How does Pharmaceutical Franchise Business Concept Works?

Pharmaceutical franchise is simple business concept where two entities are needed. One that have products and second that have capability to market and sell these. Both work at mutual benefits. Throughout article, we will try to understand how it works.

Sales team i.e. medical representative, area sales manager, regional sales manager, zonal sales manager etc is key aspects for sale generation for pharmaceutical companies. Setting up and maintaining this team is expensive one. Suppose if we want to cover one or two states. Then we will require at least one medical representative per two or three districts, one area sales manager per four to five medical representatives, One Regional sales manager per four to five area managers etc. Sales team will be set-up like this.

There will be required a huge amount of investment for sales team only. This investment will be separate from investment done for setting up pharmaceutical manufacturing unit or pharmaceutical marketing company and products launching.

A newly launched and/or small & macro sized pharmaceutical company don’t have such a huge fund to set up sales team and sell their products. For selling their products, they will require individuals or groups who can market and sell their products at mutual benefits basis.

On the other hand, a sales professional or person capable to sell medicines and want to start own business in pharmaceutical sector but don’t have enough knowledge and fund to set-up own pharmaceutical manufacturing plant or pharmaceutical marketing company. Starting pharmaceutical company is also a time consuming process. It will take time for completing license formalities and product manufacturing.

Sales professional require products that he/she can market, distribute and sell like his/her own products and no other then him/her can provide these to working territory so creates a monopoly situation.

That situation creates need of each other for both. Pharmaceutical company requires sales professionals to market and distribute their product and sales professionals require company products for selling and setting up own business.

Pharmaceutical company and sales professional go into a deal in which pharmaceutical company will provide medicines while sales professional will market distribute and sell it. In other words, pharmaceutical company will provide authorization to sales professionals to conduct commercial activity on behalf of them.

Now come to profit sharing that is the most important aspect of pharmaceutical franchise business. Both require adequate profit and margin so they can easily run their set-up. Pharmaceutical franchise business model take care of both without creating any dispute.

Before calculating profit sharing, we need to understand few terminologies that are used in pharmaceutical franchise i.e. Product List, Price list, Net rates, offer, trade rate/PTS, PTR, profit margin, MRP, Promotional material etc.

Product List: Product list is a document which describes complete detail of products available at company along with their brand name, composition, pack size, packing, MRP etc.

Price List: Price list is a product list which also describes rates and offers also along with details mentioned in product list.

Net Rates: Net rates are the price at which pharmaceutical company provides medicines to franchisee partner. Net rate are calculated on the basis of manufacturing cost plus profit margin at product. One common conception about net rates is that net rates should be one fourth of MRP but it could vary product to product. Read in detail about Net Rates here

Offer/Free Goods: Offer or free goods are medicine that are given when you purchase a preset quantity of goods i.e. 10 +1, 20+2, 50+10 etc.

Trade Rates: Trade Rates are the rates at which a franchisee sells their medicines to stockist, distributor, chemist or doctor. It may be Price to stock, price to retailer or any other price at which franchisee further sell.

Profit Margin: Profit margin in pharmaceutical franchise is calculated from difference between net rates and trade rate. Other expenses like promotional, travelling expenses, fuel charges and miscellaneous charges are also included to calculate profit margin. Read in detail about how to calculate profit margin here

Maximum Retail Price (MRP): MRP is maximum price that be paid by consumer for any product or service. MRP has an important role in pharmaceutical franchise marketing. MRP is the basis of calculating profit margin, product selection and other aspect at which that depend whether product should be launch or not.

Promotional Material: Promotional and marketing materials like visual aids, reminder cards, literatures, product cards etc are provided by pharmaceutical company to its franchisee for smooth working and sale boosting.

Read Related: Medicine wholesale business profit margin

Profit Sharing:

Pharmaceutical Franchise Company provides medicines at net rates which is fixed by adding own profit margin in total cost. When a pharmaceutical franchise company sell its medicine to franchise at net rates then they have gotten their profit margin at margins.

A franchisee distributor gets their profit margin by selling medicines through prescription or other means. A franchisee distributor gets their medicines at net rates and sells at trade rate. The difference between trade rate and net rate will be franchisee gross profit margin.

From this gross margin, a franchisee distributor has to cover up all expenses i.e. fuel charges, doctor’s promotional and convinces expenses, salary of MR if any, rent, stockist margin etc. After deducting all these expenses from gross margin, we will have net profit margin of franchisee distributor.

We will try to understand it with following example. Suppose company has a product having complete cost of 8/- and MRP is 38/-, GST value is 12%. Company add its margin 2/- in it and sell at 10/- to franchisee. Now franchisee has own distribution and sell it to price to retailer to chemist/pharmacy. Price to retailer will be 28.28 (w/o GST). Gross margin of franchisee distribution is 28.28-10 = 18.28/-.

Franchisee monthly sale is 56560/- and purchase is 20000/- (w/o GST). Now gross margin is 56560-20000 = 36560/-. His monthly expenses include doctor’s promotional expenses approx. 30% of PTR i.e. 10968, petrol and other expenses i.e. 5000 etc. Approx. Total expenses is 20000/-.

Now net profit margin is 36560-20000 i.e. 16560/-

You can put your own value and calculate your own profit margin based upon above calculation.

That was over article about how pharmaceutical franchise business works. Hope this information is helpful to you...

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