SM E-5

Chofee: Designing Trade Scheme

Jaiprakash (JP), sales head for Newgen Foods, wanted to increase the sales of
Chofee, a new age instant coffee with a dash of chocolate. He decided that a
trade scheme would meet his immediate objective of expanding the number of
outlets as well as the secondary sales to retail outlet. The implicit assumption
was increase secondary sales will eventually translate to increase in offtake
The design principle he applied were
a) Cover all the retailers
b) Grade the incentive by purchase quantity to reward retailers who sell more
and also make retailers push to move up the slab.
He worked out the following structure and presented it to Faiyaz ( VP-Sales
and Marketing).
Monthly Purchase during the scheme period
Scheme Number of Incentive ( Total Sales per Total
Purchase outlets in Rs. Per month of all Incentive
Quantity each slab KG) outlets in the pay-out (Rs.)
( Kgs) slab(Kg)
<10 700 5 4900 24500
11 to 20 500 6 8000 48000
21 to 30 200 7 5600 39200
31 to 40 50 9 1700 15300
Total 1450   20200 127000

Faiyaz looked at the plan and remarked “JP, can you explain how you have
constructed the plan”
JP replied “On our MRP of Rs.120 per Kg, the expected average scheme cost @
Rs.6 per kg is just 5%.
Our contribution margins are 40% and as a thumb rule we operate trade
scheme offers at 5%
With the scheme I expect secondary sales to go up by 20%. I have worked out
the sales and slabs based on Scheme operation"

Faiyaz responded “Can’t you see that this scheme structure has serious flaws”

Case Prepared by Prof. Surya Mahadevan for class discussion

Class exercise
I. Is there a design/construct flaw in the proposed scheme?
II. Can you redesign his scheme to improve the construct and its
effectiveness?
III. If the actual sales are higher -- say 30% increase does it makes the
scheme more effective?
IV. If the tertiary sales (in one month during the scheme period) actually
goes up by 10% what is the effective cost per incremental sales
V. And if the eventual consumption (in one month during scheme period ---
allowing for purchase lag) actually goes up by 5% what is the impact of
the scheme
VI. How do these schemes impact distributor? Will he push it aggressively?
VII. Will this offer attract new/ non-stocking retailers? If not, what should be
the construct for expansion?

Case Prepared by Prof. Surya Mahadevan for class discussion