Agriculture Marketing (Mkt165) chapter 5-marginal cost & mktg efficiencies


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Agriculture Marketing (Mkt165) chapter 5-marginal cost & mktg efficiencies

  1. 1. Mohd Zahid Laton, FPP UiTM Pahang CHAPTER 5 MARGINAL COST AND MARKETING EFFICIENCIES1. Marketing cost. Marketing cost is the cost involved in the marketing and willdirectly influence the profit or losses suffered by sellers. Most marketing costs areinfluenced by general economic forces outside of the food economy, especially labor,transportation, packaging, and energy costs. These rising costs will maintain theirpressures on the rising food marketing bill, and government regulations, affectingsuch areas as occupational safety, plant sanitation, energy sources and uses, andenvironmental protection, also will add costs.2. Food marketing firms incur a number of costs when performing marketingfunctions. Thus it is helpful to look at the composition of the marketing costs whenevaluating the costs of food marketing. The marketing cost can be categorized as; 2.1 Labor cost. 2.2 Transportation cost. 2.3 Packaging cost. 2.4 Hire purchase machinery. 2.5 Depreciation. 2.6 Advertising. 2.7 Taxes. 2.8 Maintenance and utility cost.3. Factors contributed to the marketing cost. The marketing costs increasingsteadily and more rapidly than the farm value of food. Three factor are responsiblefor this rising marketing costs; 3.1 As a result of population growth, the physical quantity of food that is marketed has increased, raising the total expenses of marketing food. 3.2 The costs of most food marketing inputs, especially labor and energy, have added to the rising cost of marketing food. 3.3 Consumers desires for additional food marketing services, such as represented by convenience foods, have further increased the food marketing bill.4. Marketing margin. Marketing margin is the portion of the consumer’s foodmoney that goes to food marketing firms. This is the difference between what theconsumer pays for food and what the farmer receives. In other word it is adifference between the purchase and resale prices of a product. The marketingmargin is the price of all utility-adding activities and functions performed by foodmarketing firms such collection, processing, transportation, advertising, retailing,etc. This price includes the expenses of performing marketing functions and also thefood marketing firms’ profits. 1
  2. 2. Mohd Zahid Laton, FPP UiTM Pahang5. Factors influenced the marketing margin. The allocation of theconsumer’s food dollars between farmers and food marketing firms is one of themost controversial aspects of food marketing. Consumers do not earmark part oftheir expenditures for farm production and another part for marketing services.Factors influenced the marketing margin are; 5.1 Time. The consumer wants the products immediately. At this juncture, the existence of time utility is at high demand where the products needed at reachable. One of the characteristics of products is seasonal and on the producer, they are widely dispersed in locations. To reduce such time utilities, the used of physical functions, communications and storage must be implemented soon to avoid the delay of sending the products whereby the buyer might get the products on time. 5.2 Form. Usually the consumer or buyer of the products want the product in the form of finished or ready to consume products. The appetite of the consumer depend on the product offered based on how the products are wrapped, quality control and even certain occasions advertising also plays an important role to persuade the buyer. 5.3 Institution. The role of the institution in handling the finished or raw products are very important. One of the main function of the institution is physical functions and exchange function. 5.4 Weather. Weather can influenced demand and supply of the products offered in the market. Weather directly influenced the seasonal agricultural products production in the market. 5.5 Location. The location of the products offered by the producer is important. If the location is at a distance, then the cost of transportation, handling and pricing will have an impact of high cost incurred by the producer. And this also has to be shouldered of high cost by the buyer. 5.6 Competition and bargaining. The division of the consumer’s money is determined by competition and bargaining between farm sectors and marketing sectors of the food industry. In effect, consumers face two prices for food; the farm price and the marketing price or margin. These prices reflect the cost of producing farm products, the cost of marketing services, as well as the consumer desires for these two products. 5.7 Marketing costs. The size of marketing margin depends upon the number and costs of marketing functions performed rather than the number of middle-men. The division of labor resulting from the addition of more and highly specialized middlemen might well increase rather than decrease marketing efficiency. 5.8 Marketing communication. It is quite possible that the farm price and the marketing margin will rise together as retail food prices rise. We should also remember that some of the marketing activities, such as 2
  3. 3. Mohd Zahid Laton, FPP UiTM Pahang advertising and merchandising, are designed to increase the demand for food, and this can lead to higher farm prices. 5.9 Costs and profits. Marketing margin is composed of both costs and profits. The size of the food marketing margin is sometimes taken as a measure of the profits to be gained by farmers and consumers as a result of performing additional marketing functions. There is no guarantee that farmers or consumers will perform marketing functions as efficiently as middle-men and thus capture food marketing profits.6. Marketing efficiencies. Efficiency in the food industry is the most frequentlyused measure of market performance. Improved efficiency is a common goal offarmers, food marketing firms, consumers, and society. Efficiency is measured as aratio of output to input. Marketing input includes the resources (labor, packaging,machinery, energy, etc) necessary to perform the marketing functions. Marketingoutput includes time, form, place, and possession utilities that provide satisfactionto consumers. Thus, resources are the costs and utilities are the benefits of themarketing efficiency ratio. Efficient marketing is the maximization of thisinput-output ratio. It requires the existence of a marketing system having astructure of stages and firms within stages such that marketing costs are minimized.7. Any marketing change that reduces the costs of performing the functionswithout altering the marketing utilities would clearly be an improvement inmarketing efficiency ratio. The marketing efficiency ratio can be increased in twoways; 7.1 Operational efficiency. Operational efficiency refers to the situation where the costs of marketing are reduced without necessarily affecting the output side of the efficiency ratio. An example would be a new labor-saving machine that reduces the cost of processing oranges into juice. Operational efficiency is frequently measured by labor productivity or output per man- hour. As a result of rapid technological change, labor productivity in agricultural has increased more rapidly than in other sectors of the economy. 