CategoriesMarketing Pricing

How do we set MRP?

Normally it is no big deal to set a MRP (Maximum Retail Price). All the battle is fought between competitors on the wholesale price. MRP is only a maximum, retailers can sell at any rate below it. Set it as a little high so that retailers can sell at any price they desire. It is only about printing on the package. There is no obvious consequence. Taxes are only on 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 they desire, but there is a paying consumer. Manufacturer may sell to wholesaler or retailer, but brand ultimately sells to consumer. Brand must not leave too much of flexibility to retailer to dictate their price to consumer, it must be limited.

Retailer’s interest
  • Higher margins – That is the reasons retailer does business or sells a product. He looks to maximise his returns on his efforts i.e. sale.
  • Flexibility to set price – Not all consumers are 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, retailer should be able to get suitable margins by selling at his desired prices.
  • Give discount to consumers – Retailers like to woo consumers through discounts but without giving up on 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 shop. In return the driver demands commission from the spice shop for the transaction done. The margins from the transaction should sufficiently cover this commission and still the spice shop be left with handsome margin.
  • Not be guilty – Retailer looks for additional margins without being guilty himself. If consumer complains about high price, he can always point to MRP set by manufacturer and pass the buck.

There is nothing wrong with protecting retailers interest as long as it doesn’t exploit consumers, does’t hurt the brand and his own 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. Lesser the MRP, lesser is the price at which consumer gets the product.
  • Discount – Consumer feels happy with the retailer when he gets the product at significant discount to MRP. Consumers should be mature enough here to look at absolute price at which he gets than the discount on MRP.
  • Consistent prices – 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 – Cost of raw materials keep 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 creates confusion in the stock supplied and billing rate.
  • Variations in nature of market – Different markets have different consumption pattern and cost of retail operations and hence the cost of supply
  • Favour retailers – To a brand consumer is the end, but retailers are required to reach the consumer. If retailers are not satisfied, they will only supply to those consumers who ask for the brand and sell whatever brand he likes to others. When the brand doesn’t enjoy sufficient pull, brand can ill afford to ignore retailers.
  • Different MRPs – Coconut oil is used for cooking in coastal Karnataka, so per capita consumption is more. Cost of retail operations are low as the towns are of smaller size. Cost of supply 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 rest of Karnataka, so per capita consumption is low. Cost of retail operations are high in big cities like Bengaluru due to high rentals. Cost of supply is high as they are far away from 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.

Yet another price increase

Price premium of coconut oil packs have been increased to about 10% as compared to other mass brands in the market and at par with a premium brand.

We have a sales officer Mr. Nandakishora who has strong opinions about pricing and 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 price but about fine tuning it as per our marketing strategy. Because after so long we have a 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 PremiumThen 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, Association was tending to keep the price low to discourage price rules violation.

It was not very smooth for 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 taking decisions. But bold decisions had to be taken, that is what has made me an entrepreneur in the first place. By now everyone got adjusted and were expecting further price moves by 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 in 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 association stopped fixing the price as the members had already stopped strictly following the prices. Fearing price fall due to competition we still had to increase our price premium to survive. Price fluctuations weekly were another big problem to tackle as it caused disturbance to members in our trade channel. This meant we cannot reduce prices immediately, we have to give 1 week notice to distributors before reducing price. A couple of times, we didn’t reduce 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 price 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.


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.

A friend casually asked while talking about each other, is Cocoguru the ‘Apple’ of Coconut Oil? That was 2 years after we started the business and struggling to stay afloat with various operational issues and struggling to find feet in the market. Couldn’t tell a lie and say ‘yes’, shy to say ‘no’ either. Couldn’t give any proper answer, but started imagining how an ‘Apple’ of coconut oil will be. With cut-throat competition and price sensitivity in the market didn’t think it was possible.

Coastal Karnataka market has majorly 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 area. Re-packers bring coconut oil in tankers, pack in small consumer packs and distribute at competitive prices to all wholesalers and retailers. Each one tries to undercut their price compared to others. There also exists a few age old mills (between 50 to 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 salary 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 manufacturing process must be strictly controlled to deliver right product to have 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 network.
    • 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.


