Indian Telecommunication Market is in for a shake up ! AIRTEL-VODAFONE-AIRCEL-IDEA : JIO

With Reliance Jio entering the Mobile network market in India many believe it has started a war of sorts and the whole market is panicking. 13,500 crore Rs. was lost in market capital in a single day and tariff cuts are being announced by Airtel, the largest mobile network service provider in India.

But if we have to analyse this brick by brick, we can dismantle the new wall built by Jio and Airtel or any other mobile network for the matter of fact can be peaceful at mind and concentrate on retaining their customers in a more friendly manner. I have split this blog into 3 parts for better understanding :

- Prequel
- Present
- Sequel

Market share by service providers as on 1-Mar-14

Credit:www.telecomlead.com

PREQUEL 

Before any new entrant hits the market with a big plan and capital in hand, we can be rest assured that the industry leaders will be well informed about the new entrant's move if not for the full picture atleast partially. This partial information should be enough for the experienced market leaders to take decisions that should keep the new entrant in check. Airtel's move to give away 5GB free data for every broadband user was a preparatory move but was it successful, I would say it did not really impress its existing customers nor did it create enough excitement in the market to get new customers for Airtel.

Both Vodafone and Airtel came up with flexible post paid plans that were quite user friendly unlike their earlier either rigid plans or plans with hidden terms that gives you bonkers every month. Airtel even came up with an open network promotion where they advertised about their existing tower locations and they claimed to be transparent to their customers. But where both Vodafone and Airtel lost is in gaining customers' trust and that is what has left them to panic right now, for customers will be more than willing to port their numbers to Jio and currently it seems the effort needed to port one's number to Jio is worth it.

PRESENT

Porter's 5 forces is the best tool to explain the current situation

- Threat from New Entrant

- Threat from Substitutes

- Competitor Rivalry

- Bargaining Power of Customers

- Bargaining Power of Supplier

Threat from New Entrant

This is the first or the real threat that has caused ripples and activation of the other 4 forces. Reliance Jio is the new player in the telecommunication space but Reliance is not taking things for granted and they are playing their cards carefully unlike the original Reliance Communication's (RCOM), currently owned by Anil Ambani, entry into the CDMA mobile network which was and is not so successful venture.

Reliance Jio unlike RCOM which gave away handsets for free with no proper recovery mechanism leading to huge losses, is betting on cheap tariff charges alone to attract customers. This has directly hit the customer base of the existing large players who have huge customer base with less or very little loyal customers.

The cost of entering the mobile network market is very high but with Jio's capital investment power of 1,50,000 Crore this is very much achievable and it can be done with sheer style and strength.

Threat from Substitutes

The entry of Jio has created a new substitute for the existing networks and in fact it has also created new substitutes within the existing players due to drop in tariffs among the latter. This time substitute is not in the form of products but it is in the form of service providers. Now customers have a new service provider who says he will listen to their requests, give them free call services, low data tariffs and please them with offers.

The worse thing that existing players can do right now is to match the plans that the new substitute is offering and sadly that is what is happening right now.

Competitor Rivalry

Competitor rivalry was always there in the India mobile network market but it was not that aggressive all this while because one way or the other we paid the same amount as tariff to all the service providers, so customer's preferred to pay a bit more and stay with a good mobile network provider rather than being pulled by offers with hidden terms and conditions.

But with Jio's entry it has all changed and there is a new rivalry again in the market and this time experts call it a war due to the aggressive stance Reliance has taken. The rivalry will only worsen now, at least for the next few months until the dust settles.

Bargaining Power of Customers

With the above 3 forces acting in conjunction with another on each one of the service providers, the bargaining power of the customer has increased. In fact customers can now call up the customer service and ask for discounts on their post paid bill to stay in the network, if you are taking this for a joke try it for yourself and you will be successful if you pitch it right.

The bargaining power of customers will only increase if the existing players and the new entrant keep fighting to expand and retain their customer base.

Bargaining Power of Supplier

In mobile network market, the only supplier for telecommunication network is the Indian Government. So there is not going to be much change except for players betting higher to get more spectrum. If the betting is more aggressive then it can lead to huge capital expenditure but since these are amortised and paid to government over the period of 10 to 20 years it can be kept under check.

Bargaining Power of Employees

This is one force that we look down or shy off and it is not part of the Porter's 5 forces but this is a serious force that can come to devour into the efficiency of the existing players. With an entry of a new and big player in the market, it is sure to attract existing talents. The new player can bring in new hardware, new offices, new network, new ERP but he will require experienced talents from the existing market and if the big players were not treating their resources well then they are going to be in for a bigger surprise. Attrition can impact the overall efficiency and it can worsen the panic situation for a new employee will not understand the core strength of the company and will play the wrong cards at the wrong time, only to worsen the situation further.

