AECO 242 :: Lecture 03 :: MARKETING CHANNELS, MARKETING COST, MARKETING EFFICIENCY AND MARKET INTEGRATION Show
Marketing Channel
The channels for
paddy-rice and pulses are broadly the same, except that the rice millers or dal millers come into the picture before the produce reaches retailers or consumers.
Marketing Channels for Fruits and Vegetables
An important feature of marketing channels for fruits and vegetables is that these commodities just move to some
selected large cities/centres and Marketing Channels for Eggs
Sometimes, the wholesaling and retailing functions are performed by a single firm in the channel. Most of the studies on the identification of marketing channels for agricultural commodities have concentrated on a concept of marketing channel which defines the flow of the produce from the producer (farmer) to the consumer. But as the commercialization (market orientation) of agriculture is increasing and as the farmers and consumers are located in different states or different countries, the marketing channels that are emerging go across state or even national boundaries. This apart, unless quantities flowing into various channels are estimated, the relative importance of alternative channels cannot be assessed. Such an analysis was done by Acharya for gram grains in Rajasthan. According to this study, there are three points of entry of gram grain in the marketing channel, viz., farmer level, wholesaler level (from outside the state) and processor level (also from outside the state). There are 28 marketing channels, village traders appear in 8 channels, grain wholesalers appear in 18 channels, processors appear in 15 channels, dal (split) wholesalers appear in 5 channels and retailers appear in 15 channels. Assuming the farmers' surplus entering the marketing channel as 100 units, the entry from outside the state at wholesaler and processor level was 4.24 per cent of the farmers surplus. The percentage quantities moving in 28 channels are given in Table 3.1. Table 3.1
F = Farmer, C = Consumer, R = Retailer, V = Village Trader, Innovative Marketing Channels (Direct Marketing)
History
Rythu Bazars have generated a great deal of enthusiasm both among farmers and consumers as farmers get better prices for their produce due to curtailment of commission and overhead costs on account of the non-existence of middlemen and the consumers get vegetables at low prices compared to the prices in other markets.
(vii) Mother Dairy Booths Market Integration, Efficiency, Costs, Margins and Price SpreadMarket Integration
Horizontal integration may be actuated by the following motives:
Horizontal integration in the food industry is limited because of its potential impact on competition. Conglomeration integration may be actuated by the following motives:
Marketing Efficiency
Of the three components, the last two are the most important because the satisfaction of the consumer at the lowest possible cost must go hand in hand with the maintenance of a high volume of farm output. Approaches to the Assessment of Marketing Efficiency
The pricing efficiency refers to the structural characteristics of the marketing system, where
the sellers are able to get the true value of their produce and the consumers receive true worth of their money. Marketing Costs, Margins and Price Spread Market functionaries or institutions move the commodities from the producers to consumers. Every function or service involves cost. The intermediaries or middlemen make some profit to remain in the trade after meeting the cost of the function performed. In the marketing of agricultural commodities, the difference between the price paid by consumer and the price received by the producer for an equivalent quantity of farm produce is often known as farm-retail spread or price spread. Sometimes, this is termed as marketing margin. The total margin includes: (i) The cost involved in moving the product from the point of production to the point of consumption, i.e., the cost of performing the various marketing functions and of operating various agencies; and (ii) Profits of the various market functionaries involved in moving the produce from the initial point of production till it reaches the ultimate consumer. The absolute value of the marketing margin varies from channel to channel, market to market and time to time. Concepts of Marketing Margins There are two concepts of marketing margins. (i) Concurrent Margins These refers to the difference between the prices prevailing at successive stages of marketing at a given point of time. For example, the difference between the farmer's selling price and retail price on a specific date is the total concurrent margin. Concurrent margins do not take into account the time that elapses between the purchase and sale of the produce. (i) Lagged Margins A lagged margin is the difference between the price received by a seller at a particular stage of marketing and the price paid by him at the preceding stage of marketing during an earlier period. The length of time between the two points denotes the period for which the seller has held the product. The lagged margin concept is a better concept because it takes into account the time that elapse between the purchase and sale by a party and between the sale by the farmer and the purchase by the consumer. The method of calculating lagged margins is based on the same principle as that involved in the first in-first out method of accounting. However, it is difficult to obtain data on time lags between purchase and sale with a view to maintaining continuous series of marketing margins. Importance of Study of Marketing Margins and Costs Studies on marketing margins and costs are important, for they reveal many facets of marketing and the price structure, as well as the efficiency of the system. (i) The magnitude of the marketing margins relative to the price of the product indicates the efficiency or otherwise of the marketing system. It refers to the efficiency of the intermediaries between the producer and the consumer