent, and thereby bias the respondent in the subsequent questions. One example is that asking a question like ‘Have you heard of Brand X?’ itself raises conscious awareness of the respondent who may not be consciously aware of the brand. Another example is that if a respondent is asked to indicate which brand s/he buys and later if s/he is asked to rate the brands, then there is a danger that the respondent might try to be consistent with his or her earlier answers, and hence will give higher ratings to the brand the respondent buys.

At a high level, the general rules are:

1. Ask the most important questions first when the respondent is more active.

2. Ask those questions which are most sensitive to conditioning such as attitudes and preferences earlier.

3. Ask factual and historical information towards the end as respondent becomes less enthusiastic and fatigued.

In a well-designed questionnaire, the respondent should not know the brand of interest (the brand for which the research is being conducted) up to a desired stage, thus avoiding any respondent bias. If the respondent comes to know that the research is being done for Brand X, then the respondent may become biased towards the Brand X. So, any question that has a danger of revealing the brand of interest must be delayed until all the information that is prone to conditioning is retrieved.

The most popular way of designing a questionnaire is the funnel approach. ESOMAR defines the funnel approach as ‘A way of ordering questions in a questionnaire so that general questions are asked before specific questions. This ordering avoids the responses to specific questions biasing the answers to general questions.’

Typically, the questions regarding awareness of the brands in the marketplace must be asked first. In fact, if the awareness of brands is being measured, then awareness must be the first question which must be asked when the category is mentioned.

Purchase Intention (PI) is one of the most important measures and is very sensitive to conditioning, so it should be asked immediately after the awareness question or as soon as possible depending on the research objective. In controlled experiments, the purchase intention should be asked immediately after exposure to the treatment.

PI should be followed by the attribute ratings – which attributes (category) are considered important by the respondent?. Brand Evaluation on the attributes should be asked next. All the brands that featured in the earlier purchase intention question must be individually evaluated against the attributes. Moreover, it helps to quantify the Fishbein Model. This can be followed by questions on brand behaviour, category behaviour, psychographics, and demographics.

Question Sequencing is a huge research area and there is a lot of interesting research regarding the right position of a question, the right way to frame a question, and the right scale to be used. One example is that some experts say that the consumers tend to be biased towards the left side in a Likert Scale. Another example is that some experts say that demographics should come at the start, while others say that demographics should come at the end. Some people take the middle path by asking the key recruitment demographic questions early and then postpone the rest of the demographic questions until the end.

All the above mentioned factors together make questionnaire design a very interesting and a crucial work in quantitative market research. But due to very demanding timelines, practising market researchers may not always be able to devote enough time for the questionnaire design.

 

Analysis of New Triers, Repeaters, and Lapsers of a Brand

At any period of time, the consumer base of a brand is comprised of two sets of buyers:  New Triers, and Repeat Purchasers.

Repeats, New Triers

The terms are self-explanatory. To put it simply, Repeat Purchasers are consumers (or households) who repeated the purchase of the brand, and New Triers are consumers (or households) who bought the brand now, but who didn’t buy earlier.

A little more detail

For example, lets take two annual periods 2007 and 2008. Repeat Purchasers of a brand X are those who bought the brand atleast once in 2007 and also who bought the brand atleast once in 2008. New Triers are those who didn’t buy the brand in 2007, but bought the brand atleast once in 2008. Lapsers are those who bought the brand atleast once in 2007, but didn’t buy the brand in 2008. So, it is evident that whenever we refer to the terms New Triers, Repeaters, and Lapsers, we should always have two periods for reference. These periods can be an year, a quarter, a month,  or a week. Similarly, the terms New Triers, Repeaters, and Lapsers can refer to the number of consumers or households depending on the industry. In Telecom or IT, typically it might refer to the number of consumers or users of your device or app, whereas in FMCG it might indicate the number of households that bought the brand. So, whether it refers to consumers or companies or households depends on the industry data, but the philosophy remains the same.