HOW TO HANDLE THE SITUATION

Now that we have seen an overview of the existing market situation, the existing players should come up with quick and actionable business plan to tackle the threat and rivalry created by the new entrant. We can come up with a few DOs and DON'T and plan of action

Don't create a panic Situation

Do not panic and create one in the market as it will lead to a worser stock market situation which has already happened in this case.

Understand the strengths and weakness of the new entrant and your competitors, if you have already done a SWOT for your competitors do one again because your competitor's strategy has been altered by the new entrant just like yours.

This will give you the insight to hit the right cord with your customers and retain them. This will also create new opportunities to pull the confused customers, from the existing rivals, who are not sure whether to change their network to Jio or not

Avoid Hidden Charges

It's high time you stop charging customers heartlessly for their ignorance, like draining the entire airtime for no reason within a few minute once the data pack is 100% consumed or charging randomly a few customers with no reason at all and then giving them lame excuses to justify that through untrained call centre employees.

Instead be transparent to your customers, charge them for what they use. Do not give them nightmares and train your call centre employees to handle customer's properly. Put decision makers behind the telephone and not parakeets who are worse than your automated answering services.

Avoid Price Cuts

Do not go for price cuts to match the new entrant all of a sudden. This will be the worst thing to do. Customers are now more cautious and educated, they can very well understand that if you cut the price now that means you have been looting them all this while or you are temporarily doing this to lure them to stay. This will only encourage them to switch if not to Jio may be to any other network.

Instead give them freebies and loyalty bonuses such as free talk times and excess data on recharges. When a customer applies for number portability through message, give them a call and tell them that they have been qualified for free talk time and free data pack and credit it instantly to their account. Then if your call centre contacts them for portability, for sure most of them will cancel the application for portability. This will retain them until the excitement created by Jio settles and they will stay with you after that for you have created a connection with them. And DON'T TRY to recover this freebie from them later through hidden charges.

Use Analytics

Perform competitor analysis and see what strategy they are adopting to tackle the situation. You got to have ears and your ears got to have ears in this situation to gain as much information as possible about the market situation. Only data analytics will not help you in this area, inputs from industry experts and information from your ground staffs will help you do the right thing.

Perform customer insights to see what segment of your customers are dropping out of your network and why. Try to gain deeper insights with the help of your data analysts, they are the most valuable resource to your right now. Mining your data to get patterns and to understand where you can concentrate to retain your customers, by looking at their usage trends. Start customer centric promotions and give loyalty bonuses based on the respective customer's usage trend. It will save you money and help you do just the needful to retain your customers by putting a big smile on their face.

Check for high usage and loyal customers who have stayed with your for long and give them bonuses as talk time or data without them asking for it. Do not ignore them assuming they will continue to stay with you.

Treat your employees well

You need your employees now to your rescue more than ever before. Get your ground staffs and operations team motivated. See for opportunities to do it with little operational expense. Let the CEO do the talking and address the employees through conference. Explaining the current situation and guiding them how to pull it off. Do not let them move to your competitors. It also depends on how well you have treated them so far, if you haven't treated them well then please get yourself prepared for the stormy days to come.

The worst thing you can currently do is to cut cost by reducing usage of paper, by stopping or reducing the quality of services, beverages and snacks provided to employees. This will be a 'Penny wise pound foolish decision to do' and if you are going to cut your employees increments during appraisal it will take a toll on your best performers. Ask your HRD to do a more performance based appraisal and not the regular bell curve. Give spot awards and introduce Gamification in your organisation, this is the best time to implement it to keep your employees' moral high.

Advertise and Connect

Connect to your customers and indirectly you have to highlight the faults of your competitors with humour by projecting your strengths just like what coke and pepsi does to each other. The best thing for Vodafone to do will be to reinstate their ZOO ZOOs for they will bring back the glory days of Vodafone and gain customers, they can be put to the right use to mock at the competition.

Do not spare your competitors in the commercials and do hit the sweet spots with your customers, put your marketing team to work to come up with a creative marketing campaign. This will be the joker card that will bring you fortunes by winning this game of rummy that Reliance has pulled you all to play, willingly or unwillingly you will have to play it, spectators have no room.

SEQUEL 

Now for the Sequel, if you can get the solutions mentioned above put in place and analysed, you will build resilience and survive the storm. There are so many lessons to learn from this market disruption attempt by Jio. Your business strategy is being put to real test and if you find it faulty, have the heart and mind to accept it and change it for the better, being rigid and stuck to your point will only throw you to the backseat for you to never raise again.

Reliance Jio has adopted a 'Red Ocean Strategy' and it has not only disrupted the market for the existing players but also for itself. It has created a price competitive market rather than a customer centric market. Being a new player this will give a lot of hick ups to their own operation because it will not be profitable and even after amortisation of the capital invested their balance sheets will be out of balance for the first few years. This means pressure from investors and capital crunch. It may lead to poor network coverage and customer service and when the excitement dust settles it will settle only to bury them in their own ditch.