Price Increase

We market Coconut Oil all over Dakshina Kannada district for edible use. In order to prevent unhealthy competition that erodes everyones profits, an association is formed among all oil millers. Minimum Price is being set weekly and all oil millers are expected to follow it in selling price of respective brands. Cocoguru started off with its price at 1 Re premium when association started 2 months back. Now we will increase the premium by 1 more Rupee and there by setting a premium of 2 rupees on a product that is valued at about 150. The following are our thoughts behind the price increase
  • Increase Brand Value – Brand Value is measured as Price Premium x Increase in sales because of use of brand name compared to an unbranded one. We invest in increasing our brand value and then look to encash it.
  • Signal of Quality – It is otherwise very difficult to communicate value of our product w.r.t. that of competition. One of the easiest and sure shot way is to increase price. While comparing 2 shirts that are seemingly similar, we tend to think that shirt that is higher priced as one that is better. Food served in a star hotel is supposed to be better than one served in an ordinary hotel because one gets a higher bill there.
  • Reason for Purchase/Sale – People should buy our product because they want it and badly want it, not because it is available at a lesser price.
  • Increase Responsibility – By price increase, in order to maintain and increase sales, one must back it up by improving the quality, service, marketing, be consistent and responsible. This will again be good for the brand.
  • Satisfaction – Company employees, suppliers, salesforce, distributors, retailers and consumers all feel very satisfied, have prestige in being associated with the brand.
  • Insulate from competitor moves – Lower priced brands are always under threat from new entrants and competitive price moves. Whereas premium brands are harder to topple by competitors. Competitors must work very hard to build their brand in order to acquire our customers.
  • Prevent Bargains – When our selling point is lower price, customer always tend to bargain. Transaction then happens only when we yield to the bargain. If we yield to those who bargain, then the one who doesn’t bargain suffers, eventually he too starts bargaining. For a routine FMCG sale, bargaining with the same customer every week is not a smooth way to deal.
  • Futile Price Wars – Price as a competitive advantage is never permanent and not worthy. We can gain a temporary sale by selling at a lower price. But competitor will immediately react by selling his at an even lower price. This will end in a price war with no winners but all badly wounded losers.
Going forward we like to increase the price gap and eventually not lend Cocoguru to price comparision with another brand. Every aspect of our business is undergoing continuous improvement, price will also undergo improvement accordingly.

Effects of Price Increase on Coconut Oil Trade

In exactly one year we have witnessed increase in price of coconut oil, coconut, copra and coconut oil cake from its lowest to highest (so far). We are all talking about it because the growth in price has been whopping 3 times! So, I will try to put across some of the wisdom at hind-sight on its effects on various stake-holders. Not many in this industry including us, would have been prepared for this change that seems irreversible now. Till now inflation has happened on most commodities except coconut.

Price increase should naturally bring cheer to the farmers. But this time it didn’t bring along the desired cheer to them. The price increase is not because of the increasing demand but more because of scarcity of the commodity. If the farmer had grown 100 nuts last year, sadly he has only grown 50 nuts this year. So, despite 3 times increase in price, his income has only grown 50%. Farmer has also witnessed similar inflation in the cost of his farm inputs like labour, fertilizers, water and so on.
Farmers generally don’t aspire to grow coconuts as much as they do for other cash crops like Arecanut and Rubber. They only cultivate coconuts for their own consumption and for plant diversity in their farm. Justifiably so, as the coconut price was way below his cost of production. This price increase should re-kindle interest in them to take coconut cultivation more seriously. If they do, this should be a great boon for entire coconut industry.

Coconut Oil finds widespread use in household cooking, baking applications, soaps, hair oil, body massage and so on. In a few of these applications, there are no easy substitutes and the demand is inelastic. That is why price is continuing to rise unabated.
Coconut from the tree was earlier used mostly for making copra and hence coconut oil. The price of coconut and copra was mostly driven by coconut oil and palm oil. Now the scenario is likely to change. Coconut Oil millers find that the coconuts cultivated don’t come as copra to their factory doors. Instead, Coconut is plucked while it is tender, the yield of coconut tree is also higher when tender coconut is plucked. Mature coconut (many times immature) is used extensively for making Desiccated Coconut. The remaining coconut that is still dried into copra again finds usage as edible copra (good shape and color) at higher price. The residue is available as copra for milling.

Coconut Processor
Profitability-wise it has been a great period for coconut traders and processors. They buy raw materials and when they about the sell the finished goods, the price would have increased. More stock one is able to hold and faster one is able to complete the processing cycle, better were is profits. Earlier the price increase brought with it some caution, what if the price comes down tomorrow? Now it has become highly predictable. But it has not been all that rosy.
Working Capital required has increased proportionally. For those with limited working capital his ability to hold stock has reduced. A certain level of stock is required to maintain quality in production (e.g. Time is required for drying copra, filtering oil through sedimentation). Minimum stock is required to meet sudden demands, ensure supply just in case production has been disrupted. While discussing with a Vendor, he was telling about his customer in Coconut Oil industry. Who were once paymasters when it comes to vendor payments have now been delaying his payments.

Extent of adulteration is directly proportional to the price difference between Pure Coconut Oil and its adulterants. Palm Kernel Oil is the often used adulterant owing to its similarities with Coconut Oil. Many other malpractices also go along with adulteration like Underweight and Sales in Black.

It is the consumer who has been badly hit by this price increase. He is obviously forced to pay much more. Also, he has to consume adulterated products. In order to keep his expense on cooking oil within budget, he will try substitutes like Palmolein Oil and Sunflower Oil. Worst thing to happen will be when he has changed his edible oil for good, when he doesn’t buy coconut oil again even when the price has come down.

Coconut Oil compared with other edible oils
Coconut Oil will join edible oils like Ghee, Gingelly Oil and Groundnut Oil as premium, local cooking oils. A place where it rightfully belongs. It should be consumed because people want to consume it and not because it is cheap. Each one of them having a cheaper substitute, Vanaspati for Ghee, Ricebran Oil for Gingelly Oil, Palm Kernel Oil for Coconut Oil. Palmolein Oil, Sunflower Oil, Soyabean Oil, Cottonseed Oil and Rice-bran Oil will be for the masses.