Understanding Marketing Efficiency, Marketing Cost, Margin and the Price Spread

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The marketing efficiency depends on costs, margins and price spread and for continuous observing of marketing efficiency we need to have a rational comprehension of marketing costs and margins. Marketing cost is the cost involved in moving goods from the producer to the consumer and the number of services offered. Marketing efficiency is directly linked to the marketing cost. Higher the cost incurred when compared with the services involved, lower will be the marketing efficiency and vice versa. That is to say that the developments and improvements in marketing efficiency mean the reduction of marketing cost, keeping the number of services to the consumer fixed. Marketing costs can be differentiated into three categorical types of costs: a) Direct costs encompassing direct marketing functions and services viz. transportation and assemblage costs, treatment costs like load, unload, repackaging, etc., processing and storage charges as well as other costs as taxes, levies, customs and duties, b) The operating costs, which comprise the opportunity cost of the tied-up capital, c) Physical damages arising from transportation, storage loss or processing (in value terms) as a fraction of the initial market crop value (FEWS NET, 2009 As cited by FSTS & SIFSIA, 2011).
Price spread is one of the important measures of market efficiency (Gardner, 1975). It is the difference between consumer and producer prices. The spread includes the marketing cost incurred by the intermediaries as well as their margin. Price spread analysis not only shows the marketing costs and marketing margins at different levels of marketing by different marketing agencies or channels but also show a clear picture of the entire system of marketing. It also gives a fair idea about the efficiency of the marketing system and thereby helps to judge whether the services of marketing channels involved are provided at a reasonable cost.
Funke (2006) gives a classic difference between price spreads and margins. The former refers to the difference between the retail price and the farm price while the latter includes the payment of all costs involved after the product has left the farm plus the profit margins. The marketing margin is the price charged for single or a group of marketing services. It is the price differential for a particular good in different stages of the marketing channel (Myers et al., 2010). Marketing margin is an equilibrium entity that is a function of the difference between equilibrium retail and farm prices (Wolgenant, 2001). Margins are estimated all along the channels of distribution or marketing channels and each margin reproduces the value addition at that level of the market channel (FEWS NET, 2009 As cited by FSTS & SIFSIA, 2011) and gives an indication of the performance of a particular industry. That is to say that the marketing margin is an indicator of the efficiency of the marketing system and market structure. The larger the market chain or channel larger is the marketing margin and lower is the market efficiency (Tomek & Robinson, 1990).
The form of the market power is likely to manifest in larger marketing margins than would otherwise be the case. Basically, they tried to build a relationship between the form of market power and the marketing margins and concluded that the larger marketing margins reflect the larger market power and domination of middlemen (Gordon & Hazledine, 1996). The study by Gardner (1975) provided a basic structure for analysing marketing margins. It defined the major sources of variation in the retail-farm price spread, i.e., shifts in the retail food demand, shifts in the farm product supply, or shifts in the supply of marketing services. An increase in marketing costs and the level of farm output reduces the percentage marketing margin (Heien, 1977).
A priori knowledge of marketing efficiency, marketing costs and, marketing margins is very essential for those involved in marketing. Companies and producers aiming to produce commercial high-value crops, final goods and services, and increase profits should not only look for production costs but marketing costs as well. Marketing costs, margins and price spread are the tools for checking the profitability of intermediaries involved in moving goods from the producers to end users. The market analysts who constantly aim at monitoring the marketing efficiency need to have a mental grasp of marketing fundamentals in general and marketing costs, margins and price spread in particular.
Funke, T. B. (2006). From Farm to Retail: Costs and Margins for Selected Food Industries in South Africa. A M.Sc. Thesis in Agricultural Economics. Faculty of Economic and Management Studies, University of Pretoria. South Africa.
FSTS & SIFSIA. (2011). Price and Market Structure Analysis for some selected Agricultural commodities in Sudan: Marketing costs and margins. Retrieved from http://www.fao.org/fileadmin/user_upload/sifsia/docs/Marketing%20Cost%20Margin%20Final%20May%202011%20 (2).pdf.
Gardner, B.L. (1975). The Farm-Retail Price Spread in a Competitive Food Industry. American Journal of Agricultural Economics 85: 235-242.
Gordon, D.V. and T. Hazledine. (1996). Modelling Farm-Retail price Linkage for Eight Agricultural Commodities: A technical report for the Agriculture and Agri-Food Canada. http://dsp-psd.communication.gc.ca/Collection/A21-49- 1996-1E.pdf
Heien, D. M. (1977). Price Determination Processes for Agricultural Sector Models.Amer. J. Agr. Econ.Vol.59 (1).126-32.
Myers, R. J., Sexton, R. J. and Tomek, W. G. (2010). A century of research on agricultural markets. American Journal of Agricultural Economics. Vol. 92, pp. 376–402.
Tomek WG, Robinson K L (1990). Agricultural product prices. 3rd ed. Cornell University Press, Ithaca, NY.
Wohlgenant, Michael K. (2001). “Marketing margins: Empirical analysis,” Handbook of Agricultural Economics ,in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 16, pages 933-970 Elsevier.

The author is a Research Scholar at the Department of Economics, Central University of Kashmir, an Academic Counsellor at the IGNOU STUDY CENTRE 1209,S.P. College, Srinagar. She is also the Editor in EPH – International Journal of Business and Management Science & Asian Journal of Managerial Science and an Ezine Articles Expert Author. She is the IJRULA title awards, 2018 winner (Best Researcher, 2018) and can be reached at: qadribinish@gmail.com