This is one of the main reasons why not only did the share value of Airtel, Vodafone and Idea fall but so did the share value of Reliance Industries.

But if they have the financial band width to accommodate all this loss as a investment cost to enter the new business area and either write it off as loss or amortise it and show profits with higher customer happiness index and network quality then the competitors will have to run for their money. But this is hard to come by in the ruthless corporate world where investors spare none and if the investors lose faith then Jio will end up being one of those second tier players in the market with lot of hidden chargers to recover the losses incurred and with cost cutting down the line leading to resource attrition and unhappy customers. But only time and customers can decide this, all that the network providers can do right now is to truly impress their forgotten customers.

If you see mergers of relatively smaller service providers then don't be in for a shock. It is still a good option to tackle a giant as big as Reliance. What an 'idea' sirji ! 

AN INTRODUCTION TO INCOME STATEMENT

We shall discuss on how we can arrive at our organisation's profit and loss without getting into the core financial side of the business, this is also known as Income statement. I have kept it as simple as possible for retail business users to understand the calculation mechanism and the various factors that impact our profits. I have not included capital expense, re-investment of funds, expansion expenses, paid-up stock value, creditors, debtors, dividends, etc. I have only considered a few simple expense and revenue components to give an understanding of how we can arrive at our Income Statement
Before we begin with the workings, let us understand the below terms that will be used in the calculations that follow :

TURNOVER
In simple business terms turnover is nothing but our front line sales i.e. the sales value realized after deduction of VAT, sales and service/miscellaneous taxes that are collected from customers.

COGS
This is the cost of goods that are sold i.e. (Weighted average cost of the goods sold X quantity sold). This helps us understand the purchase cost incurred for the sale of a good and this amount does not include VAT in it. This is the weighted average of the unit cost at which the goods are purchased. Refer "RETAIL FORMULAE - THEIR USAGE AND BENEFITS TO BUSINESS OPERATIONS" post to know how it is calculated

EBITDA
This is the Earnings that an organisation makes after its operational expenses and before applying Interests, Taxes on earnings, Depreciation of assets and amortisation cost. This is a simple base figure or percentage what a business makes from the turnover after incurring variable/ fixed operational costs. It gives us a picture on how efficient we operate our business and how much room we have for applying the other financial expenses as mentioned above.

PBT 
Profit Before tax or gross profit that an organisation achieves before paying the tax on earnings. This value can also be arrived at as a percentage by dividing it with Turnover value

PAT 
Profit after tax or net profit that an organisation achieves after paying the tax on earnings. This value can also be arrived at as a percentage by dividing it with Turnover value

OVERHEADS/ OPERATION EXPENSES
Every Business will have over head costs that are differentiated as fixed and variable cost for the given financial period. Examples for fixed expenses are Rent paid, Annual Maintenance Charges, etc.,
and for variable expenses are Marketing, Wages, Electricity & Water, Repair and Maintenance, etc.,
For further details check out the post "OPEX and CAPEX - Fixed and Variable Costs"

DEPRECIATION
Not all assets acquired by an organization will appreciate in value. Most of the assets depreciate in value over a period of time and it has to be eventually disposed for purchase of a new one. We cannot write off the total value of the asset after a few years in a single fiscal year in one go as it may lead pull down profits for the financial year drastically and more over it is not the right thing to do too for we have used the asset in business over a period of time. In order to manage this, the business will write off a percentage of the asset value as depreciation every year throughout the asset's life time.

AMORTISATION
Every Business will have to invest in technology, licenses and hardware but this should not be totally consumed as a expense for a single financial quarter or year because we will use them over a period of time though they are paid up front. So the lifespan of the technology, hardware and license investment is projected and the investment is split equally throughout the period. This is known as amortisation.

TAX
This is no the VAT or Service tax collected on behalf of the government. This is the actual tax on revenue that the organisation has to pay to the government. The revenue that will be considered here is the net revenue after deduction of all expenses, amortisation expense and depreciation.

I will summarise the workings at 4 levels i.e. Turnover, EBITDA, PBT and PAT with an illustration.

Retailer ABC has taken a franchise for Apple products in 4 States in India. He has 20 stores that are operational and sells all the latest apple gadgets. Lets see his sales for a quarter from April 2016 till June 2016 for both of his stores as given below

