It is no big deal to set an MRP (Maximum Retail Price). All the battles are fought between competitors regarding wholesale prices. MRP is only a maximum, retailers can sell at any rate below it. Set it a little high so retailers can sell at any desired price. It is only about printing on the package. There is no apparent consequence. Taxes are only on the selling price, not on MRP. But, we at Cocoguru look beyond the obvious, beyond only the retailer’s interest. That is in the interest of consumers. Retailers may sell at any price, but there is a paying consumer. Manufacturers may sell to wholesalers or retailers, but the brand ultimately sells to the consumers. Brands must not leave too much flexibility to retailers to dictate their prices to consumers; it must be limited.

Retailer’s interest

• Higher margins are the reasons retailers do business or sell a product. They look to maximise their returns on their efforts, i.e., sales.
• Flexibility to set price—Not all consumers are the same. They buy different quantities and need different levels of services. Retailers also have differing levels of sales and cost of operations. To manage this, the retailer should be able to get suitable margins by selling at his desired prices.
• Give discounts to consumers—Retailers like to woo consumers through discounts without sacrificing their profit margins.
• Pay commissions—There are many spice shops in tourist areas like Dharmastala and Subramanya. The shops rely on tourist operators to bring customers to their shops. In return, the driver demands a commission from the spice shop for the transaction. The margins from the transaction should sufficiently cover this commission, and still, the spice shop will be left with a handsome margin.
• Not be guilty – Retailer looks for additional margins without being guilty himself. If a consumer complains about the high price, he can always point to the MRP set by the manufacturer and pass the buck.

There is nothing wrong with protecting retailers’ interests as long as it doesn’t exploit consumers or hurt the brand and its reputation.

Consumer’s interest

• Low price—Obviously, but the reason for stating this explicitly and in the beginning is that the brand must consider this fact while setting MRP. The lower the MRP, the lower the price at which the consumer gets the product.
• Discount—The consumer feels happy with the retailer when he gets the product at a significant discount to MRP. Consumers should be mature enough to look at the absolute price rather than the discount on MRP.
• Consistent prices – The price range in which he gets the product should not vary too much depending on the place and shop from where he buys

Challenges to brand

• Price fluctuation—The cost of raw materials keeps changing, especially when they are commodities. This results in changes in wholesale prices and MRPs. To better serve the market, every player in the supply chain needs to maintain some stock. Changes in MRPs create confusion in the stock supplied and billing rate.
• Variations in nature of the market – Different markets have different consumption patterns and costs of retail operations, and hence, the cost of supply
• Favour retailers – To a brand, the consumer is the end, but retailers must reach the consumer. If retailers are unsatisfied, they will only supply to those consumers who ask for the brand and sell whatever they like to others. When the brand doesn’t enjoy sufficient pull, it can ill afford to ignore retailers.

Conclusion

Different MRPs – Coconut oil is used for cooking in coastal Karnataka, so per capita consumption is higher. The cost of retail operations is low as the towns are more minor. The supply cost is also low as they are closer to our factory. So, we have kept a lower MRP here. Price sensitivity is very high. Coconut oil is used only for hair and skin in the rest of Karnataka, so per capita consumption is low. The cost of retail operations is high in big cities like Bengaluru due to high rentals. The cost of supply is high as they are far away from the factory. So, we have a higher MRP there. Price sensitivity is lower.

Minimum mark up Cocoguru is no ordinary manufacturer, we are a brand that care for the consumers. So, we look to protect interests of consumers even at the cost of being not too favourable to retailers. So, we keep a tight MRP that is a maximum of 25% mark up to wholesale price.

The price premium of coconut oil packs has been increased to about 10% compared to other mass brands in the market and is at par with a premium brand.

We have a sales officer, Mr Nandakishora, who has strong opinions about pricing and is in favour of traders.
While discussing he said, “We have reached the final stage of our pricing evolution, haven’t we?”.
I countered, saying, “No, there is still a long way to go!”.
He was worried, “With great difficulty, we have increased the price premium to this stage, and you still want to increase it further?”
I swayed his concerns, “From now it is not going to be about increasing the price but about fine-tuning it as per our marketing strategy. Because after so long, we have control over our pricing.”

How did we reach here?
November 2014 – 1 Rupee Premium – Association was formed and prices were fixed by them. We used to supply to shops directly with our own vehicles.
January 2015 – 2 Rupees Premium – Then we changed from van sales to distribution system. Distributor was given at association wholesale rate which was 3 rupees discount to retailer rate. With 2 rupees premium, we gave distributor 5 rupees margin.
July 2015 – 3 Rupees Premium – This was because the Association decided to reduce the wholesale discount by 1 rupee to just 2 rupees. We retained distributor margin by increasing retailer price.
November 2015 – 5 Rupees Premium –The Association was tending to keep the price low to discourage price rule violations.

It was not very smooth with every price increase. We lost a couple of distributors, a few wholesalers and many retailers. Even those who continued buying from us raised serious questions. I used to get very nervous before making decisions. But bold decisions had to be made, and that is what made me an entrepreneur in the first place. By now, everyone had adjusted and was expecting further price moves from us. We were left with only loyal customers; retailers kept our brand only to give to those who asked for Cocoguru. Still, this customer base was substantial to help us survive. We gained confidence as these are the customers who we have rightfully earned.

