What is Pharma Franchise? Pharma Franchise Model, Benefits, Profitability Ratio (Profit Margins) etc

Chapter 1: What is Pharma Franchise? Pharma Franchise Model, Benefits, Profitability Ratio (Profit Margins) etc


Franchise marketing meaning is different in different industries. For understanding Pharma Franchise Model, we will need to understand the basic concept of franchising in different businesses.

What is Franchise?

A Franchise is type of business operated by an individual or group known as Franchisee by using the trademarks, branding and business model of Franchisor. In simple words, Franchise is type of distribution model where Franchisor is a company and Franchisee is individual/group that is distributing or selling franchisor’s products/service. Franchisor is providing all rights to franchisee to use trademark, brand names, products, business model and conduct business.

Franchise Models in Different Industries

There are generally two models of franchising. One is Business Format Franchise and Second is Product distribution Franchise.

Business Format Franchise: In Business Format Franchise, Franchisees are allowed to use brand name and trade name of franchise, exclusive outlet pattern, processes, products etc. This type of franchise model generally works at establishments like shop, outlet, showrooms etc. This type of franchise format is used by McDonald’s, Subway, Patanjali Store and other businesses. If we talk about healthcare and pharmaceutical sectors, online pharmacies or pharmacies chains give their franchise to open pharmacy store at different locations. Major Hospital Brands are use this type of franchise model.

Product Distribution Franchise: In Product distribution Franchise, Franchisee are also allowed to use brand names, trade names and other commercial activities. But in Products Distribution Franchise model, Franchisor manufacture/market the products and Franchisee sell and distribute the products at exclusive or semi-exclusive basis. Major example of businesses doing at products distribution franchise are Coca-Cola, John Deere, and Ford Motor Company etc.
If we talk about healthcare and pharmaceutical sector, most of pharmaceutical companies work of this franchise model. And Pharma Franchise Model is in another sense is a modified Product Distribution Franchise model.

What is Pharma Franchise?

Pharma Franchise is a product distribution franchise model where pharmaceutical company provides authorization to individual/group (Pharma Distributors, sales professionals etc) at monopoly basis or other mutual agreed term & condition to use trademark, brand names and conduct all commercial activities (i.e. marketing, doctor’s promotion, distribution, appointment of distributors, payment collection etc) on behalf of pharmaceutical company at assigned territory.

Pharma Franchise Model:

In pharmaceutical industry, majority of medicines are sold through by generating prescription from registered medical practitioner. For conducting business by this way, a good sales team is required. Big pharma companies have such resources and funds so they can manage and invest at sales team. But Small and Medium Sized pharmaceutical companies don’t have much resources and funds to launch pharmaceutical company at large scale by appointing sales team all over India or aboard.

On the other hand, if a pharmaceutical sales professional/pharmaceutical distributor wants to start business i.e. pharmaceutical company then starting own pharmaceutical company will be a time consuming process and will require good amount of investment.

Now we have a pharmaceutical company who can’t manage sales team and a person who don’t have enough fund to launch own pharma marketing company. Pharmaceutical Company have good range of products and sales professions/distributors have potential to sell and distribute it. Collaboration of these two will form an association of a supplier (Pharmaceutical Company/Franchisor) and seller (Franchisee).

By this way, pharmaceutical companies can find out Franchisee at different locations of country and sell their products without appointing a single sales person whereas a franchisee can start their own pharma business without much fund and easily start with as minimum as ten to twenty thousand rupees with marketing and promotional inputs.

Benefits and Advantages:

Pharma Franchise Business is beneficial for both pharmaceutical company and franchisee. Pharmaceutical company can prevent its largest expenses that it has to spend at sales and marketing whereas a Franchisee distributor can prevent investment at large products range and inventory that would be difficult for him/her to maintain at small territory. Here we are providing some benefits that we need to understand.

Benefits for Pharmaceutical Companies:

  • Sales Team expenses can be prevented as no sales person is not directed paid by Pharma Company
  • Sell products all over India from a single place
  • Low marketing cost
  • Low administration Cost
  • Profitable
  • Only need to concentration at medicines manufacturing and stock management.

Benefits for Pharma Franchisee Distributors:

  • Start Business with small investment
  • Be own Boss
  • Easy to start
  • Ready to sell products available along with promotional inputs for doctor’s promotion
  • Good number of products to market without fear of inventory
  • Minimum Risk involvement
  • Good profit margin
  • No Sales pressure
  • No fear of infiltration as monopoly rights is provided by the pharma company
  • Easy availability of number of companies to select from

Profitability Ratio:

Pharmaceutical Franchise Business is profitable for both – Pharmaceutical Franchise Company and Pharmaceutical Franchisee Distributors. In this section we will try to find out how much profit can be earned by pharmaceutical company and franchisee partners and how they earn in pharma franchise concept.