Based on the above sales figures we shall arrive at our EBITDA and PAT
Incomes
Total Gross Sales for the period  (A)                                             :  67,35,00,000
Total VAT Collected                                                                          :  8,27,10,526 (-)
Total Net Sales  (Turnover)(B)=(A/(1+VAT%))  or (A-V)           :  59,07,89,474
Cost of Goods Sold   (G)                                                                  :  49,00,00,000 (-)
Total Revenue  (C) = (A-B)                                                            :  10,07,89,474
Turnover Net Margin %  (A-G)/A X 100                                     :  17%
Expenses & Loss
Rental expense                                                                                  : 1,10,00,000
Salaries and Wages                                                                           : 1,20,00,000
Repair and Maintenance                                                                   :      3,50,000
Marketing Expense                                                                           :      6,00,000
Electricity and Water                                                                        :     12,00,000
Staff Welfare                                                                                     :     13,00,000
IT and Administrative Expense                                                        :     45,00,000
Insurance Expense                                                                            :     10,00,000
Logistics                                                                                           :     10,00,000

Shrinkage (Variance due to loss of stock)                                        :     10,00,000
Total Expense (D)                                                                            :  2,94,50,000 (-)
EBITDA   (E) = (C-D)                                                                    :   7,13,39,474
EBITDA %  (E/B X 100)                                                                :  12.1%

Interest Paid                                                                                      :     30,00,000 (-)

Amortisation value                                                                           :      55,00,000 (-)

Depreciation value                                                                            :     20,00,000 (-)

Total Income before Tax                                                                 :   6,08,39,474  

Tax Payable                                                                                       :   1,05,28,000 (-)

Profit After Tax      (P)                                                                    :   5,03,11,474

Profit Percentage to Turnover     (P/B X 100)                               :   8.5%                

The above shows how we can work a simple income statement by which we can get to know how our business operations is performing, which are the areas we need to work on and where we need to concentrate to reduce our expenses. All expenses can be expressed as a percentage of turnover to see which one of them actually eat into our profits more. I have shown the same in the below pictorial representation for all expenses as a percentage of turnover. I hope this helps to get an overview of an income statement.

OPEX and CAPEX - Fixed and Variable Costs

Will be published shortly, please come back.

Franchise Business Models

Franchising can be defined as Business Operations owned or operated or both by a third party under the licensing from the parent brand which entitles the licensee to use the brand name, operational procedures and the products of the licensor.
Franchise model is used by well established brands to expand their business presence and market share in a fast paced manner.
Benefits of Franchising to the Brand
- Rapid expansion of business
- Penetrating new markets by engaging partnership with local business men
- Reduced Capital and Operational expenditure
- Higher return on investment
- Lower risk of business exit
- Increase brand value and presence
Usually a company begins operations with Company Owned and Company Operated Model of business (COCO) but when the brand is well established, the company get into a franchise model to reduce operational cost, capital cost and to increase the return on investment through the brand value that the company has created for itself.

1. Franchise Owned Franchisee Operated (FOFO)
This model is adopted by companies for faster expansion of business/brand presence and to penetrate completely new markets with the help of local business men. In this model the training of staffs, initial store setup is done by the Company and handed over to the Franchise to over see the operations and maintain standards based on SOPs set by the Company. Then on the operations is independently managed by the franchisee. The Franchisee pays a licensing fee as per the agreed terms to the Company. Surprise and scheduled SOP audits are done by the Company to ensure high standards are maintained. When Franchise fails repeatedly in audits, the Company either levies fines or pulls out from the contract eventually closing the franchisee business.
But when well operated, the local market knowledge of the franchisee coupled with the business expertise of the Company are put to the right use there by fetching good profits for both the Company and the Franchisee.
A good example for this model are Fast Food Chains where in the business is owned and operated by the franchise but regular audits are done by the Company to ensure standards are maintained as agreed.

2. Franchise Owned Company Operated (FOCO)
This model is adopted by Companies when they want to reduce their capital expenditure and expand faster in an already established market or in a known market. In this model the franchise owns the business but the brand and the operations is handled by the company with regular reporting done to the franchisee on performance of the business. The franchisee can oversee the business and question the Company in case of poor performance. This model is usually signed under profit sharing basis where in the company gets a bigger share of the profit compared to the franchisee as it is company operated.
A good example for this model are Exclusive Brand Outlets in fashion and lifestyle retail segment where the brand operates the business with its staffs as per its standards and the business is owned by a local or national franchise.

3. Company Owned Franchise Operated (COFO)
This model is adopted by Companies when they want to reduce their operational expenditure. In this model the Company leases the operations of the business to an interested franchise to take over the operations of the business with the former holding trainings and SOP audits to ensure standards are adhered to. The business ownership still lies solely with the Company, the franchise can be changed when the Company identifies a more profitable and efficient franchisee. This model is adopted by the Company only in well established markets where the company has operated and got high return on investment.
A good example for this model is Cafeterias within Hospitals and Corporates that are owned by the company but operated by a franchise for a lease period and then new bidding happens at the end of the lease term or when the company find out that the franchise is not maintaining the expected standards.

4. Franchise Invested Company Operated (FICO)
This model is similar to FOCO but the difference here is unlike FOCO the franchise does not involve themselves in business operations at all. Only an agreed fixed amount is paid to the Franchisee by the company for the investment done by franchisee in the business. In this model there can be multiple franchise investors for a single business unit and the Company runs the business operations with end to end control of the supply chain.