Various Segments of the New Triers of a Brand

So, continuing with the previous example, New Triers are those who didn’t buy the brand in 2007, but bought the brand atleast once in 2008. The important thing to notice is the criteria ‘atleast once‘, which means some number of new triers might have bought the brand multiple times in 2008 (say once in February, June and October of 2008). Don’t get confused with Repeater because the Repeater has bought the brand atleast once in both 2007 and 2008.

So,  a New Trier of a Brand X in 2008 comprises of all consumers (or households) that have:

– Not bought the brand in 2007, and bought the brand in Jan’2008 and never bought the brand again in 2008.
– Not bought the brand in 2007, and bought the brand in Jan’2008 and repeated the purchase in Jun’2008
– Not bought the brand in 2007, and bought the brand in Feb’08 and Aug’08 and Dec’08.
– Not bought the brand in 2007, and bought the brand only in Dec’08
– Not bought the brand in 2007, and bought in ………………

So, regarding New Triers of a brand,  the marketer is interested in finding out:

– How many New Triers have bought the brand in the year 2008?

– Out of the New Triers of 2008, how many consumers (or households) went on to repeat purchase my brand in the next 12 months? For example, if a New Trier purchased the brand in May 2008, then did he repeat purchase my brand in the next 12 months or in 2008. You can define the period as you wish. This shows us the effectiveness in understanding if the problem is in converting the new trials to repeat purchases or is the problem of the brand not getting enough trials? (Please note that these repeaters are different from the brand repeaters in 2008).

– How many First Time Ever Buyers?  If you observe carefully, the new triers in our example are consumers (or households) who didn’t buy in 2007, and bought atleast once in 2008. So, the consumer (or household) could’ve bought in 2006, but didn’t buy in 2007 and then bought in 2008. So, these type of consumers are also New Triers in 2008, but they are not buying the brand for the first time.

So, First Time Ever Buyers of Brand X in 2008 are those who didn’t buy the brand anytime before, but bought the brand X in 2008.

– Among the New Triers (consumers or households) that my brand got in 2008, how many of them are category entrants (consumers or households that were not using the category before, but entered the category with my brand), and how many of them are brand entrants (consumers or households that were using some other brand in the category, but not using your brand). This is especially important for SKUs that are launched to drive the category and brand recruitment.

– How many of the New Triers of my brand in 2008, were using some specific brand ABC before. For example, if a user was using a brand Cinthol in 2007, but now she bought the brand Dove of the same category in 2008.  So, this will help the marketer understand which are the brands that I am pulling consumers from?

– What is the Average Revenue Per User (ARPU) or the Average Volume Consumption of the New Trier? Am I recruiting the high category volume consumers? Do my New Triers increase the volume consumption along the line?

– Is my New Trier also buying some other brand? Is he buying both Cinthol and Dove ?

Similarly, there are a lot of things that can be done on the New Triers, Repeaters and Lapsers. So, one can slice and dice the data in anyway we want to look at and analyze for key insights. I will write down more details in another post.

Thank you.

How Price Undercutting happens via Wholesale Trade?

Wikipedia defines price undercutting as: ‘Price cutting, or undercutting, is a sales technique that reduces the retail prices to a level low enough to eliminate competition‘. It is obvious that price under-cutting happens mostly to boost volume sales. This article is about how undercutting works in the context of Indian FMCG.

Brief Overview of the supply-chain and the trade schemes

As mentioned in earlier posts, the typical distribution line for an FMCG product in your area looks like: Stockist -> Company Distributor -> Wholesaler -> Retailer  Or  Stockist -> Company Distributor -> RetailerTypically, the distributor gets a margin of about 6-8% and the retailer gets a margin of 10-15%.

Just like the way the FMCG company brings out various promotions to the end consumer, the company also introduces various trade schemes or trade promotions as incentives for all the partners in the supply-chain. Typically, the incentives are based on the quantity of the volume purchased or the value purchased. There are many different types of incentives such as, but the major ones are:

1. Quantity Purchase Schemes (QPS)

A few examples are below:

a).     Buy 25 pieces, get one piece free;  50 pieces, get 5 pieces free;  100 pieces, get 12 pieces free;  200 pieces, get 25 pieces free
b).    Buy 25 pieces, get 1% discount;  Buy 75 pieces, get 3.5% discount;  Buy 150 pieces, Get 7.5% discount

2. Value Purchase Schemes (VPS)

Example: Buy Rs.5000 get 4% discount,  Buy Rs.8000 get 7% discount, etc.

