29 Aug 2019 15:59 IST

The great Indian MRP trick

The concept of MRP should go, as it fails to really protect the consumer against price spikes

My pet peeve as a retailer has always been maximum retail price (MRP). It is an outdated concept. MRP was introduced by the government in as part of the Packaged Commodities Act, which mandates that every packaged commodity needs to have certain information printed on the packaging, which includes the date of manufacturing, the expiry date, if relevant, and manufacturer’s details.

The fundamental flaw in the system is that the MRP is applicable only on packaged commodities and not on various essential commodities, such as groceries and vegetables, unless they are sold in packaged form. In fact, a bottle of water which has an MRP of ₹10 cannot be sold above that price, legally. However, if one were to break the seal and open that bottle, a person can even sell a capful of the same water for ₹100, and that would be perfectly legal.

During a recent interaction with management students, I was explaining this flaw and why MRP as a concept needs to be abolished. One person raised a query about consumer protection and what would happen if there was no MRP. The fear was that, as consumers, they would be fleeced, and no one would know if they were paying the correct price.

What is fair and correct?

This led to the question whether the MRP being fixed by the manufacturer was fair and correct. The response was that the MRP was decided basis market dynamics and the concept of demand and supply. I countered that a retailer would follow the same premise in fixing the selling price of any product and that the consumer cannot be fleeced.

The example I shared is as follows:

- A 300-ml soft drink can is sold in the market for ₹35-40

- The same soft drink is sold in airports for ₹60 and it contains 330 ml.

- Ironically, the same soft drink on board a flight is ₹100, for 350 ml.

Essentially, the manufacturer has marked up the product by a whopping 70 per cent for an increase of 10 per cent volume, and a mind-boggling 186 per cent for an additional volume of 17 per cent. No amount of increase in packaging costs can justify such a price increase.

Yet, consumers have been conditioned in our country to trust that manufacturers can fix the MRP, and that it would be fair, whereas, retailers cannot be trusted to fix the selling price.

Differentiated MRPs

There is a reason for this practice. A court judgment forbade manufacturers from having differentiated MRP for the same kind and type of products. In order to cater to the demand by selected trade channels, they have chosen to follow this practice.

In reality, no one follows MRP. In high-demand catchment areas, where price sensitivity is low, any product is sold above MRP. On the other hand, in price-sensitive areas, the same product is sold at a discount.

The question now arises as to why the retailer cannot determine the selling price. After all, they have their own cost structures to manage and are far more sensitive to the local demand and supply dynamics.

If consumers are ready to trust a manufacturer to fix the correct MRP, which anyway seems to be flawed, why not do away with this system and let the retailer decide the selling price?

If at all the government wants to protect the consumer’s interest, let it set up a price monitoring mechanism under the Consumer Affairs Ministry that could publish the fair price of key products every week or fortnight.

In the majority of countries, there is no concept of MRP. Each retailer fixes the selling prices based on two aspects. First, the basic economic principle of demand and supply. In any catchment, there exist multiple retail formats and no one is going to have pricing strategy which will drive away the shoppers.

Pegged to cost structure

The second and most important factor that defines the pricing strategy for retailers is their cost structure. A retailer who operates in a central business district (CBD) and obviously has a higher cost structure, especially with regard to the real estate component, would naturally fix a higher price than a retailer who operates in a suburb and has a significantly lower real estate cost. Similar is the second biggest cost aspect, which is service in terms of the extent and quality of store staff. Better levels of service translate into better quality of staff and, therefore, higher manpower costs.

Let me end by quoting the airline industry, where the cost aspects have been delinked, and passengers can choose to pay more if they want a higher level of convenience and better service. Imagine if the airlines were constrained to provide all these with an MRP ceiling!

Perhaps it’s time to do away with this mirage of MRP, which supposedly protects consumer interests while actually doing nothing of the sort.