1. Mohd Zahid Laton, FPP UiTM Pahang
CHAPTER 5
MARGINAL COST AND MARKETING EFFICIENCIES
1. Marketing cost. Marketing cost is the cost involved in the marketing and will
directly influence the profit or losses suffered by sellers. Most marketing costs are
influenced by general economic forces outside of the food economy, especially labor,
transportation, packaging, and energy costs. These rising costs will maintain their
pressures on the rising food marketing bill, and government regulations, affecting
such areas as occupational safety, plant sanitation, energy sources and uses, and
environmental protection, also will add costs.
2. Food marketing firms incur a number of costs when performing marketing
functions. Thus it is helpful to look at the composition of the marketing costs when
evaluating 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 increasing
steadily and more rapidly than the farm value of food. Three factor are responsible
for 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 food
money that goes to food marketing firms. This is the difference between what the
consumer pays for food and what the farmer receives. In other word it is a
difference between the purchase and resale prices of a product. The marketing
margin is the price of all utility-adding activities and functions performed by food
marketing firms such collection, processing, transportation, advertising, retailing,
etc. This price includes the expenses of performing marketing functions and also the
food marketing firms’ profits.
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2. Mohd Zahid Laton, FPP UiTM Pahang
5. Factors influenced the marketing margin. The allocation of the
consumer’s food dollars between farmers and food marketing firms is one of the
most controversial aspects of food marketing. Consumers do not earmark part of
their 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
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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 frequently
used measure of market performance. Improved efficiency is a common goal of
farmers, food marketing firms, consumers, and society. Efficiency is measured as a
ratio of output to input. Marketing input includes the resources (labor, packaging,
machinery, energy, etc) necessary to perform the marketing functions. Marketing
output includes time, form, place, and possession utilities that provide satisfaction
to consumers. Thus, resources are the costs and utilities are the benefits of the
marketing efficiency ratio. Efficient marketing is the maximization of this
input-output ratio. It requires the existence of a marketing system having a
structure of stages and firms within stages such that marketing costs are minimized.
7. Any marketing change that reduces the costs of performing the functions
without altering the marketing utilities would clearly be an improvement in
marketing efficiency ratio. The marketing efficiency ratio can be increased in two
ways;
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 physical
innovations and competitive pricing so that charges equal costs plus a normal rate
of profit is requires in a marketing system. Thus several aspects below will
contribute and improve to the marketing efficiency;
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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 be
measured 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.
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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 in
the marketing process of the producer, processor and middlemen. This can be
compared by analyzing the efficiencies of marketing. There is no single managerial
policy determines the marketing margin for the total marketing system. Instead, it
reflects the results of combined actions at various marketing stages. To figure the
marketing cost for a product over the total system, we simply subtract the
beginning farm-level price from the final retail price.
11. Price policy. Pricing is the process of determining the value of a product or
service to consumers at a particular time in quantitative terms of money. Price
policy refers to the organization procedure in setting the right price to the right
customer at the right place and time. One method of price is the price
discrimination.
12. Price discrimination. Price discrimination is situation whereby the seller
charges different prices to different customers for the same product. Price
discrimination 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.
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6. Mohd Zahid Laton, FPP UiTM Pahang
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