Marketing of Horticultural Crops

Semester I, 2023

1
 Chapter 1: An overview Marketing

2
 q Discuss how Marketing begin in
agriculture/Horticulture?

3
 1.1 Introduction
Marketing had its beginning in agriculture.
It developed only after man was able to
produce more food than he needed for himself.
 It also developed when producer had found a
way of exchanging the products of others.
T h i s t r a n s i t i o n f r o m " p r o d u c t i o n f o r
consumption" to production for exchange"
comes about slowly.
In fact, the marketing economy of today is still
a part of this transition stage
4
 1.2. Concepts of Marketing
v The concept of marketing help as to understand-
the marketing system and the key terms in the studying mar
keting.
A. Needs, wants and demand
v The starting point for the discipline of marketing lies in human
needs ,wants and demand.
v People need, want and demand many varieties of things.
v The marketer must try to understand the target market’s need,
wants and demands
Needs – are the basic human requirements like f
ood, air, water, clothing and shelter to survive.
Ø People also have strong needs for recreatio
n, education and entertainment.
Ø Human need is the deficiency of somethi
ng useful or some basic satisfaction.
A person has many needs at any given tim
e.
Ø They arises from physiological states of ten
sion such as hunger, thirst and discomfort.
• Other needs are psychogenic; they arises
from psychological state of tension such as
the need of recognition, esteem or belong
/feel right.
Abraham Maslow, a behavioral scientist has
talked about human needs.
q He said, A human need takes the form of a
hierarchy. That is, once a person is satisfied
with his basic needs, he keep on choose for
his secondary needs.

7
 Wants - are desires for specific satisfiers of
the needs.
ü A want for one person may not be a want
for another person.
Demands - are thus wants for specific
product that are supported by an ability to
buy them.
Ø Wants become demands when they are
supported up by purchasing power.

8
 B. Value, cost and satisfaction
v The consumer has to decide on the most satisfying produ
ct from among different alternatives

Value :- is the consumer’s estimate of the product’s overall

capacity to satisfy his or her needs.

ü Therefore, consumers will have to consider the product’s

value and cost before making a choice.

Cost :refers to the amount a firm or consumers spend on g

oods and services.

Satisfaction: occurs when the product performance excee

ded the customer expectation
 C. Exchange and transaction
v Both process are taken in simultaneously .

v Exchange is the act of obtaining a desired product from someone by

offering something in return.

Ø Exchange is frequently described as a value - creating process bec

ause exchange normally leaves both parties better off

Ø Transaction: two parties are engaged in exchange if the

y are negotiating and moving towards an agreement.

Ø When an agreement is reached, we say that a transa

ction takes place.
Ø Transaction may be either monetary or barter transaction
 Figure 1.1 concepts of marketing

11
 Definition of Markets
v The concept of exchange leads to the concept of ma
rket.
v The word market comes from the latin word „marcat
us" which means merchandise or trade or a place
where business is conducted.
v Traditionally, a “market” was a physical place wher
e buyers and sellers meet to buy and sell goods.
 Cont.,
v Economists now describe a market as:
Ø All the potential customers sharing a particular n
eed or want who might be willing and able to eng
age in exchange to satisfy that need or want

v the term market refers to:

Ø a collection of buyers and sellers who transact ove
r a particular product or product class as a housing
market, stock market, financial market, etc
 What is Horticultural marketi
ng?
Ø Marketing involves finding out what your customers
want and supplying it to them at a profit
This description stresses the two crucial points that
govern marketing:
Firstly, that the whole marketing process has to be
customer oriented. Production must supply customers
with what they want or need. This is the only reason
people spend their money.
Secondly, that marketing is a commercial process and
is only sustainable if it provides all the participants
with a profit

14 Tewodros Tefera (PhD)

 v A broader view of marketing(Horticultural marketing)
is provided by the following definition:
Ø The series of activities involved in making available
services and information which influence the desired
level of production relative to market requirements,
and the movement of the product (or commodity)
from the point of production to the point of
consumption

15 Tewodros Tefera (PhD)

1.2 The role horticultural marketing in econ
omic development

v Agricultural/ horticultural marketing is :

Ø The movement of agricultural or horticultural product
from the farms to the consumer.
Ø It includes organization of product, material supply and
processing industries.
Ø The assessment of demand for farm inputs and raw
materials

16
 q Importance of agricultural marketing
vThe basis of all marketing is man’s effort to satis
fy his wants.

vGenerally, agricultural or horticultural marketing

plays an important role:
Ø In motivating production
Ø In speed of economic development
 Cont.,
vThe importance of agricultural marketing in ec
onomic development is:
q Optimization of resource use and output m
anagement.
ØAn efficient agricultural marketing system leads t
o the optimization of resource use and output m
anagement.
üBy scaling down the losses arising out of i
nefficient processing, storage and transporta
tion.
 q Increase of farm income

ü An efficient marketing system ensures

higher levels of income for the farmer by
reducing the number of middle men or
restricting the commission on marketing
services.

19
 Cont.,
q Growth of agro based industries
Ø An improved and efficient system of agricult
ural marketing helps in the growth of agro ba
sed industries and stimulates the overall dev
elopment process of the economy
q Price signal (indicators)
Ø An efficient marketing system helps the farm
er in planning their production in accordance
with the need of the economy. This work is c
arried out through pricing signals.
Cont.,
q Adoption and spread of new technology
ØThe marketing system helps the farmer in the a
doption of new, scientific and technical knowl
edge
Ø New technology requires higher investment an
d farmers would invest only if they are assured
of the market clearance
q Employment
The marketing system provides employment to milli
ons of persons engaged in various activities such
as:
Ø packaging, transportation, storage and proc
essing.
Cont.,
q Addition to the national income
Ø Marketing activities and value added to the pro
duct there by increases the GDP and net national
product
q Better living
The marketing system is essential for the succes
s of the development program, which are desig
ned to strengthen the population as a whole
 Cont.,
q Widening of markets for the product
Ø A strong marketing system widens the market
for the product by taking them to remote corner
both within and outside the country i.e.
Ø to areas far away from the production point
 cont
q Creation of utility: Agricultural marketing is pro
ductive by creating utility
Ø Though, many people consider the marketing sys
tem and those engaged in various marketing acti
vities as organism to producers and/or farmers.
Cont.,
A. Form utility- is the utility that occurs due to the changin
g of product forms through processing into more desirable
and useful products
Cont.,
B. Place utility: -
üthe utility that a product has due to its location,
Example, when coffee is transported from surplus are
as to deficits areas, it means creating place of utility
C. Time utility: -
ürefers to the utility created by changing the time of us
e of the product, E.g., storing during excess surplus an
d moving into trade channels during the period of scarc
ity
ü Agricultural products are mostly seasonal in the
Ethiopian condition because it is like 4 months sur
plus and 8 months deficit
Cont.,
D. Possession utility: - utility is created by moving finis
hed products into the hands of the consumers. This mea
nt for changing ownership at different chain

Farmers assemblers wholesalers Retai

lers Consumers OR
Farmers Processors wholesalers
Retailers Consumers
 Cont’d
v The special characteristics horticultural product
are:
Ø Perishability of the Product: Most farm products are
perishable in nature; but the period of their perishability
varies from a few hours to a few months.
The marketing of farm products is virtually a race with
death and decay.
Their perishability makes it almost impossible for
producers to fix price .