in respect of the services rendered and the remuneration received by them. While comparing the efficiency of the marketing system by means of marketing margins over space or time, the difference in the value added to the product through various services/functions is taken into account; (ii) Such studies help in estimating the total cost incurred on the marketing process in relation to the price received by the producer and the price paid by the consumer. The cost incurred by each agency in different channels and the share of each agency in the cost have been revealed. This knowledge ultimately helps us to identify the reasons for high marketing costs and the possible ways of reducing them; and (iii) The knowledge of marketing margins helps us to formulate and implement appropriate price and marketing policies. Excessive margins point to the need for public intervention in the marketing system. Estimation of Marketing Margins and Costs Regular monitoring of marketing margins at regional levels are essential for the formulation and successful implementation of marketing and price policies. A study of marketing margins should include an estimation of the producers' share in the consumer's rupee, the cost of marketing functions and the margins of intermediaries. Marketing margins and costs vary from commodity to commodity, and depend on the amount of processing involved and the market structure for handling of the commodity. Even for the same commodity, the margin may vary from place to place and time to time. A number of factors, such as the method of assembling, the location of the market and the mode of transportation, influence marketing costs and margins. The method of sale, weighment and other facilities, too, affect the marketing costs. Because of a lack of standard grading in agricultural commodities, it is very difficult to make valid comparisons of price data. Adequate precautions have, therefore, to be taken when comparing marketing margins for commodities under different situations. Inspite of these difficulties, various studies have been conducted in India to study marketing margins and costs with a view to assessing the farmers' share in the consumer's rupee and to suggesting measures for improvements in the marketing system. These studies have used different approaches, and vary considerably in their depth. Three methods are generally used in the computation of marketing margins and costs. (i) Lot Method A specific lot or consignment is selected and chased through the marketing system until it reaches the ultimate consumer. The cost and margin involved at each stage are assessed. The difficulties or limitations of this method are: (a) It is difficult to chase the movement of a lot from the producer to the ultimate consumer. (b) Most of the lots lose their identity during the process of marketing, because either the product gets processed or the lot gets mixed up with other lots. (c) There is no assurance that the lot selected is representative of the whole product. This method is appropriate for such perishable farm commodities as fruits, vegetables, and milk, because the lag between the time the commodity enters the marketing system and time of its final consumption is very small. (ii) Sum of Average Gross Margins Method The average gross margin at each successive level of marketing is worked out by dividing the difference of the money value of sales and purchase by the number of units of the commodity transacted by a particular agency. The average gross margins of all the intermediaries are added to obtain the total marketing margin as well as the break-up of the consumer's rupee. The following formula may be used to work out the total marketing margins: where MT = Total marketing margin Si = Sale value of a product for ith firm Pi = Purchase value of a product paid by the ith firm Qi = Quantity of the product handled by ith firm i = 1, 2, ……n, (number of firms involved in the marketing channel) This method requires considerable effort in the location and examination of the records kept by the intermediaries. The main difficulties in using this method are: (a) Traders may not allow access to their account books. It would then be difficult to obtain complete and accurate information. Moreover, some traders often make manipulated entries in their account books to evade sales tax and income tax; and (b) This method necessitates adjustment for the difference between the quantities purchased and sole because a part of the product is wasted during handling. (iii) Comparison of Prices at Successive Levels of Marketing Under this method, prices at successive stages of marketing at the producer's, wholesaler's and retailer's levels – are compared. The difference is taken as the gross margin. The margin of an intermediary is worked out by deducting the ascertainable costs from the gross margin earned by that intermediary. This method is appropriate when the objective is to study the movements of marketing costs and margins in relation to prices and cost indices. The main difficulties encountered in the use of this method are: (a) Representative and comparable series of prices for the same quality of successive stages of marketing are not readily available for all the products; (b) Adjustment for a loss in the quality of the product at various stages of marketing due to wastage and spoilage in processing and handling is difficult; (c) The price quotation may not cover the price of a product of a comparable quality; and (d) The time lag between the performance of various marketing operations is not properly accounted for. The following general rules may be adopted in selection of the method for calculating marketing margins and costs of various agricultural commodities:
Irrespective of the method followed, the following information is required for computing marketing costs and margins:
Various measures of the price spread and for the computation of marketing costs and margins, and the procedures followed have been given in the paragraphs that follow.