So, the formula seems simple: the more somebody buys a particular product the more the discount. Bargaining Power!

But, this is where the problem starts.

Undercutting by the Wholesaler

We shall walk through a common scenario of how undercutting happens.  For simplicity of math, lets say, a product has an MRP of Rs.15, and the retailer gets it for Rs.13.50 and the distributor gets it for Rs.12.50. Lets say the wholesaler also is getting at Rs.13 as he typically buys more. So, simply just say the distributor margin is Rs.1, the retailer margin is Rs.1.5 and the wholesaler has a margin of Rs.0.50.

Lets say Mr. Lal Babu is a a very big wholesaler who caters to certain number of retailers locally. When the distributor goes to Mr. Lal Babu he says there is a new scheme. Lets say the scheme is:  Buy 75 pieces, get 3.5% discount;  Buy 150 pieces, Get 7.5% discount.

So, Mr. Lal Babu decides to buy 150 pieces. So, apart from his actual cost, he gets a bonus 7.5% discount. So, instead of buying the product at Rs.13, Mr. Lal Babu buys it at Rs.12 (7.5% discount over Rs.13). So, now instead of selling it to the retailer at the usual price of Rs.13.5, assume Mr. Lal Babu sells it to the retailer at Rs.12.50, taking his usual margin.  The company distributor is selling the same product at Rs.13.5 to the retailer. So, you see what the problem is?

The retailer would be attracted to buy from Mr. Lal Babu as he gets more margin compared to the company distributor. One might think it is only Rs.1, but when they buy a couple of cases, it translates into good savings for the retailer.

Is undercutting only relevant to wholesale?

The answer is No. The philosophy of under-cutting is the same, but it can be done by anybody in the supply chain. So, the salesman himself, in order to reach his target, can make this happen. He makes an invoice against one such large wholesaler Mr. Lal Babu and he passes the benefits to his retailer. But, this is going to be a problem in future for the salesman, as the retailer will get used to these benefits and he stops buying in normal situation. In a way, the brand or the particular product starts to become more driven by the wholesalers.

Various channel partners do under-cutting to boost volumes at his/her own level. Territory Sales Officers who will be in-charge of certain stockists too sometimes bill it against a certain stockist ABC, but he actually sells it to a big wholesaler. The distributor too can have his own share of price undercutting to attract the retailer.

Undercutting is a very common phenomena in the field. Though FMCG companies have various strict mechanisms to curb them, new loopholes are invented continuously to take advantage and undercut. After all, price matters to everybody.

Entertainment in Television Advertisements

As I mentioned in earlier blog posts, to communicate something to a recipient one has to command the recipient’s attention and then be relevant to the recipient.

Communication:  Command Attention (Clutter breaking) ->  Be Relevant

This holds true even for communication among two individuals or two groups of people or for television commercials (TVCs). For the rest of this blog we will discuss it in the context of TVCs.

Though the rules seem simple, commanding attention is itself a very daunting task in this fragmented and cluttered world of media. On top of it, the message is driven home only if you are relevant to your fragmented consumer segments. Currently, we shall focus on the first part of the problem – clutter breaking and commanding attention.

What have commercials been doing to break clutter?

Historically, entertainment has proved to be one of the most effective ways to command attention of people. Entertainment is a very pervasive element of television ads today. Research shows that creative entertainment increases the attention to view the entire ad, reduces the resistance to persuasion, and has positive effects on purchase intention.

Wikipedia defines entertainment as – “Entertainment is something that holds the attention and interest of an audience or gives pleasure and delight.”  Psychologists define entertainment as “attainment of gratification of senses”.

Though people have different personal preferences of entertainment, it has been observed that across cultures and time there are recognisable and familiar forms of entertainment such as story-telling, music, dance, drama, sex, sports, horror etc. So, most ads today have atleast one form of content used to entertain consumer such as humour, music, and creative stories, etc.