28
 Cont’d
q Seasonality of Production: Farm products are
produced in a particular season; they cannot be produced
throughout the year. In the harvest season, prices fall.
Ø But the supply of manufactured products can be adjusted
or made uniform throughout the year.
Ø Their prices therefore remain almost the same throughout
the year.
q Bulkiness of Products: The bulkiness of most farm
products makes their transportation and storage difficult
and expensive.
The price increase in bulky products is higher because of
the higher costs of transportation and storage.
This fact also restricts the location of production to
somewhere near the place of consumption or processing.
29
 Cont’d
q Variation in Quality of Products:
Ø There is a large variation in the quality of agricultural
products, which makes their grading and
standardization somewhat difficult. There is no such
problem in manufactured goods, for they are products of
uniform quality.
q Irregular Supply of Agricultural Products:
Ø The supply of agricultural products is uncertain and
irregular because of the dependence of agricultural
production on natural conditions. With the varying
supply, the demand remaining almost constant, the
prices of agricultural products fluctuate substantially.
.
30
 Cont’d
q Processing:
Ø Most of the farm products have to be processed
before their consumption by the ultimate
consumers.
Ø This processing function increases the price of
agricultural commodities.
Ø Processing firms enjoy the advantage of
monopsony, oligopsony or duopsony in the
market.
Ø This situation creates disincentive for the
producers and may have an adverse effect on
production in the next year.
31
 PROBLEMS OF AGRICULTURAL MARKETING

1) Inadequate Storage
2) Lack of Grading & Standardization
3) Inadequate Transport Facilities
4) Middlemen
5) malpractice in unregulated markets
6) Inadequate Market Information
7) Inadequate Credit Facilities
8) Seasonal Price Fluctuations
9) Forced or distressed sale

32
 Chapter two: Demand and Supply of
Horticultural Products

33
 2.1 Demand and supply an
alysis
Definition of demand (Dd) and Demand functi
on.
v Demand is defined as a schedule,
Ø Which shows the various amounts of a product which consu
mers are willing and able to purchase at each specific p
rice in a series of possible prices during some specifie
d period of time in a specified market.
Or in shortly it is:
Ø Amount of a good or service consumers are willing &
able to purchase during a given period of time

34
 Demand schedule and Curve
Demand schedule :
Ø Is a tabular presentation of the demand fo
r a commodity.
Ø It is simply a tabular statement of a buye
r’s plans, or intentions, with respect to t
he per
Price purchase of
unit (in Birr/ au product.
Quantity Demanded/Week (un
E.g. its/wk)
nit) Hypothetical Demand Schedules for a Commodity
X 1 5
2 3
3 1

The above table in row 1 shows that the buyers in this market
35 demand 5 units of X per week at the price of birr 1 per unit an
d so on
§ It is a graphic representation of preferences for a
particular good.
In other words, it is the graphic form of the demand
schedule- the quantity on the horizontal axis and th
e price on the vertical axis.
The demand curve : shows an inverse relationship be
tween product price and quantity demanded.
price

Vertical axis :Price

Horizontal axis: quantity

Quantitiy
36
 The Law of Demand
§ Keeping all other factors being constant (
ceteris paribus), as price falls, the corr
esponding quantity demanded rises, or as p
rices increases, the corresponding quantit
y demanded falls.
§ Qd/P must be negative
§ The most important circumstance affecting
the demand for a good is the price.
§ People buy more if the price of a good
falls; they will buy less if the prices ri
se, holding other factors constant.
37
38
 Cont…………….
v Generally , for most goods and service as incr
ease in income(y) (purchasing power) will cause
an increase in demand, such type of goods are n
ormal goods.
§ y and dd of normal goods= they have direct (po
sitive relationship)
§ Normal goods divide into luxury goods and neces
sity goods.
But as y increase some the level goods and se
rvices whose dd decrease such type of goods are
inferior goods.
ex. Bean Vs meat.
Dd of inferior goods and income= -ve ( inverse
relationship)
Note
39 : inferior goods at the very beginning norm
 2. Price of other related goods in the market
The effect of the change in the price of other r
elated goods is dependent on the nature of the r
elationships between the goods in consideration.
 The are two particular interrelationships of de
mand which may be quantified,
1. substitutes goods : Where goods are substit
utes one for another
2. complementary goods :Where goods are complem
entary.
a) substitutes goods : two goods are substitutes
if they satisfy similar needs or desires.
40
§ With substitutes, the demand for one rises as the pr
ice of the other rises or the demand for one falls a
s the price of the other falls.
§ For example, for many people butter is a substitute
for cooking oil and vice versa

ex : coca and Pepsi

tea and coffee
Ø If price of tea increase = demand of coffee increas
e

Price
Dd coffee 1
41 Dd coffee 0
 b) Complementary goods: are those goods that are
jointly consumed or demanded.
With complements, the demand for one rises when
the price of the other falls and the demand for
one falls as the price of the other rises.
 Thus if two goods are complements, the price of
one good and the demand for the other are invers
ely related.
ü Ex1: if P of camera increase = Qdd of camera
decrease
if Qdd of camera decrease= demand for fil
ms decrease
üEx2: price of car increase = Qdd of fuel decrea
42
se
 3.Tastes and preferences
Positive taste and preference favor the dem
and for a commodity.
 A change in favor of a good shifts the dem
and curve rightward.
A change in preferences away from the good
shifts the demand curve leftward.
Ex : fashion
4. Change in number of buyers
Since the market demand for a good or servi
ce is the sum of all individual demands, an
increase in the number of buyers in a marke
t increases demand.
43
 Increase in the number of buyers could be due to expa
nsion of markets which could be caused by expansion
the dd curve.
How number of buyers increase
- Expansion of trade- export to abroad
- Expansion of disorder
- Increase number of population( increase population gr
owth)
5. Size and composition of population
Composition Age composition
sex composition

44
q Age composition= predominance youth – e.g price
of

cosmetics increase
predominance Adult-
price of

normal good increase

q Sex composition= female( price of female material
increase)
6. Seasonal factors( time)
The demand for many products is influenced by t
he season.
Example,
45
demand for cloth during holidays; demand
for meat during fasting period.
 7. Expectation of consumers about future incom
e, price and product availability affects d
emand.
Current demand depends heavily on long-term
expected income.
Expectation of rise in future income may in
itiate consumers to increase their current
spending.
An increase in future price= current dd for
goods and service increase.
e.g . Teff in December
Future product availability= current dd for
goods and services decrease .
46
8. Culture: Religious or traditional forbidden f
or some products- either seasonal or permanent.
9. Government influences: prohibitions or restri
ctions of some goods decrease the demand.

47
 Supply
Definition of Supply (ss)
§ Supply of a commodity can be defined as the - quant
ity that producers are willing and able to offer fo
r sale in a given time period.
§ Supply is a schedule which shows the various amount
of the product which a producer is willing and able
to produce and make available for sale in the marke
t at each specific price in a serious of possible p
rices during some specific time period
§ Supply is which tells us the quantities of a produ
ct, which will be supplied at various prices, all o
ther factors being held constant.
48
 The Supply Schedule:
Is a tabular presentation of the supply for a pr
oduct.
It shows a series of alternative price-quantity
supplied combinations.
In other words, it lists the quantities supplied
at each different price, when other non-price fa
ctors are held constant.
Price per quintal (in B Quantity supplied/week
irr)
E.g. Hypothetical supply schedules for
commodity X
1 2
2 4
3 6
This shows with an increase in price the quantity supplied also incre
ases.
49
 Supply curve: graphical representation of pr
ice and Qss combination
P
ss

Qss

§ It is constructed on a two-dimensional graph by assigning

the price on the vertical (Y) axis and the quantity suppl
ied on the horizontal (X) axis.