April 2016 – 6 Rupees Premium –. To supply to distributors we introduced as super stockist and his margin of 1 Rupee was added to price.

By now, the Association stopped fixing the price as the members had already stopped strictly following the prices. Fearing a price fall due to competition, we still had to increase our price premium to survive. Weekly price fluctuations were another big problem to tackle as they disturbed members of our trade channel. This meant we could not reduce prices immediately; we had to give 1 week’s notice to distributors before reducing the price. A couple of times, we didn’t reduce the price even after 1 week, and hence, the premium increased from 6 to 7 to 8 to 9, back to 7 or 8 and then to 10. While our competitors change prices weekly, we don’t change our prices unless there is a major change in raw material cost.

This has enabled the distributors to purchase confidently without worrying about price fall after their purchase. We have successfully differentiated ourselves from competition and I can peacefully enjoy my Sunday without worrying about their price. Now, we have gained great control over our price, we will fine tune it further.
Two thoughts on “Yet another price increase.”

Starting today, we will increase our wholesale price premium per litre by another 2 Rs from existing 3 Rs to make it 5 Rs. I owe an explanation to various stake holders like company sales force, distributors, wholesalers, retailers and consumers about the move.

While talking about each other, a friend casually asked if Cocoguru was the ‘Apple’ of coconut oil. That was 2 years after we started the business, struggling to stay afloat with various operational issues and struggling to find our feet in the market. I couldn’t tell a lie and say ‘yes’; shy to say ‘no’ either. I couldn’t give a proper answer, but I started imagining what an apple of coconut oil would be. With cut-throat competition and price sensitivity in the market, I didn’t think it was possible.

Coastal Karnataka market has major 2 types of coconut oil suppliers: small millers and re-packers. Small millers have a couple of rotary machines, do job work service and cater to small local areas. Re-packers bring coconut oil in tankers, pack it in small consumer packs, and distribute it at competitive prices to all wholesalers and retailers. Each one tries to undercut their price compared to others. There are also a few age-old mills (between 50 and 100 years old) that sell their brand to a small niche market at a premium price. They have no fixed costs like bank loan interests and repayments and salaries to professionals. They don’t even have a hunger for growth, as they will be battling with succession plans.

In a market like that, for a new comer like us, with large fixed costs, loan repayment pressures, with foot barely set in the market, increasing price is the hardest decision to make. There is a huge risk that traders will alienate us, but consumer demand is what we can cling on. It is a path less travelled, but we are here to make a difference.

Higher price automatically leads to more profits is far from truth here. If short term profit is the motive, reducing price should build volume and compensating lower price by slightly reducing quantity, lowering quality, adulteration and tax evasion gives far better margins. Brands that provide full value of coconut oil to consumers have around 20% premium to mass brands. So, our 2 rs price increase now is just a means to end.

Till now one rupee was increased every 6 months, so as per plan the next increase was due in January. But we are doing it now because of the adverse circumstance we find ourselves now. Despite association being formed in coastal Karnataka, millers are resorting to short-cut routes to earn a sale by undercutting their rates below the agreed base price. Countering to that the price deciders in association have resorted to deep price cutting.

Complaints of manufacturers selling oil at below association base rates prevail. We would like to warn that prices will be dropped further and will be dropped deeply if this trend continues and will be kept lower until all undercutting stops.

Undercutting will never stop, we don’t have deep pockets to survive, we don’t want to compromise on our quality and value to alienate our consumers.

We have been trying to deliver more value to our consumers and will continue to keep the promise, which I would like to highlight a few here

• Sweet taste, aroma – This means purchase of good quality copra whose FFA is less than 0.5%. Such copra costs about 5% higher than ordinary copra with FFA of about 1%.
• Long life – Once the raw material quality is ensured. Each stage of the manufacturing process must be strictly controlled to deliver the right product to have a long shelf life of 6 months to 12 months.
• Availability – Regular availability of stocks, irrespective of season, market price and demand fluctuations. Also availability in wider geographical region, rural/urban areas, wholesalers/petty shops. This requires maintaining adequate stocks and effective supply chain management and distribution networks.
• Branded – A brand has the responsibility to stand for something and exceed customer satisfaction relentlessly. It should be well-known and liked. Demand should be driven by consumers instead of being pushed by traders.
• Food Safety – Coconut Oil is recognized as a food product and is given the respect it thoroughly deserves. It means maintenance of purity, necessary hygiene and safety standards.

Copra prices change daily and multiple times within a day, but association coconut oil prices are changed weekly. That itself is too short a cycle for a smooth trade along the channel from manufacturer to consumer. That is how commodities are traded not how branded consumer products are distributed. We intend to raise the price sufficiently high so that price comparison stops and when we have full control over our price we like to change prices at a much lesser frequency like monthly or quarterly.

To summarise, the intention of increasing price is not to increase profit but to increase customer value. Thanks everyone for your kind cooperation.

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