The answer to the question is – Commercials have been using entertainment as one of the effective ways to break clutter and maintain attention levels, increasing people’s interest to view the entire ad, and research shows that creative entertainment has positive effects on persuasion and purchase intentions.

If all is well, what is the problem about entertainment in commercials?

One observation that always intrigued and puzzled me is that the commercials that are very entertaining and enjoyable don’t always drive home the intended purpose. There are many commercials that are enjoyed a lot and has high ad recall, but they just become only a source of entertainment for the audience.

My observation of several ads and people made me come to the hypothesis that the entertainment provided in the ad actually fulfils the consumer and conflicts with the consumers’ process of synthesizing the brand/product message.  This negative influence of entertainment is especially seen when the brand purpose is not weaved into the story provided for entertainment. For example, in ads where the entertainment part comes first and the brand is shown very late in the ad and they are not so well connected. If entertainment is used to break clutter, then it is important that the brand is shown as a part of the entertainment at the beginning of the ad, else there is a risk that the TVC may be very entertaining but not serving the objective of the ad.

Harvard professor Thales Teixeira has conducted interesting research on this regard and wrote a paper – “Why, When, and How much to entertain consumers in advertisements?” This is based on a facial tracking study (software used to track the facial emotions) in response to the TVCs. This is a first of its kind study and is the latest (dated January 2013).

One of the key hypotheses for the study is – Does high entertainment in advertisements have detrimental effects on persuasion and purchase intent, while having beneficial effects on a person’s willingness to watch the ad?

Key Results from the Study:

1. Entertainment can overcrowd your product message.

2. Viewers tend to pay less attention to the message associated with the brand once they’re already entertained.

3. If entertainment is not brand-associated (brand comes first and then the entertainment part starts or both at once), then it works only as an attention capturing device.

4. An excessive amount of entertainment is ineffective because it reduces the ad’s persuasiveness, as the entertainment conflicts with the persuasiveness.

5. Medium level of positive entertainment leads to a higher intent to purchase the advertised brand than low or high levels.

Entertainment plays both a co-operating and a conflicting role

Prof. Teixeira found that entertainment plays both a co-operating and a conflicting role, depending on its type (i.e., location in the ad). Entertainment that is associated with the brand is co-operating, as it acts as a persuasion device both in the interest and purchase stages. Entertainment that is not associated with the brand acts predominantly as an attraction device at the interest stage, thus indirectly cooperating but also directly conflicting with the ultimate goal of the ad.

The paper talks about the role of the location of entertainment and brand in the ad and its effects on the purchase funnel. If the ad is solely intended to induce purchase from previously aware or interested consumers, early placement of the brand is recommended. This might be the case for established brands or mature products. Yet, if the purpose of the ad is to generate awareness and interest, for example for new brands or products, and other marketing tools will be used to trigger purchase, then placing the brand later in the ad will be more effective to increase its attractiveness. Lastly, for ads intended to increase interest and purchase, ad persuasiveness and attractiveness should be balanced.

The study shows that entertainment, while increasing interest, can hurt purchase intent, especially if it appears before the brand, and can help purchase intent, when it occurs after the brand. So having the brand appear later may work if the objective is more towards building awareness. But still I am not a strong supporter of entertainment coming first and then brand later. If you want to be safe, make sure that the brand has an appearance somewhere in the beginning of the ad (especially when entertainment is used for clutter-breakthrough).

Thank you.

Similar Posts on this blog:

https://brandalyzer.wordpress.com/2012/09/20/centuryplys-latest-gorilla-tvc/

https://brandalyzer.wordpress.com/2012/01/15/television-advertisements-and-relevance/

https://brandalyzer.wordpress.com/2011/09/03/flipkart-attacks-the-online-fears-with-its-new-set-of-tvcs/

References for this post:

https://brandalyzer.wordpress.com/2012/01/15/television-advertisements-and-relevance/

http://www.hbs.edu/faculty/Pages/event.aspx?num=387

http://www.affectiva.com/assets/Entertainment-effects-on-Purchase-Funnel.pdf