CategoriesPricing

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.
Conclusion
  • 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.
CategoriesPricing

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.

CategoriesPricing

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.

CategoriesCoconut Oil

Adulteration in Coconut Oil

Recently, 9 coconut oil brands have been banned by food safety department in kerala.

The department has banned oil brands Kera Plus, Green Kerala, Kerala A-one, Kera Super, Kera drops, Blaze, Pulari, Coco sudham and Kallada Priyam from the state on Wednesday, 8 April, reported Asianet News.

Having experience of 3.5 years in this coconut oil market, this is no news, it has been quite rampant. Here are a few relevant points –

  • A famous entrenched brand of Coconut Oil, market leader in Dakshina Kannada and Udupi is adulterated. It is a great case study of how one can build market leadership by satisfying traders than consumers
  • If the brand from Dakshina Kannada has name ending with letter ‘A’ it is definitely adulterated. A market leader will create many followers, who unfortunately have picked up the same bad habbit.
  • Coconut Oil brands from re-packers are more likely to be adulterated than those from oil manufacturers
  • At all India level, a famous brand from east having 5% national market share with tagline “Mera Pyar …” is not pure coconut oil. Legally speaking they have never claimed it is pure coconut oil, but they have not let the consumers know it is not pure either
  • KLF, a major coconut oil manufacturer in a bid to take on adulterated coconut oil with price is introducing blended coconut oil with sunflower oil
  • Oil Millers from Kerala are best friends of coastal karnataka based traders, as they sell coconut oil at lower price and buy copra from them giving a higher price. How is that possible?
  • Consumers have lost faith in coconut oil. Not because coconut oil is bad, but the coconut oil that they get is so bad. Example of how an industry can devalue the product they sell
  • In the midst of all this, genuine oil millers are getting badly affected, traders measure brands only by price. So a forum was started in Kerala to save coconut oil

Palm Kernel Oil
Palm Kernel Oil among oils is the closest to coconut oil in terms of chemical characteristics especially fatty acid saturation level. It blends easily with coconut oil, price is only about 60% that of coconut oil. So, mixing makes perfect sense. As I observed in North Karnataka market especially Belagavi, 90% of oil that is traded as coconut oil is actually palm kernel oil. I met a witty trader who said, “Your coconut oil prices changes with copra prices, but here it doesn’t, it only varies with palm oil prices”. I couldn’t control my laughter. At the time I visited Belagavi, price of so-called coconut oil was lesser than that of its raw material i.e. copra. Their defense is people in villages like to purchase hair oil at cheaper price, after all it is still a vegetable product.

Chips/Paring Oil
While manufacturing Desiccated Coconut Powder, the black skin in coconut is removed and only kernel is powdered and dried to make final product. This skin is a byproduct. It is dried and sold at about 65% of cost of copra. Like copra it is also rich in oil content. But the quality of oil is inferior to that from copra. Most manufacturers mix these chips with copra for oil extraction. Sophisticated manufacturers extract oil separately, refine, bleach and deodorize it to remove of excess FFA, dark colour and bad odour. This is later mixed with pure coconut oil or packed as it is. There is a large such unit in Tiptur that makes “Kasadinda Rasa” as we say in Kannada, turning a waste into a useful thing. Possible defense is it is oil extracted out of coconut and is hence coconut oil. That unit is not to be blamed (legally) as this oil can be used for making soaps. But the re-packers who buy this oil for marketing as edible oil is to be blamed.

The above 2 forms of adulteration can be detected easily by testing for Iodine Value. Iodine Value indicates the degree of saturation in oil, in fact, Iodine Value is equal to the degree of unsaturation in oil. Coconut Oil being highly saturated (92%) has an IV of about 8. All other oils have IV that is much higher. Due to variations is Copra, the allowed range for IV is 7.5 to 10. Paring Oil will have an IV of about 20 and Palm Kernel Oil about 25. So, Coconut Oils tested to have IV of above 10 is definitely adulterated.

Second grade oil
Best copra is white in colour and has a pleasant odour. Rotten copra will be darker and have pungent smell. Due to inferior quality, they are available at a lesser price compared to superior grade. This copra can be mixed with good quality copra during oil extraction. The resulting oil will appear good, but will deteriorate quickly. Copra manufactured from Coconut comes in all grades. Edible grade sells at highest rate and it is separated. Of the remaining, ideally second quality copra should be segregated, but many millers don’t.

This can be detected by just checking the FFA/Acid Value. Lower the acid value better the quality. Good quality oils have FFA of less than 0.7. Allowed is up to 2.0 for edible use.

Refined Coconut Oil
Excess of FFA (Free Fatty Acids) in Coconut Oil can be chemically removing by neutralising with a base, this is called refining. Coconut Oil extracted from second quality copra or that is solvent extracted from coconut oil cake is refined. This refined oil passes all the chemical parameters of food safety, but consumer is deprived of its taste, aroma and quality. We sell our coconut oil cake to a major solvent extractor in Kerala. I just asked him, where do you sell the coconut oil, he said it is finding major demand among re-packers. Re-packers buy inferior quality coconut oil and mix it with refined coconut oil to balance FFA. Surprisingly refined coconut oil is cheaper than just filtered coconut oil.

Use of refined coconut oil can be detected by again checking for FFA. Even the best quality coconut oil will have FFA not less than 0.4. Refining brings FFA down to 0 also. So, if the FFA is abnormally low, it means it has refined coconut oil.