MICROSOFT'S ACQUISITION OF NOKIA AND LINKEDIN IN BRIEF

As a business analyst it is always interesting to put your argument on the table pertaining to business decisions made by corporates. Please read the complete article before arriving upon any conclusion. This is pertaining to acquisitions done by Microsoft in the past few years - Acquisition of NOKIA and LINKEDIN

Acquisition has two meanings as a noun :
A. An asset or object obtained or bought by a museum
B. A purchase of one company by another

1.NOKIA'S FALL AND ITS ACQUISITION 

If you are feeling that meaning of A is making more sense in the case of Nokia's acquisition then you are right. Nokia innovation in hardware technology was not cascaded to its software side.
Stephen Elop became the CEO of Nokia in the 3rd quarter of 2010 and it all started with him and the then outgoing Nokia devices' head Anssi Vanjoki. When Nokia was stuck with a rigid Symbian OS which was making it difficult for developers to develop apps, it should have taken any one of these decisions :

- It should have looked inward and ideally gone ahead with the development and support of its linux
  based Mobile OS MeeGo operating system at least before it decided to rely fully on Windows
  Mobile OS. It was one of the first Mobile OS to work completely on swipe gestures without the
  need of a back-forward-home button. If you want to know more about MeeGo then check out for
  Nokia N9 videos on Youtube. Unfortunately it didn't go for this option. MeeGo development team
  later broke off from Nokia to commence their startup SAILFISH

- It could have looked outward and experimented with both Windows Phone OS and Android OS by
  launching a flagship device and a mid range device which runs both the OS similar to what
  Samsung did. This would have helped Nokia dump Windows OS for Android OS and this would
  have also helped them sustain their market share and develop their MeeGo OS simultaneously.
  This was a similar strategy that Samsung adopted, it used Symbian , then developed its own OS
  named TIZEN but it was not able to catch up. This made it switch to Android OS and it was a
  success but it still experimented with its TIZEN OS with lower end phones and now it has
  resurfaced again in the form of Watch OS for samsung Gear S2 in 2015. This shows the resilience of
  Samsung which is one of the key reasons it was able to penetrate the smartphone market.

The Fall of Nokia came in the form of :
- Bad support from Microsoft for Windows phone OS like a stab in the back
- Stephen Elop's biased decision making having his roots from Microsoft
- Steve Balmer's decision to acquire Nokia without having a solid mobile device line up ready

Microsoft eventually acquired Nokia to keep its Windows Phone OS alive by spending 7.6 Billion dollars in 2013 just to write it off as 8 Billion dollars in 2015 from its books as an acceptance of failure. The immense brand value and supply chain expertise which Nokia carried, all that was required was one elegant flagship mobile device, a tab and a couple of mid range devices. But Microsoft was not able to do that, it also lost the Nokia fans' trust once it changed the branding to Microsoft on its devices.
The biased decision making of Stephen Elop and the ego of Anssi Vanjoki (the Nokia devices head from whom Stephen Elop took over in 2010) brought Nokia to its knees by 2013 and Nokia's mobile phone story ended right there never to be sung again - for now.
Samsung and Apple only facilitated the death of 'Nokia devices' as it was already dying due to bad management decisions and internal rift. The below chart depicts the drop in Nokia devices market share.

Credit : Business Insider

This story reminds me of : Bears can only relish the honey from the Honey comb by breaking it, they can never make one. Honey bees though being robbed of their honey are resilient enough to build a new colony all over again. I am sure Nokia will be back into devices business post 2017 learning from their past mistakes and enjoy the success they once did.

2. ACQUISITION OF LINKEDIN

This story is a quite different one. Yes the price tag is mind boggling but the benefits what Microsoft might be potentially looking at will be as below :
- LinkedIn is a place having more actual data than any other online social place in the world for we will not publish false information to a large extent unlike what we might be willing to do in Facebook to seek attention of friends and family. So this amounts to huge amount of reliable data about real people from LinkedIn
- LinkedIn data can be integrated into cloud services of Microsoft such as Skype, Skype for Business
- Microsoft being more of a professional friendly solution provider unlike Apple which is more Creative Friendly, LinkedIn data will be apt to help Microsoft adapt to market trends and even get leads to sell their cloud based solutions, don't be baffled if you start seeing more of Microsoft sponsored adds on linkedIn
- LinkedIn data can be used in Microsoft CRM and ERP solution. Imagine a vendor portal and a customer portal in your ERP which can give you factual information from their LinkedIn profiles, advice you on potential customers and leads for your products. LinkedIn already has its own CRM product - LinkedIn Sales Navigator
- Imagine Cortana educating you about your invitees for a meeting and their professional links in your circle before you commence the meeting
- The potential to use all the above information to enhance machine learning and develop a more sophisticated artificial intelligence to help organisations and individuals on decision making is huge; Microsoft can pioneer this niche market by building a cloud based AI for its subscribers. Tay is an AI chat bot which Microsoft is developing and testing.
In this acquisition Option B looks more relevant.
It is a good deal but the humongous price tag of 26 billion dollars can be justified only if the synergy of Microsoft's professional solutions and LinkedIn's professional reach cum data is put to the right use.

