Marketing Cost, Market Margin, Price Spread, Ways to Reduce Marketing Costs of Farm Products - Agrobotany

Marketing Costs

Marketing costs refer to the expenses incurred in moving goods from producers to consumers, including taxes and cess. These costs vary based on the length of the marketing channel used. Common examples include packing, transportation, weighment, loading/unloading, spoilage, and wastage.

Objectives of Analyzing Marketing Costs:

• Identify the intermediaries involved between producer and consumer.
• Determine the total cost involved in marketing a commodity.
• Compare the producer's earnings with the consumer's payment.
• Explore alternatives to minimize marketing expenses.

Factors Affecting Marketing Costs:

• Location of Production: Areas nearer to markets incur lower marketing expenses.
• Seasonality: Agricultural products are seasonal, but demand is year-round, necessitating storage.
• Product Form: Many agricultural products need processing before consumption, adding to the cost.

Analyzing marketing costs helps evaluate whether expenses are excessive and how they can be optimized for better marketing efficiency.

Typical Marketing Cost Components:

• Local handling and assembling charges
• Transport and storage expenses
• Retail and wholesale handling costs
• Services like financing, risk management, and market intelligence
• Profit margins of intermediaries
• Producer’s share in consumer’s spending

Producer’s Share in Consumer’s Rupee (PSCR):

PS = (PF / PR) × 100
Where:
PS = Producer’s Share
PF = Price received by the farmer
PR = Price paid by the consumer

Total Marketing Cost:

C = Cf + Cm1 + Cm2 + ... + Cmn
Where:
C = Total marketing cost
Cf = Cost borne by the producer
Cmi = Cost incurred by the i-th middleman

Market Margins

A marketing margin is the difference between the price received and the price paid by a marketing agent like a retailer, wholesaler, or processor. It includes their profit and compensation for services like storage and capital investment.

Why Estimate Market Margins?

• To assess marketing system efficiency
• To regulate excessive intermediary margins through policies

Types of Market Margins:

1. Absolute Margin:

Ami = PRi - (PPi + Cmi)
Example: If PRi = Rs. 2850, PPi = Rs. 2450, Cmi = Rs. 250
Ami = 2850 - (2450 + 250) = Rs. 150

2. Percentage Margin:

Pmi = [(PRi - (PPi + Cmi)) / PRi] × 100
= (150 / 2850) × 100 = 5.26%

3. Mark-Up:

M2 = [(PRi - (PPi + Cmi)) / PPi] × 100
= (150 / 2450) × 100 = 6.12%

Where:
PRi = Sale price per unit
PPi = Purchase price per unit
Cmi = Marketing cost per unit

Margins encompass intermediary profits and cover storage, capital interest, overheads, and related costs.

Price Spread

Price spread refers to the difference between the amount paid by the consumer and the amount received by the farmer for the same quantity of a farm product. It is also known as farm-retail spread or sometimes marketing margin.

Components of Total Marketing Margin

1. Marketing Costs: These are the actual expenses involved in moving produce from farms to consumers. This includes handling, transportation, storage, and processing costs at all stages.
2. Profit Margins: These represent the earnings of different market intermediaries like traders, wholesalers, and retailers involved in product distribution.

Marketing margins vary depending on the product, market conditions, and distribution channels.

Methods of Calculating Marketing Margins

1. Concurrent Margin Method: This method compares prices at each stage (farmer, wholesaler, retailer) at a given time to calculate the difference. It does not account for the time taken between purchase and sale.
2. Lagged Margin Method: This method calculates the difference in prices between purchase and sale over time for each intermediary. It is more accurate but data collection is challenging.

Working out marketing margin:

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 (Sale Value) and purchase (Purchase value) 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 :

Importance of Studying Marketing Margins and Costs

• Measures the share of marketing costs and profits in product pricing.
• Indicates the efficiency of the marketing system and intermediaries.
• Helps in evaluating value addition at different stages.
• Identifies excessive costs and suggests areas for improvement.
• Assists in developing effective marketing policies.

Factors Influencing Marketing Costs

1. Perishability: Highly perishable items cost more to market.
2. Losses: Spoilage during handling, storage, or transport increases costs.
3. Product Volume: Larger volumes reduce per-unit costs.
4. Supply Regularity: Irregular supply increases cost; regular supply reduces it.
5. Packaging and Processing: More packaging and processing increase costs.
6. Grading: Ungraded products cost more to market.
7. Advertising: Promotional needs raise marketing costs.
8. Bulkiness: Bulky products are costlier to handle and transport.
9. Retail Needs: More retailing leads to higher marketing expenses.
10. Storage: The need for storage adds to marketing costs.
11. Risk: High business risk (price fluctuations, spoilage) increases costs.
12. Customer Services: Facilities like home delivery and credit raise costs.
13. Number of Intermediaries: More middlemen increase the cost.
14. Unfair Trade Practices: These can drive up expenses.
15. Inadequate Finance: Expensive or insufficient credit increases marketing cost.

Ways to Reduce Marketing Costs of Farm Products

1. Improve operational efficiency across the supply chain.
2. Reduce profit margins at each stage through better competition.
3. Minimize risks using hedging and insurance.
4. Strengthen market information systems.
5. Encourage more competitive marketing practices.

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