Ami = PRi – (PPi + Cmi)
Pmi =
Mi = where PRi = Total value of receipts per unit (sale price) Ppi = Purchase value of goods per unit (purchase price) Cmi = Cost incurred on marketing per unit The margin thus calculated include the profit of the middleman and the returns which accrue to him for storage, the interest on capital and overhead, and establishment expenditure. Total Cost of Marketing The total cost, incurred on marketing either in cash or in kind by the producer seller and by the various intermediaries involved in the sale and purchase of the commodity till the commodity reaches the ultimate consumer, may be computed as follows: C = CF + Cmi + Cm2 + Cm3 + …. + Cmn where C = Total cost of marketing of the commodity, CF = Cost paid by the producer from the time the produce leaves the farm till he sells it, and Cmi = Cost incurred by the ith middleman in the process of buying and selling the product. Some of the costs are linked with the quantity marketed and some are linked with the value of the commodity. The former is a fixed charge, while latter is a variable one. The actual rates of charges are converted in terms of the weight unit or Rs.100 worth of produce sold. The ad valorem charges are calculated on the basis of the actual market price for the physical unit or Rs.100 worth of produce sold. Farmer's Share and Gross Marketing Margins According to Acharya (2003), the gross marketing margins (GMM) can be broken down into three components viz., cost of performing various marketing functions, statutory taxes or levies payable in the marketing channel, and net marketing margins (NMM) retained by market functionaries. Marketing cost varies from commodity to commodity and changes overtime and space. Marketing costs depend on the perishability of the commodity, need for cold storage facilities, need for processing before consumption, necessity of storage and transportation, distance for transportation and nature of packaging needed. The marketing costs are, therefore, generally high for fruits, vegetables, flowers, oilseeds, sugarcane and cotton compared to foodgrains. Statutory marketing charges include taxes and levies (sales tax, market fee, octroi, special duty or cess on commercial crops etc.) which are paid in the process of transactions of commodity at different stages of marketing. The rates of these charges vary from state to state, market to market and commodity to commodity. Most of these taxes and levies are on ad valorem basis and as such their incidence is higher on high value crops. The market players have no control on these taxes and levies as these are of statutory in nature. These statutory charges exert considerable effect on gross marketing margins and farmer's share in consumer's rupee. Net marketing margin (NMM) is the amount retained by different market functionaries. The size of net marketing margin depends on the nature of competition, structure of markets and scale of business. Larger the net marketing margin, greater is the inefficiency of the marketing system. It is now increasingly realized that higher marketing costs do not always reflect inefficiency of the marketing system. The factors, which cause high marketing costs, could be geographical localization of production away from the markets, necessity of storage from production season to the lean season and involvement of processing function in the marketing process. Under such situations, the size of marketing costs reflects only one side of the coin and the other aspects viz., consumer satisfaction is not given any weightage. Over the period, gross marketing margins (GMM) decreased in foodgrains and oilseed crops due to better competitive conditions in the trade of these commodities. On the other hand, GMM increased in fruits and vegetables due to the expansion in the markets for these crops and their products. As against this, over the period, however, total cost of marketing in absolute terms have shown an increase due to:
A comprehensive review of Indian Literature reveals that studies on price-spread and marketing margins for the period 1960 to 1975 are available for only a few crops (wheat, rice, sorghum, pearl millet, chickpea and groundnut). However, in the later period i.e., 1975-2000 the studies have covered almost all agricultural products – foodgrains, oilseeds, cotton, fruits, vegetables and flowers. (For a summary of results see
Acharya, 2003).