MARK UP % AND NET MARGIN %

There are two types of margin every retailer uses to arrive at the net selling price i.e the selling price before application of tax. Now we can see what is mark up % and net margin % , their application in retail and how to arrive at selling price from net selling price

MARK UP % 
This is the percentage of increment applied on the cost i.e. the landed cost. It is calculated from the cost price to arrive at the net selling price and tax is applied on the net selling price to arrive at the actual selling unit retail.

Mark up % = {(Net selling price - Unit Landed Cost)/Unit Landed Cost} x 100

To calculate Net Selling Price using markup %

Net Selling Price = Unit Landed Cost x (1+mark up/100)

Unit Selling Price = {Unit Landed Cost x (1+[mark up/100])} x {1+(vat rate/100)}

To calculate mark up % from net margin % = Net Margin / {1-(Net Margin/100)}

Illustration : The landed cost of a product purchased is 500 Rs. and the net margin percentage of the product is 20% and the vat % is 14%. Now we shall calculate the unit selling price of the product :

Mark up %  = 20 / {1-(20/100)}
                    = 20 / {1-(0.2)}
                    = 20 / {0.8}
                    = 25 %

Unit Selling Price = {500 x (1+[25/100])} x {1+(14/100)}
                              = {500 x (1+[0.25])} x {1+(0.14)}
                              = {500 x 1.25} x {1.14}
                              = 625 x 1.14
                              = 712.5 Rs.

NET MARGIN %
This is the percentage of margin made or the percentage of gross profit made upon sale of a product. The difference of net margin % from mark up % is that net margin % is calculated as a percentage of net selling price rather than landed cost.

Net Margin % = {(Net selling price - Unit Landed Cost)/Net selling price} x 100

To calculate Net Selling price using Net Margin %

Net Selling Price = Unit Landed Cost / (1 - Net Margin)

Unit Selling Price = {Unit Landed Cost / (1 - [Net Margin/100])} x {1+(vat rate/100)}

To calculate net margin % from mark up % = Mark up / {1+(mark up/100)}

Illustration : The landed cost of a product purchased is 500 Rs. and the mark up percentage of the product is 25% and the vat % is 14%. Now we shall calculate the unit selling price of the product :

Net Margin % = 25 / {1+(25/100)}
                        = 25 / {1+(0.25)}
                        = 25 / {1.25}
                        = 20 %

Unit Selling Price = {500 / (1 - [20/100])} x {1+(14/100)}
                              = {500 / (1 - [0.2])} x {1+(0.14)}
                              = {500/0.8} x {1.14}
                              = 625 x 1.14
                              = 712.5 Rs.

SL NO	MARKUP %	NET MARGIN %
1	It is applied on Unit Landed Cost	It is arrived from Selling Unit Retail / Net Unit Retail
2	It can be more than 100 %	It is always less than 100 %
3	Cannot be used effectively for discount% calculations from selling price as it can be more  than 100 %	It is more effective for applying applied discount% from selling price
4	Used when Mark up calculation method used is COST	Used when mark up calculation method used in RETAIL

PRODUCT CLASSIFICATION

To efficiently manage inventory, launch products and improve sales retailers should continuously study and understand their products. The knowledge gained through such continuous analysis will help in achieving good inventory turnover, reduce inventory holding cost and better understand customer's needs.

CLASSIFICATION BASED ON MANUFACTURING (applicable for "private labels")

1. Core or Flagship products
2. Basics

CLASSIFICATION BASED ON PURCHASE AND SALES TYPES

1. Consignment
2. Concession
3. Regular
4. Deposit
5. Non-Trading

CLASSIFICATION BASED ON SALES

1. Top Selling
2. A Class , B Class and C Class products based on average sales in descending
3. Clearance goods

CLASSIFICATION BASED ON SEASONALITY

1. New Launch - Specific Season
2. Continued - All Season
3. Continued - Specific Season

CLASSIFICATION BASED ON FLOOR PLANNING

1. Preferred Category
2. Impulse Category
3. Destination Category

CLASSIFICATION BASED ON BUSINESS STRATEGY

1. High Volume Goods
2. High Value Goods
3. High Margin Goods
4. Footfall drivers
5. Image Building Goods

CLASSIFICATION BASED ON INVENTORY TURNOVER
1. Runners
2. Repeaters
3. Strangers

WHAT ANALYSTS CAN LEARN FROM CHILLING BEER BOTTLES ?