§ The supply curve has a positive slope showing the positiv

e or direct relationship between price and the quantity s
upplied, holding everything else constant.
50
 Law of Supply
§ Shows the behavior of suppliers - those that a
t the receiving end in a market.
§ Other things being equal, the higher the price
of a good, the greater is the quantity supplied
, i.e. price and quantity supplied is directly
related.
§ As price rises, the corresponding quantity sup
plied rises; as price falls, the quantity suppl
ied also falls.

51
 Individual versus Aggregate (Market S
upply)
An individual supply curve represents the price-qu
antity combinations for a single seller (or firm).
However, in the real world markets there are many
producers or suppliers of the same product.

The market supply is simply the horizontal sum of th

e individual supply curves.
The market supply curve represents the price-quantit
y combinations for all sellers of a particular produ
ct.

52
 Supply Curve Shifts
 The curve tells us how many more units will be
produced as the price increases and how many fewer
units will be produced as the price decreases.
These are referred to as changes along the supply
curve.

53
 Factors Influencing Supply (Determinants of ss)
Two major determinants
1. Own-price determinant/supply mover/-the price of th
e product
2. Non- Own-price determinants/supply shifters/
1. Own-price determinant
Ø P and Qss have +ve relationship movement along
the supply curve is change in Qss
P
ss

54 Qss
2. Non- Own-price determinants
1. Price of related goods
a. Production substitutes
b. Production Complements
i. Production substitute
§ Two products are substitutes in production when an i
ncrease in the price of one product causes a reducti
on in the quantity of the supply of the other produc
t.
Eg: farmer use the plot of land for production
of barley and wheat
W B W B

substitute
50% 50% 75%
25%

55
because price of wheat increase
Ø Generally if the price of one production substitu
te increase, this will decrease the supply of other
substitute.
ii. Production complements:
§ Are goods that are production together or jointly,
or one is a by- product of the other product.
§ Their production process is inseparable.
§ Generally two products are complements in the produ
ction when an increase the price of one product cau
ses an increase the supply of the other product.
Eg1: p(beef) increase= ss(beef) increase
= ss skin inc
rease
56
so P(beef) increase = ss skin increase.
2. Change in price of inputs (factors of production)
Inputs are the things that are used in the product
ion of goods and services.
Change in the price of inputs directly affects the
cost of production.
Input costs =cost of production = units of input
s used X respective prices
ØThere is close relationship between cost of pr
oduction and supply.
Ø An increase in the price of a factor will increa
se the cost of production of a firm and decrease
the amount of supply.
For a particular commodity, when the costs of produ
ction are low, relative to market price, then it wi
ll be profitable for producers to produce a great a
57 mount.
3. Change in the level of technology
The state of technology affects the efficiency of produ
ction.
Usually advancement or improvement in technology allows
producers to reduce their cost of production per unit o
f output.
This would therefore, have the effect of shifting the s
upply curve to the right. However, the effect of techno
logy on supply tends to be a long-term.
4. Number of Suppliers
The larger the number of suppliers the higher will b
e the volume of supply, other things being constant.

58
5. Change in the level of taxes and subsidies
q Taxes are deductions from the profit of produce
rs or they are additional costs to producers.
So their effect is similar to increase in cost o
f production.
Subsidies, however, are opposite of taxes.
q Subsidies are expense for the government or soc
iety but deductions from the cost of production
to the individual producer. The government, for
instance subsidies on fertilizer products.

59
 6. Nature, especially weather and pests
Bad weather, pests and disease can greatly redu
ce supplies of agricultural products, while goo
d weather and absence of pests can greatly assi
st in increasing yields and hence supply.

7. Expectation of producers with regard to futur

e price and other specific factors

60
 Supply Curve Shifts
 The curve tells us how many more units will be
produced as the price increases and how many fewer
units will be produced as the price decreases.

61
 Change in Supply versus Change in Quantity Supp
lied
Change in Supply
Change in supply is a total change in the locat
ion of the supply curve.
The change or shift in supply could be an incre
ase or a decrease.
It is caused by change in any of the non-price
supply shifters or determinants.
An increase is shown using supply curve, by shi
ft to the right of the initial.
An increase in supply happens when, due to chan
ges in one or more of the non-price supply shif
62
ters.
 Change in quantity supplied
This is movement from one point to another poin
t on a stable supply curve (the original supply
curve).

 It is caused by a change in the price of the s

pecific product under consideration.

63
 Elasticity
Elasticity is a general concept that can be used to
quantify the response in one variable when another v
ariable changes.
 It denotes the responsiveness (sensitivity) of one
variable to changes in another.
It is a measure of the responsiveness of a market to
a stimuli (change in a variable)
Types of Elasticity
A. Elasticity of Demand
§ It is important to determine how much the amount de
manded will change in response to a change in one of
its determinants.
q Three types of elasticity's of demand
üPrice elasticity of demand
64
üIncome-elasticity of demand
 1. Price Elasticity of Demand
Measures how sensitive or responsive consumers are
to a change in the price of the commodity under con
sideration other factors held constant.
It is the percent of change in the quantity of a go
od demanded that is bring on by a one percent chang
e in price,
Edp = Percentage change in q
uantity demanded
Percentage change in p
rice
Edp= Q / Qi = %
Q
65
P /Pi
%  P
 2 . Income elasticity of de
mand
Ø It relates changes in the quantity demanded to chan
ges in income.
 It measures the degree of responsiveness of the qua
ntity demanded of a product to changes in income.
 It is the proportional change in quantity demanded
divided by the proportional change in income.

66
 Cont…….
Edy = Percentage change in quantity demanded
Percentage change in income

Edy = Q / Qi = % Q
y /yi %y
= Q . yi
y Qi
Where,
Q = Change in quantity demanded
Y = Change in income
Qi = Initial quantity Qf = Quantity final
Yi = Initial income Yf = Income final
67
 Cont…….
If demand increases with income increases, the income
elasticity is a positive number and such goods are superior or
normal goods, (Edy > 0)
If demand decreases with an increase income, the income
elasticity is negative and such goods are inferior goods, (Edy <
0).
If demand change is the same as income change, the income
elasticity is unit, (Edy =1).

68
 3. Cross elasticity of demand
§ If two commodities X and Y are either substitut
e or complement to each other, the demand for o
ne of them will be responsive to changes the pr
ice of the other.
§ The extent of this responsiveness is called cro
ss elasticity of demand

 Edxy = Proportionate change in the quantity demande

d of good X
Proportionate change in the price of good Y

Where, good X and good Y are related goods.

denotes = Qx . Pyi
69
Py
Qxi
 Where
Q x = Change in quantity demanded of good X
Py = Change in price good Y
Qxi= Initial quantity of good X
Pyi = Initial price of good Y
If the cross elasticity of dd is positive the g
oods are substitute.
Ex: quantity demand of Coca-Cola increase the pr
ice of Pepsi increase.
On the other hand If the cross elasticity of dd
is negative the goods are complementary and if
zero unrelated goods.
Ex :quantity of film decrease when the price of
70
camera increase,( complementary good)
 B . Elasticity
of supply
v Is also applicable to measure the behavioral change
s of the supplier/seller/ in response to the change
s in the determinants.
Price Elasticity of Supply(PES)
§ Is the measure of responsiveness of producers in te
rms of output to changes in the price of their prod
ucts.
Essp = Percentage change in quantity supply
Percentage change in price
Essp = Q / Qi = % Q
P /Pi %  P
It
71 denotes = Q . Pi
 Three types of price elasticity of supply
I Elastic-Esp >1, i.e % Qss > % P
Ø If the percentage rise in quantity supplied is greater than the
percentage rise in price that brought it about.
Ø That is, when a change in price causes a more than proportionate
change in quantity supplied.
Ø This means producers are relatively responsive to price changes.
II. Unitary elastic- Esp equal to one, i.e % Qss = % P
Ø the percentage increase (change) of quantity supplied is exactly
equal to the percentage increase (change) in price.
III. Inelastic- Esp < 1, % Qss < % P
Ø If the percentage rise in quantity supplied is less than the
percentage rise in price that brought it about. That is, quantity
changes by a smaller proportion than price.
Ø This means producers are relatively insensitive to price changes.