I have leant these things recently, as I was forced to think and find out how other brands are able to sell their coconut oil at a lesser rate. Initially, I used to think

  • They are getting copra at a lesser price
  • Their manufacturing and overhead expenses are lesser
  • Their oil yield might be better
  • They know how to time the market and buy copra when it is at lower price
  • They are satisfied with lower margins
  • They are just doing it for the sake of brand building

But now I understand the various malpractices that are in vogue. I will write a detailed post later about other malpractices.

CategoriesManagement

80:20 Principle and its application

A business friend gave me a book “The 80:20 Manager“, I didn’t read it for 6 months thinking it is just another self-help book that is good to read but tends to be forgotten after a week. But this was something that was inline with my established beliefs and it was not hard to follow. It rather, gave me confidence to implement what I believed.

In essence, book is about Pareto Principle applied to management. 20% of selected inputs leads to 80% of outputs. For business, 20% of customers can give 80% business and profits.

Since starting 3 years back, business has been journeying in various ways. Here are a few ways in which we got back our focus in the last 3 months.

Other edible oils trading
With coconut oil getting dearer, consumers were shifting from coconut oil to other edible oils. So, our business within existing market was getting reduced. Demand was shifting from bigger SKU like 1 Litre pouch to say 500 ml pouch. So, we had started trading in other edible oils like Refined Palmolein Oil, Refined Sunflower Oil and Lamp Oil. With this, we could

  1. Provide our existing Coconut Oil customers i.e. Retailers with full range of edible oils, so that they could source more from a reliable vendor
  2. Get more income from same customer at same distribution expense and more sales turnover
  3. Use vehicle load fully, keep better tab of fluctuations in other edible oils

But with it,

    1. The focus started shifting away from our core business of manufacturing and marketing coconut oil.
    2. Adequate service could not be given to our customers because of supply disruptions from our vendors.
    3. Lot of works were to be done in transportation, unloading, loading, accounting, leakage processing, payment, selling in credit, managing working capital etc.

What seems like busy work and turnover was actually not contributing towards building Cocoguru brand or increasing bottom-line. So, we just stopped them altogether. That provided a lot of relief and we closed Sullia godown, released a rented vehicle and saved on a few resources.

Distribution
Wholesalers/Retailers were given supply of coconut oil through our Sales Van. For this we had to arm the vehicle with a driver and salesman. To account for those transactions an accountant was required, an officer was required to manage the delivery team. These are unrewarding work for a manufacturer, but had to be done initially to sell our products. The cost was very high, 40% of our company expenditure was going towards sales and distribution. We had 5 delivery vans to supply all over Dakshina Kannada district.

I always had a dream to stop doing line-sales ourselves and get distributors to do it for us. But distributors will take it up only when the brand is popular and they are confident of selling it. The margins should also be sufficient to sustain their business by only selling coconut oil.

The tough decision of increasing our selling price has made it possible and very soon. We left out less productive sales people, made enthusiastic sales people as distributors, gave away our existing vehicles to them at a reasonable price. With this we could leave out about 12 people from our payroll, stop renting 2 vehicles, sell 2 of our own vehicles, save the work of 2 accountants, Logistics officer and Top Management. Expenses are very less and under control, selling price is predictable. When the distributors have to sell to earn for their living their performance is even better and sales improved.

Leave Customers
With the eagerness to sell more and acquire as many customers as possible, we tend to serve any customer at any cost. But some customers are not worth our attention. Some need discounts, need credit, need pampering, are difficult to supply, need a different quality, put restrictions on us and still never get satisfied. Bolding leaving them out is a win-win situation for both the customer and us. We can cater to profitable customers better, others can get their desired service from a competitor. For every customer lost, there are a couple of them to be gained.

Piece Work/Contract Labour
If we believe in Theory X, labourers are lazy, they tend to take away maximum wages for minimum work. While employers looks to get maximum work for minimum wages. Mostly the labourers have their say. It is cumbersome for supervisors to get maximum work with quality from them always.
So, to align their work output with their income, we have made a piece work system, where they get paid only for the units of work done and not on attendance. This is system is fair for all workers, they are not paid on seniority, experience or any prejudice, only on output they produce.
In any annual appraisal discussion their only focus is on the revised salary, without any regard to their past performance or skills to be developed, responsibility to be assumed in future. For such people giving instant reward is the way to go.

After doing this their performance have increased multiple folds. Example, for a 5 member team segregating 6 tons of copra a day was very difficult, now 3 members are doing it very comfortably and with better quality.
For bulk quantity loading and unloading, in house labourers weren’t willing to do, so external labours had to be called. Now for 10 paise per kg, they are willing to do.
In packing section, where 9 people couldn’t finish all packing jobs, now after leaving 3 people, the 6 people are having enough time to go for other jobs.

Overall we could leave about 8 less performing people and better performing people are getting handsomely paid. Form 30 labourers we have brought down the count to about 20, work is getting done faster and better, existing labourers are fully engaged and satisfied.

With all these steps, the amount of administration work has come down drastically. Again couple of people who have become redundant were left out. With this lean an organization, it is possible to even double the business without having to add any headcount. Any decline in business can also be managed with minimum overheads. With operations focused and streamlined, way forward is to grow sales through advertising and appointing distributors to cover more area. From accumulating losses for 2 years and not knowing way forward this is a very pleasant situation to be in.