As retailers we come across multiple issues in our day to day operations that cannot wait for an analysed corrective actions, so an immediate solution is needed that too a wise one. But we end up giving the same fix over and over again.
What we need to understand is that most of us keep doing repetitive spot fixes for the same problem over and over again without actually resolving the underlying cause to an issue. The solution can be explained with a simple example and I am sure this will change your perception and plan of action towards your day to day issues.
The answer is: How an out door caterer chills the beers in the Ice box for an event in less than 10 minutes and ensures that the chillness is retained throughout the event for the beers placed in the ice box. How does he do it? Its simple, he puts a layer of solid Ice at the bottom of the ice box and places the beer bottles above it. This will keep the beer bottles chilled for longer and to get that instant chillness, he fills with another layer above the beer bottles with crushed ice. That's the trick and yes some of you will be aware of this process.
We need to apply the same principle vice versa for our retail problems. Crushed Ice is a spot fix to an issue but it will not keep out the problem for long and it will repeat. The bottom layer of solid ice is the permanent fix to the problem which will keep out the issue for ever just like it does for the beer bottles throughout the outdoor event.
When you face a problem on the shop floor, it requires a spot fix and you have to give one before it escalates further and leaves the customer unhappy. But you should not forget the solid ice. Now you have to invest time and efforts to find the actual root cause to this recurring issue and provide the permanent fix to avoid a fire fighting situation again.
This will ensure that the issue doesn't resurface and also increase your management efficiency and customer satisfaction. A simple perspective that can give an effective solution to your day to day operational issues. CHEERS ! 

Customer Relationship Management : RFM Analysis and RFMV Analysis

What is RFM analysis ?

RFM analysis is done in order to understand the health of a customer's relationship with a retailer and the value of a customer to a retailer by analyzing the historical sales data for the respective customers. The outcome of this analysis is used in direct marketing, customer centric promotions and loyalty programs.

The modules used in the analysis are :

RECENCY :
How recent did a customer purchase ?
This explains when was the last purchase made by the customer, by this we can select the list of customers who has purchased from the retailer in the last 90 days or 180 days or 365 days.

FREQUENCY :
How frequently a customer purchases ?
This explains what is the frequency of purchases the customer makes with a retailer. This is calculated based on number of purchases made by a customer in the last 90 days or 180 days or 365 days.

MONETARY VALUE :
How much does a customer spend ?
This explains how much does a customer spend for a stipulated time period similar to the previous two scales. This also provides information on customer spend per purchase and over a period of time i.e. a customer might not make big shopping per visit but totaling their purchase over the same period of time will project a bigger purchase value compared to a customer who has done a single big purchase.

VOLUME :
How many products a customer has purchased ?
This is an add on to the RFM analysis which indicates how many products a customer has purchased or volume quotient of a customer's purchase pattern over a period of time. This in combination with Monetary value of the customer shows whether the customer purchases high value products or a general shopper buying small value products for regular use


SCALE OF MEASUREMENT
Recency, frequency and monetary bench mark scales may vary from retailer to retailer based on their product assortment and the lifespan of the product sold. Based on a retailer's product portfolio they can choose a scale based on a benchmark set for each of the module. We can look at how this can be done through a simple example :

A is a supermarket store having products in convenience, home appliances and grocery categories.

Sameer had purchased at A 5 times in the last 30 days as on 30-Nov-15, his last purchase was on 27-Nov-15. He has purchased for 1000 Rs., 2500 Rs., 1500 Rs., 1500 Rs. and 2200 Rs. respectively. Total quantity of products purchased by him is 20

Rachel had purchased at A only once in the last 30 days as on 30-Nov-15, her last purchase was on 2-Nov-15. She has purchased for 10500 Rs. Total quantity of products purchased by her is 1

Based on the above purchase data we can easily arrive at the below observation through data analysis:

Sameer and Rachel are both high value shoppers but there Is a lot in difference between the two which this analysis throws light on, that can help the retailer can use to arrive at customer centric promotion to increase sales and frequency of customer visits.

SAMEER'S PURCHASE ANALYSIS :
- He is a recent shopper who has visited the supermarket in less than 15 days
- He has purchased 5 times in the last 30 days so he is a frequent shopper
- He is a high value shopper as per the retailer's bench mark. His total purchases are worth 8700 Rs.
- He is a high volume shopper as well and based on his value and volume of purchase we can see that he buys less expensive products that are more of a necessity than luxury

RACHEL'S PURCHASE ANALYSIS :
- She is an old shopper who has not visited the supermarket in the past 15 days
- She has purchased only once in the last 30 days so she is a occasional shopper
- She is a high value shopper as per the retailer's bench mark. Her total purchase is worth 8700 Rs.
- She is a low volume shopper as well and based on her value and volume of purchase we can see that she buys expensive products that are more of a luxury than a necessity

Customers who have not purchased in the stipulated time period can be contacted by customer service manager or marketing team can mail the customer attractive promotions based on their historical purchases to resume trade.