72
q Two extreme cases of elasticity of supply:
1. Perfectly elastic (Infinitely elastic)-
§ Where changes in supply occur with out any large chan
ge in price being necessary.
§ Implies a small change in price changes quantity supplie
d by an infinitely large amount.
2. Perfectly inelastic-
§ The Esp is equal to zero (Where supply is fixed).
§ Where a change in price brings no change in quantity su
pplied.

73
 Market Equilibrium
Ø is determined by the interaction of Demand and supply cu
rves.
Ø The actual quantity that demanders get in the market and t
he actual quantity that producers offer are only determined
when the two actors meet in a market.

74
75
 Determination of the equilibrium conditio
n
v In any market one of the following three conditions may exi
st:
1. Equilibrium (balance) Point
Qss= Qdd at market price
PE= equilibrium price.
QE= equilibrium quantity
Equilibrium price: is the price at which the wishes of buyers
and sellers coincide or the price that exists when Qdd equ
als Qss in a given market, in specific time period.
§ Graphically it is represented by the level of price that exists
at the point of interaction of dd and ss curves.
§ It is sometimes is called market- clearing price.

76
 Equilibrium quantity: it is the quantity that corresp
onds the equilibrium price.
The quantity at which the amount of good buyers ar
e willing to buy equals the amount sellers are willing
to sale, provided that both have the ability.

77
 2. Excess demand (shortage): a condition in which qua
ntity demanded is greater than quantity supplied.
Ø This is consumer surplus
§ There are various problems associated with shortage econ
omy;
üDiscrimination-some people will be satisfied while others
will not.
There are different solutions for the problems associated wi
th shortage economy;
ürationing or government intervention
Ex edible oil market in our case…
üeffective policy

78
 3. Excess supply (surplus): a condition in which quant
ity supplied is greater than quantity demanded at the c
urrent price.
When there is excess supply, price tends to fall as com
peting suppliers attempt to sell their product by lowerin
g the price.
There are many problems associated with surplus ec
onomy;
üexcess production problem/ lots of inventory/ produc
ts remain unsold
üremoval product
üdiscourage investor
Solution
üdealers offers discounts to encourage buyers
79 ügovernment provides subsidy to sellers.
 Chapter Three: Marketing Functions,
Costs and Efficiency

80
 Out line of the chapter
Ø Marketing Functions
Ø Marketing Agents and their function
Ø Marketing Channels
Ø Marketing Costs
Ø Marketing Efficiency
ØMarket Margin

81
 Today’s topic
Definition of Market function
-Packaging activities of market
-Transportation
-Processing
-Standardization and grading
-Risk taking
-Selling and buying activities
-Market information

82
 3.1 Marketing Functions
Is any single activity performed in carrying a product
from the point of its production to the ultimate consumer
Marketing includes all of the activities necessary to
move a product from the producer to the consumer.
q The marketing functions may be classified in various
ways.
1.Thomsen classified the marketing functions into three
broad groups.
q Primary Functions : -Assembling or procurement
- Processing
- Dispersion or Distribution
q Secondary Functions : Packaging, transportation,
83
grading, standardization and quality Control, storage and
warehousing
 Cont……
 Price determination.riskTaking, Financing, Buying
and selling, Demand creation, Dissemination of
market information
q Tertiary Functions :- Banking
- Insurance
- Communications - posts &Telegraphs
- Supply of Energy - Electricity

84
 Cont……
2. Kohls and Uhl have classified marketing
functions as follows:
 Physical Functions : - Storage and Warehousing
- Grading
- Processing
- Transportation
 Exchange Functions : -Buying
-Selling
 Facilitative Functions : -Standardization of grades
-Financing
-Risk Taking
Dissemination of Market Information

85
 Cont……
3.Huegy and Mitchell have classified marketing functions
as follows:
 Physical movement functions :
-Storage ,packaging, transportation
-Grading and distribution
 Ownership movement functions : determining need,
creating demand, finding buyers and sellers ,negotiation
of price.
 Market management functions : -Formulating Policies
-Financing
-Providing
organization
86
 1. Packaging function
Ø is the first function performed in the marketing of
agricultural commodities.
Ø Is placing the goods in small packages like bags,
boxes, bottles or parcels for sale to the ultimate
consumers.
Ø It is required for nearly all farm products at every stage
of the marketing process.
Ø The type of the container used in the packing of
commodities varies with the type of the commodity as
well as with the stage of marketing.
Example, gunny bags are used for cereals, pulses and
oilseeds when they are taken from the farm to the
87 market.
 Advantages of Packaging
It protects the goods against breakage, spoilage,
leakage during their movement from the production
to the consumption point.
Reduces the bulk (density)
It facilitates the handling of the commodity, specially
such fruits as apples, mangoes, etc., during storage
and transportation.
I t h e l p s i n q u a l i t y - i d e n t i f i c a t i o n , p r o d u c t
differentiation, branding and advertisement of the
product.
Reducing marketing costs by reducing handling and
retailing costs.
88
 2. Transportation function:
Is the movement of products between places is one
of the most important marketing functions at every
stage, i.e., right from the threshing floor to the point
of consumption.
Products must be physically relocated to the
locations where consumers can buy them.
The main advantages of the transport function
are:
Widening of the Market
Narrowing Price Difference Over Space
Creation of Employment
Transformation of the Economy
89
 Cont…..
Problems
q The important problems arising out of the
transportation of agricultural commodities are:
Ø The means of transportation used are slow moving
Ø There are more losses/damages in transportation
because of the use of poor packaging material.
Ø The transportation cost of the farm produce is
higher than that for other goods.