Suppose a product is manufactured at 10/- cost. This cost includes are expenditures to manufacture a product included packaging material, raw material, processing cost etc. The cost to make it ready to sell form is 10/-. Maximum retail price range of this product in market is around 50-65/-.

MRP in pharmaceutical sector is fixed depend at whether it covers under DPCO (Drug price control order) or not. Medicines fall under DPCO have restricted mrp and fixed by NPPA (National Pharmaceutical Pricing Authority). We can’t increase mrp of these medicines from it Ceiling price fixed by NPPA.

But medicines that aren’t covered under DPCO, there is no restriction for fixing of maximum retail price. We can fix MRP of these medicines as per our need or market prospective.

Now come to the product, we have manufactured at cost of 10/- and want to sell it to market through pharma franchise. Pharmaceutical company will add its profit of margin in this cost that could be 20%, 30%, 40% or depend at company policy. Suppose company adds around 30% of gross profit of margin in this profit as it has to provide promotional inputs and other accessories also.

Now the price of product come to 13/-. It the price at which a pharmaceutical company will provide product to its franchisee. GST and freight will be extra. In some cases pharmaceutical company provides prices to franchisee which is known as net rates included of gst and freight. Then company will add gst after adding their profit of margin i.e 13+12% = 14.56 and will add freight approx. 1/- per product. Then price to franchisee will be 15.56/- i.e. 15.50/- in round off.

MRP range in the market is 50-65/-. Suppose we fix MRP is 62/- of this product and franchisee get it in 15.50/-.

Now we will deduct all expense and margins that will be provided by franchisee in market. Franchisee distributor has to give 20% margin to retailers with scheme if applicable. For this, you have to calculate price to retailer at which you will invoice to retailer. And if we will also appoint distributor (in most of cases franchisee own-self act as distributor and don’t appoint any other distributor), then 10% of margin has to provide to distributor/stockiest. Know more about How to calculate Price to retailer (PTR) and Price to Stockist (PTS) from any given Maximum Retail Price (MRP)?

If we will provide scheme of 10%. 10% scheme will cost you as 15.5*10% = 1.55/-.

If we will calculate retailers’ margin, stockist margin etc in value then it will be as follow:
  • MRP = 62/-
  • GST value = 12%
  • Retailer Margin = 20%
  • Stockist Margin = 10%
First you need to deduct retailer margin from MRP. This will give a net value that in other words we can say PTR including GST like below:

Formula used will be MRP*(1-Retailer Margin %)
Net value = 62*(1-20%) = 49.6/-

PTR Calculation:

Now calculate Price to retailer. Price to retailer (PTR) will be calculated by dividing GST value from above net value. For that you need to first calculate GST factor value. Formula for GST factor calculation is finding below:

GST Factor = (100+GST)/100
GST Factor value = (100+12)/100 = 112/100 = 1.12
PTR calculation formula = Net Value / GST Factor = 49.6/1.12 = 44.29/-

PTS Calculation:

Price to stockist will be calculated by deducting stockist margin percentage from retailer price. Formula for calculating price to stockist (PTS) is like:
PTS calculation formula: PTR*(1 – Stockist Margin %) = 44.29*(1-10%) = 39.86/-

If franchisee don’t appoint distributor and conduct distributors activities by own-self then it will have Price to retailer – Scheme – Net rate = 44.29 – 1.55 – 15.5 = 27.24/- remaining gross margin. But if franchisee appoint distributor/stockist then it will be 39.86-1.55-15.5 = 22.82/-.

We are supposing here that franchisee also own-self act as distributor/stockist. Gross margin is 27.24/-. Practically nearly 30-40% of PTR is gone into promotion and other doctor’s activities. Suppose 40% is such type of expenses i.e. 44.29*40% = 17.72/-. Now Gross profit of margin is 27.24- 17.72 = 9.52/-. Gross profit margin percent is 61.41% based upon purchased value. That will vary product to product and based upon factor like restriction on mrp under dpco or competitors’ mrp etc. We can adjust it to 60% in round off.

That calculation is based upon single piece of single product. Franchisee distributor will sell number of products with good number of quantities. If a pharma franchisee distributor purchases goods of value 50000/- from pharmaceutical company. Then he/she can generate a gross profit margin of 50000*60% = 30000/-.

Franchisee distributor if works by own then he/she has to deduct only daily and travelling expenses from it. But he/she works by appointing Medical representative then salary and expenses of medical representative will also be deducted. But at only this small amount of sale, no need of appointing any sales person. A franchisee distributor can work by own till he/she generates a good amount of sale from territory or have any plan for expansion in other territory or adding new companies in their portfolio.

PS:

In this chapter, we have discussed in detail about pharma franchise, model, benefits, advantages and profit margin in pharma franchise business model. Our next chapter is to Know about Pharmaceutical Company.

Next: Chapter 2: Know About Pharmaceutical Company and What a Franchisee Distributor Wants?

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