NOTE : RFMV analysis is not a standardized analysis matrix in CRM. This is a customized version used by me in analyzing customer value. I feel this provides better depth into customer purchase pattern there by helping a retailer analyse his customer' value better

Porter's Five Forces - simplified !

This was originally formulated by Mr. Michael Porter, professor at Harward Business school in the late 1970s to analyse an industry based on five forces that influence an industry and its players. Porter's five forces have five forces or market elements that needs to be analysed to arrive at a successful business strategy. The derived business strategy can be implemented to achieve a clear and distinct position in the market and in the customers' minds. The outcome which also gives a clear picture of the current market situation which will help the organisation decide how they can use the market situation to their advantage or position themselves in the market where by increasing profitability and brand image.
To hear the original one from Mr. Porter himself, follow the below link :
https://www.youtube.com/watch?v=mYF2_FBCvXw

The below is my view of Porters's five forces and how they can be applied to analyse an industry and how well we can position our organisation.

MY VIEW OF APPLYING PORTER'S FIVE FORCES :

1. Competitors Rivalry
This gives insight into the rivalry that exists in the industry i.e. how competitive the players in the industry are and what are their strengths and weaknesses. It also answers the questions to how can a new entrant cope up with this competitive market and turn their business into a success model. A few of the questions that can help us draw a picture of competitors rivalry are as below :
- How competitive the industry in terms of margins and profitability ?
- How is the competitive intensity ?
- Who is the biggest player in the industry and what is the market share held by them ?
- What is the industry experience of each player in the industry and their strength ?
- What is the industry Growth in the near future ?
- Does it demand for capacity addition in large scale ?
- Brand value of competitors
- Is there a monopoly or hurdles put in place by big players to indirectly control small players' market share?
- Is it a high stakes industry where organisational structure requires highly skilled and efficient human resource ?

2. Threat of New Entrants
This gives insight into how easy it is to enter an industry or exit an industry and also how easy it is for a new entrant in the market to replace an experienced strong player in the industry. A few of the questions that can help us draw a picture or gain insight of this force are as below :
- How easy is it to enter the new market or the industry ?
- What is the economies of scale to be profitable ?
- How big and specialised capital investment needed for setup and distribution ?
- How brand conscious or brand loyal is the industry and its customers ?
- What is the increase in the inflow of supply with new entrants ?
- What are the legal complications for new entrants ?

3. Threat of Substitute Products
This gives insight into how the available substitutes for the original affects the latter's market share and sales. A few of the questions that can help us draw a picture or gain insight of this force are as below :
- How many products or service providers are available in the market catering to the same customer's need ?
- How loyal are the customers to brand ?
-  Can customer's need be satisfied by products from other industries serving the same purpose ?

- How easy is it for competitors to develop a new substitute or a clone ?

- What is the price and quality difference between the available substitutes ?

- How regulated is the market with respect to patent rights ?

- What is the switching cost for consumers ?

4. Bargaining Power of Consumers
This gives insight into whether the market favours the buyers or the sellers or a win win for both. This also explains the demand and supply quotient of the industry. A few of the questions that can help us draw a picture or gain insight of this force are as below :
-  What is the percentage of population dependent on the products supplied by the industry
-  What is the cost of switching between services or product to fulfil customer's need ?
-  What is the demand and supply, is there a surplus in supply or a shortage in supply to demand ?
-  Customer's price sensitivity, what is the elasticity of demand ?
-  What is the cost of backward integration for the customer ?
-  What is the frequency and volume of purchase ?
-  Are the products supplied by the industry come under luxury products or a necessity ?

5. Bargaining Power of Suppliers
This gives insight into whether the market favours the supplier or the organisation or a win win for both. This also provides insight into availability of capital goods and input costs. A few of the questions that can help us draw a picture or gain insight of this force are as below :
- How easily are the raw materials/capital goods available ?
- How many suppliers are available and how easy it is to find an alternative ?
- What is the possibility of backward integration  in order to negate the supplier in the process ?
- How easy is it to acquire skilled manpower in the respective field ?
- What is cost of switching between suppliers ?
- Are we to deal with government organisations in a industry involving consumption of natural resources ?
- What is your economies of scale ?
- What is the possibility of forward integration  by the supplier there by directly catering to the customers' needs ?

Once the five forces are analysed, a chart can be prepared in the below format to assess the opportunities and threats for our products/services in the industry. This will help us to define a robust business strategy to negate competition and make profits or to decide whether to enter a new industry or to exit a matured industry.

FORCES	OBERSVATIONS	OPPORTUNITIES	THREATS
FORCE - 1	Observation 1	How ?	How ?
	Observation 2
	Observation 3
FORCE - 2	Observation 1	How ?	How ?
	Observation 2
	Observation 3