90
 3.Grading and standardization fu
nction
q Many products are graded in order to conform to
previously determined standards of quality.
For example, when you purchase Ethio No. 1
Potatoes, you know you are buying the best
potatoes on the market.
q Standardization: is the determination of the
standards to be established for different
commodities.
Standards are established on the basis of certain
c h a r a c t e r i s t i c s - s u c h a s w e i g h t , s i z e , c o l o r,
appearance, moisture content, length, ripeness,
sweetness, taste, chemical content, etc.
91
 Cont….
Standardization means making the quality
provision of the grades uniform among buyers and
sellers over space and over time.
Grading
Ø Is the sorting of the unlike lots of the produce into
different lots according to the quality specifications
laid down.
Ø It is a method of dividing products into certain
groups in accordance with predetermined
standards.
Ø Grading follows standardization. It is a sub-
function of standardization.
92
 Cont…
Types of Grading
Fixed Grading / Mandatory Grading: This
means sorting out of goods according to the
size, quality and other characteristics which are
of fixed standards.
ü These do not vary over time and space.
Permissive / Variable Grading: The goods are
graded under this method according to standards,
which vary over time. In India, grading by this
method is not permissible.
C e n t r a l i z e d / D e c e n t r a l i z e d G r a d i n g : i s
implemented by State Marketing Authorities under
the overall supervision and guidance of the
93 Directorate of Marketing and Inspection
 Advantages of Grading;
Ø Grading before sale enables farmers to get a higher
price for their produce.
Ø It also serves as an incentive to producers to market
the produce of better quality.
Ø Facilitates marketing, for the size, color, qualities and
other grade designations of the product are well
known to both the parties.
Ø Widens the market for the product, for buying can
take place between the parties located at distant
places on the telephone without any inspection of the
quality of the product.
Ø It reduces the cost of marketing by minimizing
storage loses.
Ø Grading helps consumers to get standard quality
94
 4. Storage Function
Is time utility to products.
 Products must be stored and protected until they
are needed.
This function is especially important for perishable
products such as fruits and vegetables.
Agriculture is characterized by relatively large and
irregular seasonal and year - to - year fluctuations in
production.
The consumption of most farm products, on the
other hand, is relatively stable or constant.
These conflicting behaviors of demand and supply
make it necessary that large quantities of farm
produce should be held for a considerable period of
95
time.
The advantage of storage of agricultu
ral products
ØFrom the time of production to the time of
consumption, ensures a continuous flow of goods in
the market.
Ø Storage protects the quality of perishable and semi -
perishable products from deterioration(declines)
Ø It helps in the stabilization of prices by adjusting
demand and supply
Ø The storage of some farm commodities is necessary
either for their ripening (e.g. banana, mango, etc.) or
for improvement in their quality (e.g., rice, pickles,
cheese,.etc
Ø
96 Storage provides employment and income through price
advantages
 5. Risks Taking
Insurance companies provide coverage to protect
producers and marketers from loss due to fire,
theft, or natural disasters
The storage of agricultural commodities involves
three major types of risks. These are:
 Quantity Loss
 Quality Deterioration:
 Price Risk

97
 6. Processing Function
Ø Involves a change in the form of the commodity.
Ø It converts the raw material and brings the products
nearer to human consumption.
Ø It is concerned with the addition of value to the
product by changing its form.
Advantages
Ø It changes raw food and other farm products into
edible, usable and delicious forms
Ø The value added by processing to the total value
produced.
Ø Generates employment.
Ø Widens the market. Processed products can be taken
98 to distant and overseas markets at a lower cost.
 7. Buying and Selling
Buying and selling is the most important activity in the
marketing process.
Is activities in which goods are transferred from seller
to buyer, and the possession utility is added to the
commodities.
Buying - people have the opportunity to buy products
that they want
The buying activity involves the purchase of the right
goods at the right place, at the right time, in the right
quantities and at the right price.
It involves the problems of what to buy, when to buy,
from where to buy, how to buy and how to settle the
prices and the terms of purchase
99
 Cont…
Selling – Is producers function within a free
market to sell products to consumers
The objective of selling is to arrange of the goods
at a satisfactory price.
Selling involves the problems of when to sell,
where to sell, through whom to sell, and whether
to sell in one lot or in parts

100
 8. Market Information
Information from around the world about
market conditions, price movements and
political changes.
Market information is provided by all forms
of telecommunication, such as television,
the internet, and phone.

101
 3.2 Marketing Agents and their functi
on
1. Producers:
Ø Most farmers or producers, perform one or more
marketing functions.
Ø They sell the surplus either in the village or in the
market.
Ø Some farmers, especially the large ones, assemble the
produce of small farmers, transport it to the nearby
market, sell it there and make a profit.
Ø This activity helps these farmers to supplement their
incomes.

102
 Cont….
2.Middlemen
Ø Are individuals or business concerns which
specialize in performing in the marketing of
goods.
The middlemen of agricultural marketing can be
classified as follows:
Merchant middlemen (Retailers,Wholesalers
Agent middlemen (Brokers, Commission
men)
Processors and manufacturers
Speculative middlemen
Facilitative Middlemen
103
 A. Merchant middlemen
Merchant middlemen normally take title to, and
therefore own, the product they handle.
They buy and sell for their own gain and derive their
income from the margins arising from the sales (i.e.
difference between buying price and selling price).
q Wholesalers: Any merchant who does not sell to
ultimate consumer in any significant amount.
Ø He/she therefore can sell to other wholesalers or to
industrial users or retailers.
q Retailers: Any merchant middlemen who buys
goods / services for resale directly to ultimate
consumers.
104
 B. Agent middlemen
All agent middlemen of marketing don’t own
what they handle i.e. not take title to the goods.
Are basically hired by their principals or clients.
They derive their income from the fees they are
paid by their clients or commissions given.
Agent middlemen in reality sell services to their
principal, not physical goods to customers.
T h e i r m a i n s t o c k ( s u p p l y ) i n t r a d e i s t h e i r
knowledge of market in which they participate.
They use the knowledge in bringing together
potential sellers and buyers.
105
 Cont…
T h e r e a r e t h r e e c a t e g o r i e s o f a g e n t
middlemen:
Brokers
Commission agents
Auctioneers
Brokers: they are not given any physical
control over the product.
Ø They ordinarily follow directions from their
principals.
Ø Usually have little power over terms of sale or
revenue collection.
Ø Bring seller and potential buyer together.
106
 Cont…
Commission agents: are given more flexible
powers over physical handling of the product,
arrangement for terms of sale / purchase,
Ø Collection of revenue from sale.
Ø They are allowed to deduct their commission
before paying the difference to their principals.

107
 Cont…..
The difference between brokers and commissions
agents is one of
Ø Degree of power they have given to handle the
product that is being sold
Ø Discretionary powers to assist their principals in
ensuring that marketing process is a accomplished.
Auctioneers: They do not own what is handled, may be
involved in a number of activities.
Ø Have places for physical display, space where participants
meet
Ø Announce the date of auction, facilitate in price formation.
Ø During the bidding process the main role of auctioneer is to
announce the price offered by various participants
108
 C. Speculative middlemen
Are those who take title to goods / products with
a major purpose of profiting from price
movement.
They are specialized risk takers.
Speculative Middlemen are interested in short
term price fluctuations.
Speculators derive their income from short term
price fluctuations in goods they handle.
Speculative middlemen play important role in
marketing process in ensuring that commodities
are available from time to time.

109
 D. Facilitative agents
§ Facilitative agent / organizations assist the variou
s middlemen in performing their tasks.
§ Such organizations do not directly participate in m
arketing process as either merchants or agents.
§ Ensure that the activities take place in smooth ma
nner.
§ Assist in giving standardization, grading of the pro
duce, actual arrangement of payment for the trans
actions.
§ One group of these organizations provide the phys
ical facilities for the handling of products or for the
bringing of buyers and sellers together
110
 2.3 Marketing Channels
A channel refers to a way of making a product avai
lable to distribute to the end consumers.
Market channel : Is The route along which goods a
nd services travel from producer/manufacturer throug
h marketing intermediaries (such as wholesalers, dist
ributors and retailers) to the final user.
All of the institutions in the channel are connected b
y several types of flows.
 These include the physical flow of products, the flow
of ownership, the payment flow, the information flow

111
 Cont….
 Is a specific kind of connecting path between
a producers and its customers.
 It is also the physical movement of the
product.
 It is alternative ways or routes of product flows
from producers to consumers.
 A marketing channel helps by getting the right
products to the right consumer in time for
purchase.
 Describe the method by which a product
moves from producer to consumer.
112
 Cont…
Market channel can be either:
 Direct Channel: when a producer and
ultimate consumer deal directly with each
other.
 Indirect Channel: when intermediaries are
inserted between the producer and
consumers and perform numerous channel
functions.

