Daily lots of people inquire about starting a derma franchise because on paper, dermatology boasts some of the highest gross margins in the pharmaceutical industry, often between 40% to 80% for specialised cosmeceutical and premium serums. Most ask the same questions:
How much margin will I earn?
Which company offers the highest profit?
Can I earn 40% or 50% margin?
There is always one pattern after research repeatedly two companies may advertise the same 40% margin, yet one partners earns significantly more than the other over the course of a year. The reason almost always comes down to understanding three numbers printed on every price list:
- MRP – Maximum Retail Price
- PTR – Price to Retailer
- PTS – Price to Stockist
There are three terms that will control not only what you will make, but the competitive posture of your products on the shelves, retailer buy in to your proposed deals, and ultimately, whether physicians continue to prescribe your product. We’ll use these pricing terms to show you how to appraise a derma franchise like an old time distributor, not a banner-headlines gross margin guru.
Decoding the chain: MRP, PTR and PTS
If you want to command your margins you’ll have to follow the money around the consumer to you:
- MRP (Maximum Retail Price) – The maximum retail price of the product, i.e., the highest price that is charged at the counter of a pharmacy or clinic. The maximum retail price does not include GST and includes all applicable taxes like GST.
- PTR (Price to Retailer) – How quickly your chemists, retail pharmacy or dermatology practice is purchasing the product from your stockist. PTR is always taken excluding GST.
- PTS (Price to Stockist) – Your stockist’s purchasing price of inventory from the core pharma company. When you operate as a master franchise owner, it’s the minimum entry point before your own distribution network takes its price slice.
The Real World Math with GST Factor
To find your cost you cannot just subtract percentages from the MRP to find your cost. Because the MRP includes GST 12% for medicated formulations and 18% for high end cosmetical sunscreens, you must first strip out the tax using a GST factor. If you mishandle this calculation, you will end up paying taxes out of your own pocket.
The industrial formulas:
Remove Retailer Margin from MRP: Net Margin = MRP – Retailer Margin Value
Calculate PTR: PTR = PTR (Excluding GST) = PTR (Including GST) ÷ (1 + GST/100)
Calculate PTS: PTS = PTR – (PTR × Stockist Margin%)
How MRP grow your business?
You’ll get loads of new comers, who think a higher MRP equals more profit, when in reality the pricing should reflect the expectations. If I price my Niacinamide serum miles above similar other products, then it’s highly likely that a more well-known option might be prescribed, a more competitively priced alternative! The retailer’s increased confidence and acceptance to be prescribed with.
Why is PTR important for retail relationships?
Retailers benchmark profit margins across competing brands. When a retailer’s product cost relative to the purchase price creates little profitability for the retailer, other products may take precedence. By providing adequate retailer profit margins, retailers gain incentives for product visibility, future purchases and loyal customer relationships.
Why does PTS determine your working capital?
The doctor vs Chemist Dynamic in Dermatology
Lower PTS will boost your cash flow-but this only holds true if stock turns well and if demand and quality remain stable. Knowing your inventory and your PTS will help you. Sophisticated distributors look at PTS and stock turnover in combination, not in a vacuum.
Why is this architecture important for your Franchise Success?
The chemist’s domain the acute lines, the dermatologist the prescriptive category. Dermatologists want good clinical results and also believe in the brand perception. The doctor trusts the patient outcome.
Setting up your PTR too high in order to maintain your margins in the acute lines is a no win situation as the chemist will not stock your product or worse substitute.
Similarly, setting up MRP too low for competitive prices to appear as value would be the demise for the prescription product, as doctor will view your product as having less therapeutic benefit and of lesser quality. Premium packaging and scientific data sheet will support higher MRP thus expanding margins.
The trap of free schemes
Franchise companies know the power of freebies and will readily throw around 10 + 2 free promotions. Once you extend these deals to retailers to encourage them to aggressively move your skin-brightening serums or sunscreen products, you have to run your Net PTS and Net PTR figures again or a large volume month might leave you with a negative cash flow result because you paid for the free items.
Expiry and Breakage Realities
Skincare products most of which are topicals including those lotions, creams and Vitamin C serums do have stringent storage and shelf life limits and in the practice of retailing, you’re expected to take a cut off of any near expired items.
In negotiating your initial franchise agreement look beyond the standard PTS discount. Make sure to ask: What is the credit back policy on expiries. A business which might have slightly higher PTS but 100% buy-back on expired stock is infinitely safer than a low PTS agreement which locks you into stock that just won’t sell.
How to maximise your real margin?
- Cosmeceuticals over Generics
The pricing flexibility on medicated soaps and store-brand anti-fungal creams is virtually nil. Save your advertising money and emphasise higher-profit beauty items such as sunscreens, anti-aging serums and peel products.
- Monopoly rights deeply
Take not just your city, take the next satellites. The more territory, the higher order volumes you can negotiate from manufacturers, which lowers your entry PTS, giving you breathing room for competitive credit on major retailers.
- Marketing materials
Often you will find franchise owner with only look at the PTS without knowing that doctors conversions have been sustained by sampling. It is also known that some companies charge heavily on their visual aids, catch covers and MR bag. In this case it is inflating the PTS so claim them as free collaterals in your agreement.
How to compare two derma franchise companies?
- Is the MRP competitive?
- Can retailers make reasonable money from the PTR?
- Is the PTS model sustainable for my business?
- Are the products recommended repeatedly?
- Does the company always have the product in stock?
- How often do I get a reorder?
- How often are new derma products launched?
- Does the company give any promotional help?
Final Thoughts
Don’t get bogged down learning price terminology for the sake of learning price terminology – learn about what the different MRP, PTR and PTS really mean to your business decisions.
The most thriving derma franchise owners get their eyes on the big picture pricing balance, product quality, prescription pull, relationship with retailers and stable availability.
A truly sustainable business requires repeat customers and dependable products, not the largest advertised mark up.
FAQs
Is the MRP of product should be high?
It is important to remember that a higher MRP doesn’t equate to greater profits if it leads to overpricing or low product demand.
What is a good margin for a derma franchise?
There is no one-size-fits-all margin, as product type, competitor activit, and demand play a role.
Which brings the largest influence on bottom line?
In reality, all are important for profitability. However, the PTS have the largest impact on your gross margin as it dictates your purchase price.
Will identical margins always mean equal profits?
Definitely not. Although you may hear that several businesses are offering similar margins, differences in product popularity, prescribing habits of doctors and availability can cause substantial disparity in actual profits earned.