Agribusiness Management and Trade

Lesson-34 Marketing cost-margins-price spreads

34.2  MARKET MARGINS

Margin refers to the difference between the price paid and received by a specific marketing agency, such as a single retailer, or by any type of marketing agency such as retailers or assemblers or by any combination of marketing agencies such as the marketing system as a whole.

Absolute margin is expressed in rupees. A percentage margin is the absolute difference in price (absolute margin) divided by the selling price. Mark-up is the absolute margin divided by the buying price or price paid.

• Marketing margin of a Middleman: There alternative measures may be used. The three alternative measures which may be used in estimating market margins are.

(a) Absolute margin of ith middlemen (Ami)

=  PRi PPi + Cmi

(b) Percentage margin of ith middlemen (Pmi)

  PRi - (PPi + Cmi)

--------------------- X 100

         PRi

(c) Mark-up of ith middleman (M2)

PRi - (PPi + Cmi)

-------------------- X 100

Ppi

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 includes profit to the middlemen and returns to storage, interest on capital, overheads and establishment expenditure.

Sum of Average Gross margins method:

The average gross margins of all the intermediaries are added to obtain the total marketing margin as well as the breakup of the consumers rupee :

  n        Si - Pi

MT = Σ ---------

i=1       Oi

MT = Total marketing margin.

Si = Sale value of a product for ith firm

Pi = value paid by the ith firm

Qi = Quantity of the product handled by its firm

i = 1, 2, . . . . n (No. of firms involved in the marketing channel).

• Concepts of Marketing Margins:

• Complex because it is difficult to follow the path of the channel for a given quantity of the channel for a given quantity of the commodity.

• It is still difficult to estimate in respect of commodities subjected to processing.

Two methods are identified:

1. Concurrent margin method:

This method stresses on the difference in price that prevails for a commodity at successive stages of marketing at a given point of time.

2. Lagged Margin Method:

This method takes into account the time that elapses between buying and selling of a commodity by the intermediaries and also between the farmer and the ultimate consumer.

Lagged margin indicates the difference of price received by an agency and the one paid by the same agency in purchasing in equivalent quantity of commodity.

34.3  PRICE SPREAD

• The difference between the price paid by the consumer and price received by the farmer.

• It involves various costs incurred by various intermediaries and their margins.

• Marketing costs are the actual expenses required in bringing goods and services from the Producer to the consumer.

34.4  MARKETING COSTS

The movement of products from the producers to the ultimate consumers involves costs, taxes, and cess which is called marketing costs. These costs vary with the channels through which a particular commodity passes through. Eg: - Cost of packing, transport, weighment, loading, unloading, losses and spoilages.

• Marketing costs would normally include:

• Handling charges at local point

• Assembling charges

• Transport and storage costs

• Handling by wholesaler and retailer charges to customers

• Expenses on secondary service like financing, risk taking and market intelligence

• Profit margins taken out by different agencies.

• Producer’s share in consumer’s rupee :

        PF

Ps = ---- x 100

        Pr

Where,

Ps = Producer‟s share

PF = Price received by the farmer

Pr = Retail price paid by the consumer

Total cost of marketing of commodity,

C = Cf + Cm1 + Cm2 + . . . + Cmn

Where, C= Total cost of marketing of the commodity

Cf = Cost paid by the producer from the time the produce leaves till he sells it

Cmi= Cost incurred by the ith middlemen in the process of buying and selling the products.

34.4.1  OBJECTIVES OF STUDYING MARKETING COSTS

1. To ascertain which intermediaries are involved between producer and consumer.

2. To ascertain the total cost of marketing process of commodity.

3. To compare the price paid by the consumer with the price received by the producer.

4. To see whether there is any alternative to reduce the cost of marketing.

34.4.2  REASONS FOR HIGH MARKETING COSTS

1. High transportation costs

2. Consumption pattern – Bulk transport to deficit areas.

3. Lack of storage facilities.

4. Bulkiness of the produce.

5. Volume of the products handled.

6. Absence of facilities for grading.

7. Perishable nature of the produce.

8. Costly and inadequate finance.

9. Seasonal supply.

10. Unfair trade practices.

11. Business losses.

12. Production in anticipation of demand and high prices.

13. Cost of risk.

14. Sales service.

34.4.3  FACTORS AFFECTING MARKETING COSTS

1. Perish ability

2. Losses in storage and transportation

3. Volume of the product handled

Volume of the More – less cost

Volume of the Less – more cost

4. Regularity in supply : Costless irregular in supply – cost is more

5. Packaging : Costly (depends on the type of packing)

6. Extent of adoption of grading

7. Necessity of demand creation (advertisement)

8. Bulkiness

9. Need for retailing : (more retailing – more costly)

10. Necessity of storage

11. Extent of Risk

12. Facilities extended by dealers to consumers. (Return facility, home delivery, credit facility, entertainment)

34.4.4  WAYS OF REDUCING MARKETING COSTS OF FARM PRODUCTS

1. Increased efficiency in a wide range of activities between produces and consumers such as increasing the volume of business, improved handling methods in pre-packing, storage and transportation, adopting new managerial techniques and changes in marketing practices such as value addition, retailing etc.

2. Reducing profits in marketing at various stages.

3. Reducing the risks adopting hedging.

4. Improvements in marketing intelligence.

5. Increasing the competition in marketing of farm products.