113
 Cont….

 Marketing channels for agricultural products

vary from
ü product to product
ü country to country
ü time to time
For example, the marketing channels for fruits are
different from those for food grains

114
 Cont…
q Market channels vary considerably in
complexity depending on the product.
ØProducers selling their products directly to a
consumer (like a farmer selling their goods at a
farmers market) is the most basic type of
distribution channel.
Ø Other channels are much more complex, with
products sometimes passing from producers to
brokers to wholesalers or retailers before
finally reaching the consumer

115
 Cont….
Important channel of distribution are:
1. Producer or manufacturer – Retailer – Consumer
2. Producer or manufacturer – Consumer
3. Producer or manufacturer – Wholesaler – Retailer
– Consumer
4. Producer – Commission agent
5. Producer--------Consumers
6. producers-----Assemblers-----wholesaler---
retailer---consumer

116
 producers

Wholesale Agents
producer rs
s
Wholesalers
Retail
ers
Retailers

Consumers

117 Fig 1 Market channel

 Cont.,
Factors determining choice of channels are:-
Nature of the product, Price of the product, No. of units of
sale.
Ø Low priced articles with small units of sale are distributed
through retailers.
Ø High price special items like radios, sewing machines etc
are sold by manufactures and then agents.
Ø Public services like gas, electricity and transport are usuall
y sold directly to the consumer.

118
 3 .4 Marketing cost
Ø The total cost associated with delivering goods or
services to customers.
Ø The movement of products from the producers to
the ultimate consumers involves costs which are cal
led marketing costs.
Ø With increased urbanization, marketing costs ten
d to increase relatively to the farm gate price receiv
ed by the farmer,
Ø i.e. the product moves greater distances, throu
gh more intermediaries, there is high market c
ost.
119
 Con t….
Ø These costs vary with the channels through which a
particular commodity passes through
Eg - Cost of packing, transport, weighting, loading,
unloading, losses and spoilages

120
 Cont…
 The factors that makes marketing costs vary
from commodity to commodity and product
to product are:
Ø The more perishable the product the greater
the marketing costs.
Ø The more processing of the commodity the
greater the marketing costs.
Ø The greater the amount of produce handling
and transportation the greater the marketing
costs.

121
 A) Packaging costs:
q Packaging serves three basic purposes.
1. It provides a suitable way of handling and transpor
ting produce. Costs would certainly be much higher
if everything had to be carried and moved without an
y form of packaging.
2. It provides protection for the produce.
3. It can be used to divide the produce into convenient
units for retail sale and to make the produce more att
ractive to the consumer, thus increasing the price at
which it can be sold
§ The more sophisticated the packaging, the greater th
122 e cost
 Calculating packaging costs
Assume that oranges are packed 20 kg at a time in woode
n boxes which, with occasional repairs, can be used for 10 tr
ips. A box costs $10, repairs and cleaning during its life cost
s $2 and each time transporting back the empty box to the pr
oducing area costs $1.
Then the packaging cost per trip is...
[(original cost + repairs) ÷ no. of trips] + tran
sport when empty or
($10 + $2) ÷ 10 trips + $1 = $2.20 per 20 kg and
$2.20 ÷ 20 kg = $0.11 per kg

123
 B)Transport costs
Transport costs are incurred by farmers when they
take their produce to the market and by traders as
they move the produce down the marketing chain
to the consumer.

124
 Calculating transport costs
Assume that there are 40 m3 of space available in the truc
k to be used and that it costs $500 to hire the truck. A contai
ner of 0.2 m3 holds 8 kg of tomatoes and a container of 0.4
m3 holds 10 kg of green peppers.
Then the transport cost for tomatoes per container and per
kilogram is...
$500 ÷ (40 m3 ÷ 0.2 m3) = $2.50 per container
And $2.50 ÷ 8 kg = $0.3125 per kilogram
While the transport cost for green peppers per container a
nd per kilogram is...
$500 ÷ (40 m3 ÷ 0.4 m3) = $5.00 per container and $
125 5.00 ÷ 10 kg = $0.50 per kilogram
 C) Product losses
v If a trader buys one kilogram of produce from a farmer, ho
w much of that one kilogram will he actually end up sellin
g? And
v what will be the average price of what he sells?
v Post-harvest losses of produce, particularly fresh produce,
can be quite considerable, both in terms of quantity and qu
ality and considerably affect the selling price

126
 cont.,
Calculating the cost of product losses
Assume that, at 10 percent loss levels, 1 kg of tomatoes purcha
sed by the trader from the farmer results in 900 grams (0.9 kg.) a
vailable for sale to consumers. The trader buys tomatoes from the
farmer at $5 per kilogram and marketing costs are $2 per kilogra
m for the tomatoes originally purchased. The selling price of tom
atoes is $8 per kilogram.
Then the costs are...
1 kg purchased at $5 per kg = $5.00
1 kg packed and transported at $2 per kg = 2.00
Total Costs = $7.00
Sales Revenue or $8 x 0.9 kg = 7.20
Thus the margin to the trader = $0.20
127
 D) Storage cost
v Storage of product is carried out in order to extend the per
iod of availability of a crop to a consumer
 In the case of staple food crops long-term storage is esse
ntial
v Calculating storage costs
Assume that a warehouse is hired for 120 days of the year
at a total cost of $600 and that the weighted average conte
nts are 250 bags of potatoes.
Then the storage cost is...
$600 ÷ 120 days = $5.00 per day
$5 ÷ 250 bags = $0.02 per bag/day
128
 The major reasons contributing for hig
h marketing cost:
1. High transportation costs
2. Consumption pattern outline – 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. Seasonal supply.
9. Unfair trade practices.
10. Production in anticipation of demand and high prices.
11. Cost of risk.
112. Sales service.
129
 Ways of reducing marketing costs of farm products
1. Increased efficiency in a wide range of activities betwee
n producers and consumers such as
Ø Increasing the volume of business
Ø Improved handling methods in pre-packing
Ø Storage and transportation
Ø Adopting new managerial techniques and changes in m
arketing practices such as value addition
2. Reducing profits in marketing at various stages
3. Reducing the risks adopting pre-distortion
4. Improvements in marketing intelligence
5. Increasing the competition in marketing of farm products
130
 3.5 Marketing margin
The proportion of the consumer expenditure
that goes to the food marketing firms is referred
to as Marketing Margin
Marketing margin refers to the difference
between the price paid and received by a
specific marketing agency.
Ø Is the difference between the price received
by producers and that paid by consumers.
It is price difference between two marketing
stages:
T h e d i f f e r e n c e b e t w e e n w h a t t h e
consumers pays for food and what the
131 farmer receives.
 Cont…
• i.e. is simply the difference between the
primary and derived demand for a particular
product.
Primary demand is determined by the response
of the ultimate consumers and this is usually
based on the retail price and quantity purchased
by consumers.
The derived demand (The agents demand) for
the farm product
DD = PD - MC.
132
 Market Margin can be:
q Absolute Marketing Margin (AMM):
Ø This is the gap between prices at different
marketing levels (farmers, wholesalers, retailers).
Thus
M1= PR - PF is AMM at farmer level
M2= PR - PW is AMM at retail level
M3= PW - PF is AMM at wholesale level
q Relative Marketing Margin (RMM)
It is the ratio of AMM to price at which the product
is bought. RMM = AMM/ PB.
The relative margin from farmer to retailer is
RMMFR = M1/ PR.
It is also known as Gross market margin(GMM)
133
 Cont…
Net Marketing Margin (NMM)
Here the concept takes account of fixed cost,
taxes and subsidies - i.e.
NMM = GMM - FC - T + S