Source: Directorate of Marketing and Inspection, Government of India, Faridabad (1985).
Source: Acharya, S.S., AgriculturalMarketing in India: Some Facts and Emerging Issues,Indian Journal of Agricultural Economics, 53(3), July-September 1998, pp.311-32. Factors Affecting the Cost of Marketing where FS = Farmer's share in the consumer price expressed as a percentage RP = Retail price of foodgrains MC = Marketing costs, including margins PF = Price received by the farmer The farmer's share in the amount of the consumer's outlay at the retail level is not static and undergoes change with the change in market conditions. An increase in the share is taken as an evidence of increase in the efficiency of the marketing system in favour of the farmer, while a decrease in the farmer's share is taken as evidence of the fact that middlemen retain a larger share. The effect of change in marketing charges or costs on the farmer's share are shown in Fig. 9.4. In period t3 (compared to period t2), the farmer's share in the consumer's rupee has increased because of the reduction in marketing costs and margins. It is evident that all the factors which bring about changes in marketing costs affect the farmer's share as well. Several items of the marketing costs are almost sticky, i.e., they do not move up and down with the movement in prices. The basic reason for sticky marketing costs is that many of the items in them are related to the physical volume handled rather than to the value of the product. For example, transport cost, labour cost, weighing cost, storage cost and octroi are charged on the basis of weight. With any given level of sticky marketing margin or cost, the farmer's share (price received) moves directly with the retail price; that is, if the retail price increases, the farmer's share also increases. But the proportionate change in the farmer's share is more than the proportionate change in the retail price. To illustrate: let the retail price, the marketing costs/margin and the farmer's price be Rs.100, Rs.50 and Rs.50 per unit respectively in period t1. Suppose, in period t2, the retail price decreases to Rs.90 per unit, i.e., a fall of 10 per cent. If the absolute gross marketing margin remains the same, i.e., Rs.50 per unit, the farmer's price falls to Rs.40 per unit, i.e., a fall of 20 per cent. In other words, 10 per cent fall in the retail price results in a 20 per cent fall in the farmer's price. This has been shown in Table 3.4. Table 3.4Effect of Change in Retail Price on Farmer's Share
Another point that emerges from Table 9.11 is that, in period t1, the price received by the farmer was 50 per cent of the price paid by the consumer but that in period t2, the farmer received only 44.4 per cent of the price paid by the consumer. To the extent that marketing margins or costs are sticky, the farmers lose more when the retail price decreases.
TRUE or FALSE
Which of the following terms refers to the ability to separate a product or service from that competition?Product differentiation is a marketing strategy designed to distinguish a company's products or services from the competition.
In which of the following situations is quantifying a solution likely to be most crucial?Quantifying the solution is especially important in situations where the purchase represents a major buying decision. the process of talking about all the great things product X or service Y has without enabling a customer to see what it means to him or her.
Which of the following could just candles do to best recapture their previous customers and gain new customers?Which of the following could Just Candles do to best recapture their previous customers and gain new customers? A) Just Candles could lower their prices on less popular candles to create "loss leaders" that would induce new customers to purchase regularly-priced candles from them.
Which of the following terms refers to the decisions and activities intended to create and maintain the concept of a product?Product positioning refers to the decisions and activities intended to create and maintain a certain concept of the firm's product (relative to competitive brands) in customers' minds.
|