How to calculate Profit Margin (Net Rate to MRP) in Franchise Marketing?

Different types of franchises in Ayurvedic sector, we have discussed in our article: How to take Ayurvedic company franchise?.

In franchise type where company gives outlets franchise profit margin is fixed by companies but in case where companies provide marketing rights, profit margins could be varying according to your potential and selling technique.

In this article, we will cover profit margin calculation in marketing right franchise distribution/marketing. First we need to know there is no fixed margin in this business unlike others. Profit margin depends at your marketing skill and types of distribution you are using i.e. prescription, OTC, Ayurvedic hospital supply, generic distribution etc.

The profit margin, we are going to discuss here will be approximate because we will calculate by directly deducting retailer margin from Maximum retail price, not through PTR/PTS calculation. To know how to calculate Price to Retailer (PTR) and Price to Stockist (PTS) here

In marketing rights franchise system, following major terms you should be used to:

Net Rates

Net Rate is a price at which company sell products to its franchisee. Every company has simple way to calculate its net rates. Net rates and MRP depend at many factors like raw material cost, market conditions, competitor’s price, price control by government if any and much more.
Net rate = Total Manufacturing/Processing Cost + Percentage of Margin
Total Manufacturing/Processing Cost = Raw Material + Packaging Material + Excipients + Processing Cost + Taxes + Transportation Cost + Promotion and Marketing Material Cost + Other Hidden Expenses etc
Profit margin varies company to company. Some companies take lesser margins and few takes high margin.

Scheme/Offer:

Scheme and offers are free goods that are provided by companies at purchase of particular quantity of a product or any particular amount or any other terms.

Trade Rates:

Trade rates are rates that are provided by franchisee to their distributors/stockist.

Maximum Retail Price:

Maximum Retail Price is a maximum price at which a good/service could be sold to final consumer by a retailer.

How to calculate Profit Margin (Per Piece/Unit/Strip)?

Suppose we purchase a product having
MRP 40/-
Net rate 10/-
Add transportation cost and others: 1/-
Product Cost: 11/-
Retail Margin: 20% plus 10% offer
If we calculate retailer’s 20% margin and offer then it will cost approx. 9/-
Deduct MRP-Retailer’s margin = 40-9 = 31/-
Distributor Margin: 10%
According to distributor’s 10% margin, it will cost you approx. 3/-
Deduct amount after retailer’s margin – distributor’s margin = 31-3 = 28/-
If you will deduct your product’s cost from this amount i.e. 28-11 = 17/-. You will have 17/- remaining in your hand.
In this 17/-, you have to manage doctor’s commission/promotion, your salary, team salary (if any) and other expenses.

Suppose approx. 40% of retailer’s price, you have to spend at doctor’s promotion and commission then you have to spend approx. 12/-.
Now deduct this 12/- from remaining amount. You will have 17-12 = 5/- as a profit margin. If you calculate profit margin in percentage then it will be (Profit margin/Net Rate)*100 i.e. (5/10)*100 = 50%

Some franchise distributors supply goods at further net rates to doctors, hospitals, chemist, wholesalers etc by adding their margin. Their supply rates will be Net Rate + (Net rate * % of margin).

How to calculate Profit Margin (Monthly Purchase value)?

Similarly if you purchase goods of 10000/- per month with MRP of 40000/-. Profit margin will be approx. 5000/-

As we discussed, values that are taken is approx. This is Idea to calculate profit margin in Franchise Distribution. You can put your own value and calculate.

Net Rate Sale:

Some Franchise distributors supply goods to further net rates to hospitals, doctors, vaids, hakim etc after adding their profit of margin.

Supply Rate = Net Rate + Expenses + Profit Margin (10%, 20%, 30% etc)

Hope above information is helpful to you...

For any query and suggestion, mail us at pharmafranchiseehelp@gmail.com

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