134
 Cont….
Example - Price of Honey in the market channel
Market chain participants selling price
Producers’ price ------------------------------------------
3.26br/kg
Rural assemblers price -----------------------------------
4.5br/kg
Wholesalers’ price ----------------------------------------5br/kg
Retailers’ price ---------------------------------------------6 br/kg
Consumers’ price ------------------------------------------6br/kg
Calculate the Absolute Marketing Margin and GMM:
A. At producer level
B. At UralAssembler level
135 C. At Wholesaler level
 Cont….
Solution:
A. At the producer level:
AMM= PR – PP
= 6br/kg-3.26br/kg=2.74

136
 Cont…
GMMRA i s the percentag e o f t h e t o t a l g r o s s
marketing margin received by rural assemblers;
GMMRA = Assembler price-producer pricex100
Consumer price
= 4.5-3.26 x 100 =21%
6
G M M W i s t h e p e r c e n t a g e o f t h e t o t a l g r o s s
marketing margin received by wholesalers;
GMMw= Wholesaler price – Assemler price x100
Consumer price
= 5-4.5 x 100
137
6 = 8%
 Cont…
GMMR is the percentage of the total gross marketing
margin received by retailers;
GMMr = Retailers price-wholesalers price x 100
Consumers’ price
= 6-5 x 100
6 = 17%
Total % or Gross marketing margin= GMMra+GMMw
+GMMr=21%+8%+17%=46%
Gross marketing margin of producers ( GMMp)
=100%-46%= 54%
 Therefore, from the above calculation, it is clear that
21%, 8%,17% and 54% of the final consumers price is
shared by rural assemblers, wholesalers, retailers and
138
producers respectively
 Example 1: Calculate market margins if the buying pri
ce of tomato from the farmer is $0.50 per kg, the weighte
d average wholesale selling price is $0.90 per kg and the
weighted average retail price is $1.17 per kg.

Producers share(0.50$/1.17$) =0.427 or 43%

Wholesale Margin(0.90$-0.50
= 0.342 or 34%
$)/1.17$
Retail Margin(1.17-0.90$)/1.17 0.230 or 23%
$

139
 Exercise 1
Table 2. Chickpea marketing margin
Price at various level of chain actors Birr/qt
Average farm gate price ……………………………… 663.30
Average rural assemblers price ……………................752.20
Average rural wholesalers price ……………………….895.00
Average urban wholesalers price …………………….. 1048.45
 Average retailing price……………………………….1224.15
Calculate:
GMMRA, GMMRWS, GMMUWS, GMMR and GMMP

140
 3.6 Marketing Efficiency
Ø Marketing efficiency is essentially the degree of market p
erformance.
Ø It is the effectiveness or competence with which a market
structure performs its designated function.
Ø It is the ratio of market output (satisfaction) to marketing
input (cost of resources)
Ø An increase in ratio represents improved efficiency.
Ø This means a reduction in marketing cost without reducti
on in consumer satisfaction indicates improvement in effic
iency

141
 Measurement of marketing efficiency
1.Technical or Physical or Operational efficiency:
Ø It related to the cost of performing a function;
Ø Efficiency is increased when the cost of performing a func
tion per unit of output is reduced
v Improved operational efficiency is clear where marketing
costs are reduced but outputs are either continued or actual
ly increase.
v Examples of operational efficiency gains would be the int
roduction of a less expensive method of storing grain.

142
2. Pricing efficiency/ allocative efficiency : is when the sel
lers are able to get the true value of their produce and the c
onsumers receive true importance(value) of their money.

143
 Empirical Assessment of Marketing Efficienc
y
v A reduction in the cost for the same level of satisfaction
or an increase in the satisfaction at a given cost results in th
e improvement in efficiency

E=( ) 100

E = level of efficiency
O = value added to the marketing system.
I = real cost of marketing

144
 cont.,
v Shepherd’s formula of marketing efficiency:
ME = ( - 1) 100

ME = Index of marketing efficiency

V = Value of the goods sold or price paid by the consumer (
Retail price)
I = Total marketing cost or input of marketing

145
 Chapter four:: Marketing Mixes and
marketing research

146
 Marketing Mixes
Introduction
vMarketing:
Ø is set of activities involve determining what your cust
omer wants, developing that product
Ø Delivering that product to a place where the custom
er wants to purchase it
ØSet a price for the product that is profitable and attra
ctive to the customer, and
Ø Then informing the customer about the product
v This may sound complicated but there is an easier w
ay to understand and remember the important parts
of marketing called the ‘Marketing Mix’
 Cont.,
vThe marketing mix is the set of marketing tools t
he firm uses to perform its marketing objectives i
n the target market
Sometimes called the ‘four P’ (Product, Price,
Promotion & Place)
 Robert Lanrterborn suggested that sellers’ four P’s correspond t
o the customer’s four C’s
Four P’s Four C’s
Product Customers solution
Price Customer cost
Place Convenience
Promotion communication
 Cont.,
v All the marketing mixes are for better customer satisfa
ction
vBased on the marketing concepts, the whole acti
vities of marketing are centered on customer val
ue
v Hence, customer is not part of the marketing mix. The cu
stomer is surrounded by the four P.

Figure 1.3 Marketing mixes

 Product
v Product – is anything that can be offered to a market for at
tention, acquisition, use, or consumption that might satisfy
a want or need
v The idea of “product” as potential customer satisfaction or
benefits is very important
v Quality and satisfaction depend on the total product offeri
ng
ü If potato chips get decayed on the shelf because of poor pa
ckaging, the customer will be dissatisfied
vA product mix is variety of products and product line
s.
Ø A product line is a series of related products
 i) Place - reaching the target
v Place is concerned with all the decisions in view o
f getting the “right” product to the target market’s pl
ace
v A product isn’t much good to a customer if it isn’t a
vailable when and where it’s wanted
v A product reaches customers through a channel o
f distribution, refers to any service of firms (or indiv
iduals) from products to final user or consumer
vSometimes a channel system is quite short
vIt may run directly from a producer to a final user o
r consumer.
 Promotion
v Promotion is communicating information between sel
ler and potential buyer .
v It is important in the channel to influence attitudes
and behavior of the consumers.
v The marketing manager's main promotion job is to t
ell target customers that the right product is availa
ble at the right place at the right price
 The promotion methods
1. Personal selling:- involves direct communication
between sellers and potential customers .
Ø It is Face-to-face selling provides which immediat
e feedback which helps sales people to adapt
2. Mass selling:- - is communicating with large numbe
rs of potential customers at the same time
ü Advertising is one of the main forms of mass selling
 Cont.,
3. Publicity:- This is an unpaid form of non-personal pr
esentation of ideas, goods, or services
ü But they try to attract attention to the firm and its offe
rings without having to pay media costs.
For example, book publishers try to get authors on TV
talk shows because this generates a lot of interest - an
d book sales - without the publisher paying for TV time
Price
vIn the narrowest sense, price is the amount of m
oney charged for a product or service
ü Price refers to the amount of money charged for
a product or service
ü The sum of the values that consumers exchange
for the benefits of having or using the product or
service
 Cont.,
ü Price of products are important variables in the product mi
xes
ü Traditionally price has operated as the major determinants
of buyer choices
ü This is still the case in poorer nations and with commodity
-type products
ü Price is one of the most important decision variables
for a firm
ü Due to this, firms usually design different pricing strategi
es
 Pricing Decisions
vAll of the decisions made with respect to th
e elements of the marketing mix are critica
l importance.
vPricing is one of the decisions as to what p
rice to ask for the product or service
 Cont.,
qThere are different strategies of setting price
s
q The different strategies can be categorized under two basi
c approaches:
Ø Cost-oriented
Ø Demand-oriented price setting
 1. Cost-based pricing
Is a pricing method in which some percentage
of desired profit margins is added to the
cost of the product to obtain the final
price.
Or it is a pricing method in which a certain
percentage of the cost is added to the
cost of the product to determine its selling
price.

