Marketing Costs, Margins and Price Spread
In the marketing of agricultural commodities, the difference between the price paid by consumer and the price received by the producer for an equivalent quantity of farm produce is often known as farm-retail spread or price spread. Sometimes, this is termed as marketing margin.
The total margin includes:
(i) The cost involved in moving the product from the point of production to the point of consumption, i.e., the cost of performing the various marketing functions and of operating various agencies; and Profits of the various market functionaries involved in moving the produce from the initial point of production till it reaches the ultimate consumer.
Marketing costs: Marketing costs refer to the expenses that a business incurs in order to promote and sell its products or services. These costs may include advertising, sales commissions, packaging, transportation, and other expenses associated with bringing a product to market. Marketing costs are an important consideration for businesses because they directly impact the profitability of a product or service.
Price spread: Price spread refers to the difference between the price that a farmer receives for a commodity and the price that consumers pay for the same commodity. The price spread is affected by a variety of factors, including transportation costs, processing costs, marketing costs, and other factors that affect the supply and demand for the commodity. The price spread is an important consideration for farmers because it directly impacts their income, and for consumers because it determines the price they pay for food and other agricultural products.
Total Cost of Marketing
The total cost, incurred on marketing either in
cash or in kind by the producer seller and by the various intermediaries
involved in the sale and purchase of the commodity till the commodity reaches
the ultimate consumer, may be computed as follows: where
C = CF
+ Cmi + Cm2 + Cm3 + …. + Cmn
C = Total cost of
marketing of the commodity,
Factors Affecting the Cost of Marketing
The factors which affect marketing costs are:
(i)
Perishability
of the Product
(ii)
Extent of
Loss in storage and Transportation
(iii)
Volume of
the Product Handled: The larger the volume of business or turnover of a
product, the less will be the per unit cost of marketing.
(iv)
Regularity
in the Supply of the Product:
(v)
Extent of
Packaging: The cost of marketing is higher for the commodities requiring
packaging.
(vi)
Extent of
Adoption of Grading:
(vii)
Necessity of
Demand Creation:
(viii)
Bulkiness of
the Product: The marketing cost of bulky products is higher than that of
which are not bulky.
(ix)
Need for
Retailing:
(x)
Necessity of
Storage: The cost of the storage of a product adds to the cost of
marketing,
(xi)
Extent of
Risk:
(xii)
Facilities
Extended by the Dealers to the Consumers: The greater the facilities
extended by the dealer to the consumer (such as return facility for the
product, home delivery facility, the facility of supply of goods on credit, the
facility of offspring entertainment to buyers, etc.), the higher the cost of
marketing.
Reasons for Higher Marketing Costs of Agricultural Commodities
Generally, the cost of marketing of agricultural
commodities is higher than that of manufactured products. The factors
responsible for this phenomenon are:
(i)
Widely
Dispersed Farms and Small Output per Farm: the cost of assembling is high.
(ii)
Bulkiness of
Agricultural Products:
(iii)
Difficult
Grading: The sale or purchase by contract or sample is not
easy because an inspection of each lot of the product is required by reason of
variation in their quality.
(iv)
Irregular
Supply: Agricultural products are characterized by seasonal production.
(v)
Need for
Storage and Processing: . Storage and processing add to the
cost of marketing. Losses of agricultural products in storage are also high
because of their perishability.
(vi)
Large Number
of Middlemen: In foodgrain marketing, the number of middlemen is larger
because there is no restriction on their entry in the trade. The
larger the number of middlemen, the higher the marketing costs.
Risk involved: The risk of price fluctuations is higher in agricultural products. The higher risk leads to higher risk premium, which adds to the marketing costs.
How to Reduce Marketing Costs
Some ways of reducing marketing costs for farm products are:
(i) Increase the Efficiency of
Marketing
An increase in the efficiency of marketing can be
brought about by a wide range of activities between producers and consumers.
Some major areas in which improved efficiency may result in a reduction in
marketing costs are:
(a)
Increasing the
Volume of Business: By increasing the quantity to be handled at a time, one
can effectively reduce marketing costs and increase marketing efficiency.
(b)
Improved
Handling Methods: The new methods of handling, such as pre- packaging of
perishable products, the use of fast transportation means, the development of
cold storages and an efficient use of labour are some of the methods by which
efficiency may be increased and costs reduced.
(c)
Managerial
Control: The adoption of proven management techniques increases efficiency.
By a constant monitoring of costs and returns, the efficiency at each stage in
marketing may be stepped up.
(d) Change in Marketing Practices and Technology: Changes in marketing practices and technology (such as sale of orange juice instead of orange, retailing food services through super markets, and integration of marketing functions) reduce marketing costs and increase marketing efficiency.
ii. Reduce Profits in Marketing
Profits in the marketing of agricultural commodities
are often the largest because of the inherent risk at various stages of
marketing. The risk may be reduced by:
(a)
The adoption of hedging operations, improvements in
market news service, grading and standardization; and
(b)
Increasing the competition in the marketing of farm
products.
