1. Net Revenue Management
Nice work on measuring the performance of Healthmax. Let’s dive into Net Revenue Management or NRM to see how we can improve the performance.
2. Net Revenue Management (NRM)
As explained in the previous chapter, FMCG companies want to drive the consumption of their products to grow their business. But when businesses become more established, it becomes increasingly difficult to continue to drive consumption year after year.
Studies have shown that, in the recent years, more than 66% of the growth of the biggest FMCG companies came from NRM initiatives rather than an organic increase in consumption. NRM has become increasingly important for the FMCG industry. It is an approach to unlock new growth potential by maximizing the net sales and profits for your company.
Before going into more details, let's have a look at the exact definition of net sales and profit.
3. Net sales and gross profit
It’s an oversimplification, but net sales is your total revenue minus the discounts you give to your customers.
Imagine you make excellent cookies and decide to start a business to commercialize them.
4. Net sales and gross profit
Your net sales will depend on the amount of cookies you sell and at what price. If you sell 100 cookies at a net price of $5, you will have a total net sales of $500.
5. Net sales and gross profit
Your costs will also depend on the amount of cookies you sell, and the price it costs to make them. Here we use the metric "COGS", which stands for "cost of goods sold". If your COGS amounts to $1, your total cost will be $100.
6. Net sales and gross profit
Your gross profit is the difference between your net sales and your costs and is always expressed in dollars. In this example, your gross profit amounts to $400.
7. Net sales and gross profit
Finally, the gross margin is a ratio that measures how profitable your company is. It indicates the relationship between the gross profit and the net sales and is always expressed as a percentage. In this example, 80% of your total net sales, is profit.
8. Business expansion
Your cookies are selling unbelievably well: over time, you created more flavors, are listed at multiple retailers, and are driving consumption with promotions.
But you want to increase your net sales and profit even more. You are wondering if you shouldn't increase your pack size from 5 tot 10 cookies, or maybe even 12.
9. Business expansion
Then you ask yourself if the cookies are priced high enough, given that they are so tasty.
10. Business expansion
Finally you also don't really know which flavor is the most profitable one.
11. The 5 pillars of Net Revenue Management
By applying the principles of Net Revenue Management, you will find the answer to your questions and will be able to increase both your net sales and gross margin.
The 5 pillars of NRM are: Brand Portfolio Pricing, Pack Price Architecture, Mix Management, Promotion Management and Trade Terms Management.
We’ll focus on the first and the third pillar for now. We’ll revisit the other pillars in the next chapter.
12. Brand Portfolio Pricing
The first pillar is Brand Portfolio Pricing. Are you capturing the full value of your brand to consumers? Your cookies taste way better than the other cookies on the market, but do they pay a premium price for them? You could be over or underpricing your product, depending on the consumer's willingness to pay and the pricing of your direct competitors. These elements might be different per region or channel.
13. Mix Management
The next pillar we'll cover in this chapter is Mix Management. Mix Management is about changing and driving your product portfolio to profitable growth.
Imagine you can only sell two products at a retailer. Which products will you choose? You should not only look at the best-selling kind of cookies, but also at their profitability.
Let’s investigate a theoretical scenario where you plot your products on a graph according to their net sales contribution and their gross margin. Normal cookies are scoring excellent in terms of net sales as well as gross margin. Chocolate cookies are selling very well, but they are not very profitable. If you could only choose two products to sell, you should choose the oatmeal cookies as the second product to be listed at your retailer. Sales are lower on this product than on the chocolate cookies, but they are way more profitable.
14. Let's practice!
Enjoy analyzing, with or without a cookie!