7.2 Pricing efficiency. Pricing efficiency is concerned with the ability of the market system to efficiently allocate resources and coordinate the entire food production and marketing process in accordance with consumer directives. Pricing efficiency is less than perfect when prices fail to; 1) fully represent consumer preferences, 2) direct resources from lower to higher- valued uses, or 3) coordinate the buying and selling activities of farmers, marketing firms, and consumers. The goal of pricing efficiency is efficient resource allocation and maximum economic output.8. Criteria/aspects of marketing efficiency. By encouraging of physicalinnovations and competitive pricing so that charges equal costs plus a normal rateof profit is requires in a marketing system. Thus several aspects below willcontribute and improve to the marketing efficiency; 3
  4. 4. Mohd Zahid Laton, FPP UiTM Pahang 8.1 Technology. Technical efficiency has to do with the physical operations of marketing. These should utilize the best technical know-how available and the forces of competition should be allowed to work to ensure improvements. 8.2 Organization. Organizational efficiency implies optimum combinations of marketing functions. This may entail vertical and horizontal integration to find the optimum number of stages in the marketing system- that is, the lowest-cost combination. 8.3 Pricing. Pricing efficiency implies a sufficient number of firms at each marketing stage to ensure that prices reflect the true costs of marketing. 8.4 Price discovery. Price discovery is, of course, related to pricing. The structure of marketing system should be such that the price sufficient to clear the market supply and demand will be arrived at quickly. 8.5 Product innovation. Introduction of new or improved products is a relatively recent concern. It entails developing and marketing products that will keep up with the changing needs of consumers and industry. 8.6 Stable growth. If the foregoing criteria are met, there should be evidence of stable growth in food and fiber subsector industries. A poorly functioning system react too slowly and, when reacting, over-responds, so that there are continual inefficient imbalances between supply and demand. 8.7 Market coordination. Market coordination implies clear and distinct price signals transmitted by the marketing system among the stages and particularly to producers and to buyers. This allows better coordination between the forces of supply and demand and, in turn, better allocation of scarce resources within the agricultural-agribusiness economy.9. How to measure the marketing efficiencies. Marketing efficiencies can bemeasured through several ways such; 9.1 Price. The current price of certain agricultural products that need to be marketed must reflects the total cost and the profit margin. The cost involves are physical risks and other costs of the producer. 9.2 Implementation of services offered. The quality of services offered is not too high and not too low as long as is preferably affordable to be accepted by the consumer. It must not incur a lost to the producer. 9.3 Structure. Structure will involve marketing channels. Two phenomena can be seen and applied such; i. The number and sizes of firms involved in the channels. 4
  5. 5. Mohd Zahid Laton, FPP UiTM Pahang ii. Number of competing firm either they are competing alone or exist linkage concerning to the production, processing and other marketing activities. 9.4 Attitudes. Attitudes refers to the situation where the firm compete each other, and how they are compete or changing various technique used to increased marketing or transferring capitals for investment else where.10. Total cost of marketing. Total cost of marketing is the total cost involved inthe marketing process of the producer, processor and middlemen. This can becompared by analyzing the efficiencies of marketing. There is no single managerialpolicy determines the marketing margin for the total marketing system. Instead, itreflects the results of combined actions at various marketing stages. To figure themarketing cost for a product over the total system, we simply subtract thebeginning farm-level price from the final retail price.11. Price policy. Pricing is the process of determining the value of a product orservice to consumers at a particular time in quantitative terms of money. Pricepolicy refers to the organization procedure in setting the right price to the rightcustomer at the right place and time. One method of price is the pricediscrimination.12. Price discrimination. Price discrimination is situation whereby the sellercharges different prices to different customers for the same product. Pricediscrimination is made through customer segment pricing, place basis, time pricing,and product pricing. Some of the price discrimination schemes are; 12.1 First degree or perfect price discrimination. First degree price discrimination is simple. Take each consumer and sell her individual units one at a time. Set a price equal to her maximum willingness to pay for each unit. Keep selling her more units, charging the maximum willingness to pay for each unit until her maximum willingness to pay is less than the marginal cost of production. The firm would then follow the same method for each consumer. 12.2 Second degree price discrimination. Second degree price discrimination entails giving all consumers the same price schedule but offering quantity discounts. The assumption is that the firm cannot distinguish between consumer types, so the firm has no choice but to offer all consumers the same pricing scheme. 12.3 Third degree price discrimination. Third degree price discrimination is the situation where a firm is able to distinguish between different consumer types. Each consumer type has a different shaped demand curve, one is more elastic than the other. The firm then proceeds to set different prices for each consumer types. The more inelastic the demand of each type, the higher the price it pays. 5
  6. 6. Mohd Zahid Laton, FPP UiTM Pahang 6