MRP; Do we need it?

Maximum Retail Price or MRP as we all know it is unique to our country. India is possibly amongst a handful of countries where the MRP system is in vogue. In fact if one were to do a Google search about MRP, you would mostly find links to material requirement planning!

MRP is the defined price above which any product cannot be sold. This is required as per the Weights and Measures Act as also for determining the Central Excise Duty. Initially the manufacturers had the option of printing this as a number without taxes or an all inclusive price including taxes. Subsequent to several instances where the ambiguity of “taxes extra” was misused to overcharge the customers, a standardized version of the MRP, inclusive of all taxes is more in vogue as of now.

There are 3 sides to this story.

• The excise duty to be paid by the manufacturer is calculated basis the MRP which has been declared. Why it cannot be calculated basis the selling price by the manufacturer to their dealers/ stockists is an interesting hypothesis. That’s a long story and starts with the socialistic/ license & high tax regime of yester years. Shall dwell upon that later. Suffice to say that the trust that the amount declared as the selling price is the correct figure is not there. It would not be feasible for manufacturers to print this on the products and hence there is always a doubt that the declared price might be lower than the actual price, hence lower tax realization. Sales Tax was also linked to MRP, thankfully we are moving away from that towards VAT.
• The manufacturers face an interesting challenge. Each state has their own set of taxes and rates for the same. Then how do they print the price inclusive of taxes? That’s the interesting part. My guess is that they have averaged out the taxes basis past sales trends and built that into the all inclusive number.
• The retailer, especially in the context of corporate retail has to live with this constraint of a MRP. Why a constraint? Simply put, this is the one constant in the operating environment when every other variable changes for the retailer. Hence it is near impossible to use pricing as an effective element of the value proposition.

In most of the countries the way the pricing system works is basis the purchase price plus market dynamics. Volumes enable the retailer to negotiate the buying price effectively and then decide how and where his margins should be invested, for optimum returns. For example the retailer might have stores in commercial/ high traffic areas like a station or an airport. This becomes possible because the retailer can charge more for his products as the value proposition is more of a convenience rather than savings. On the other hand in a large format, suburban store the rents are lower and that can be effectively utilized to offer lower prices to drive volume sales.

Funnily enough this system works in India too, but not for corporate retailers and definitely to the detriment of the consumers and the government. All of us have paid more for soft drinks or processed food at a station or an airport or in a mall. This happens all the while. So, where is the MRP? Technically we can file a complaint of overcharging and action would be taken against the person who sells above the MRP. But does that happen practically? Never.

Most operators often get away with this by ‘taking care’ of local officials or by getting around the system. They simply open the packaging and sell the product. In which case the weights and measures act is no longer applicable!

We had gone to a pizza outlet of an international chain and ordered including soft drinks. One of the persons did not want ice in the soft drink and preferred it at room temperature. The staff came back after some time and said that they could not serve the drink at room temperature. Upon prodding he confessed that the vending machine was out of order and they were serving the soft drinks from PET bottles which were all in the fridge and hence quite cold. We then requested him to get the PET and leave it outside for a while and we would have it once it had warmed up a bit. He again declined and said that he could only serve it in glasses.

After some thought I realized what the game was! A 2 litre PET bottle costs approximately Rs. 50/- as per the MRP. If I recall correctly a glass of soft drink was Rs. 30/- and would typically have 300 – 350 ml. Now do your math! That’s not taking into account the fact that the purchase price of that PET bottle would have been lesser than Rs. 50/-.

Nowadays such enforced profits are squeezed out of consumers under the pretext of security due to which one is not allowed to carry anything into malls, amusement parks, etc.

Only in a few instances have I seen the law being followed while compensating for the operational costs. The packaging clearly mentions that it has been specially packed, thereby differentiating itself from what is in the market.

So, the question is who does MRP benefit? Why should it not be scrapped?

In my view it benefits no one and least of all the consumer. Anyways, in today’s competitive environment the retail operators have to match prices and have to remain competitive. The conventional trade does not need this as their cost structure is fairly constant and definitely lesser than that of corporate retail.

So, why not remove this glass ceiling and allow free pricing. Especially when we are moving towards a consumer centric, free market environment, this should be amongst the first steps to be taken. Imagine a world without MRP. Imagine retailers being able to leverage one of the most important ‘P’s’ of marketing.