159
 Types of cost oriented pricing
1. Markup Pricing
ü Some firms including most retailers and wholesale
rs - set prices by using a markup
Markup- is amount of dollar/Birr added to the cost of produc
ts to get the selling price.
For example, consider that a retail shop buys a kilo of sugar f
or 4.50 Birr from Metahara Sugar Factory
ü To make a profit, the retail shop obviously must sel
l the sugar for more than 4.50 Birr
ü If it adds 50 cents to cover operating expenses and provide
a profit, we say that the retail shop is marking up the it
em 50 cents
 Cont.,
ü Markup means percentage of selling price that is adde
d to the cost to get the selling price
ü Thus, the markup for the above item can be calculated as:

Markup
Cont.
Ø For the above example;

Ø Selling price (revenue) = 5.00 Birr, Buying price (cost) =

4.50 Birr

Markup =

=
=10%
Ø A standard markup is related to gross margin
Ø It is usually set close to the firm’s gross margin
Ø It is also important to study the markups at differ
ent levels in the marketing channel
 Markups and Profits
v Some people including many traditional retailers thin
k high markups means big profits Often this is not tru
e
v A high markup may result in a price that is too high -
a price at which few customers will buy
v And you cannot earn much if you do not sell mu
ch - no matter how high your markup.
v But many retailers and wholesalers seem more conc
erned with the size of their markup on a single item t
han with their total profit
vAnd their high markups may lead to low profit
- or even losses
 Cont.,
v Some retailers and wholesalers, however, try to speed turn
over to increase profit by reducing their markups
vIf firms need sale greater amount in the same tim
e period,
üThey may be able to take a lower markup and
üStill earn higher profits at the end of the period
qThe higher the stock turn rate, the higher will
be the total profits at the end of the year even if
the markup may be lower.
 Cont.,
vReducing markups to increase profit works e
specially:
Ø if reducing price and increases percentag
e sales by more than the reduced percentag
e price
v In other words, TR increases when price dec
lines if the price elasticity of demand of the ite
m under consideration is elastic
ü That is the percentage increase in quantity sold is g
reater than the percentage decline in price
 2. Average cost Pricing
v Adding a reasonable markup to the average c
ost of a product.
Ø This implies that businesses will set the unit pr
ice of a product relatively to the average cost
n e e d e d t o p r o d u c e i t

q It is the cost per unit output

Cont.,
v For example a company incurred the following costs last
year
Total Fixed overhead expenses (FC) ---- 30000
Total Labor and material expenses (VC) -- 32000
Total costs (TC) -----------62000
if the firm produce and sells items (Q)--------------40,00
0
q Average cost (per unit cost) - is obtained by dividing total
cost by the related quantity (that is the quantity that caus
es the total cost).
AC = TC/Q = 62000/40,000 =1.55
AC - average cost
TC - total cost (fixed cost plus variable cost)
 3. Break-even Pricing
v Evaluates whether the firms cover all its costs of productio
n - with a particular price.
vFarmers develop marketing plans to obtain a p
rice that is higher than their per-unit cost of pr
oduction.
v Knowing the variable and fixed cost of production easi
ly provides the per-unit cost of production.
v The producer would sell when the market price is
above the per-unit cost of production.
 Cont…
v Break-even point is the level of quantity at which the
firm’s total cost will just be equal to its total revenue.
vBreak- even pricing is setting price to make a
target profit.

170
Figure Break – even point
 Cont.,

vAs shown in above Figure, the TFC is constant a

t 20,000 Birr irrespective of the level of output i.e.
, whether the firm produces nothing or produces
100 tons; the total fixed cost remains the same
v It is horizontal line and will remain so as long as
the firm does not increase or reduce its scale or s
ize.
vThe TR curve will be more smooth(flat) if the selli
ng price is lower and will be steeper when the sel
ling price rises
cont.,
ü The difference between the TR and TC at a given
quantity is the π or loss
ü If TC lies above TR curve, the firm incurs a loss
ü The firm will make a π if the TR lies above the T
C curve

ü However, the firm would be at break – even p

oint, if it could sell 80 tones. At this point TR j
ust equals TC It is a point where TR curve int
ersects TC curve
 cont.,

The formula for determining breakeven tak

es into consideration both variable and fixe
d costs calculated as follows:
= Total Fixed Cost
= # of Units
Price – Variable Cost Per Unit
 Cont…
For example: Assume a company operates a single-
product manufacturing plant that has a total fixed
cost (e.g., purchase of equipment, mortgage, etc.)
per year of (US) $3,000,000 and the variable cost
(e.g., raw materials, labor, electricity, etc.) is
$45.00 per unit. If the company sells the product
directly to customers for $120, it will require the
company to sell 40,000 units to breakeven.
$3,000,000 = 40,000 units
$120 - $45

175
 Cont….
vThe derivation break-even point is:-
ü Breakeven point is the point where TR = TC or
TR-TC = 0 (1)
TR is equal to quantity of output sold (Q) times
price of output (PQ) or
TR = (2)
TC is the summation of Total Fixed Cost and
Total Variable Cost
TC = TFC + TVC (3)
 AVC is total variable cost divided by total output.

176
 cont.,
Thus, TVC can be expressed as

Substituting equation (4) in equation (3), the TC will be ex

pressed as
TC = TFC + AVC x Q (5)
Substituting equation (5) in to equation (1) gives the condi
tion at break-even
TR = TFC + AVC x Q
PQ  Q
Substituting in place of TR
 cont.,

Solving for Q to obtain break-even quantity

cont.,
Qb is break-even quantity which is the ratio of TFC to the
c contribution of FC per unit (PQ – AVC) is the per unit contr
ibution of FC
v To illustrate the formula, let us assume that the average va
riable cost per unit is 80 cents and the price per unit is 1.2 Bi
rr
v If the total fixed cost is 30,000 Birr, the break-even output
will then be:
 cont….

q From this you can see that if the firm sells 75000 units, it
will exactly cover all its fixed and variable costs
q If it sells even one more unit, it will begin to show a profit
- in this case, 40 cents per units - because all the FC are alre
ady covered and the part of revenue formerly going to cover
FC is now all profit
cont.,
v If we multiply the break even quantity - 75000 units - by t
he unit selling price (1.20 Birr), we get 90000 Birr - the br
eak-even revenue or cost
v The importance of computing the break-even quantity is th
at we can accept the proposed price if it is possible to se
ll sufficiently large quantity that exceeds the break-eve
n quantity
Demand – oriented Pricing methods
Demand-based pricing refers to a pricing
method in which the price of a product is
decided according to its demand.
 If the demand of a product is more, an
organization prefers to set high prices for
products to gain profit; whereas, if the
demand of a product is less, the low
prices are charged to attract the
customers.
182
 Cont..
The seller charges the maximum price that the
customers are willing to pay for the product or
services under given circumstances.
This method earns high profit in the short run.
However, it cannot be used in the long run.
This method holds good where demand is
inelastic to the price and where competition is not
high.
 Consumer movement is opposed to this kind of
pricing. Possibility of earning larger profits in the
short-run attracts new competitors.

183
 Cont…

184
 Leader Pricing
v Leader pricing means setting some very low prices -
to get customers in to real stores
v The idea is not to sell large quantities of the leader it
ems but to get customers into the store to buy other
products .
v Certain products are picked for their promotion valu
e and priced low-but above cost
Leader pricing is setting very low prices, usu
ally at cost or just above to drive customers i
nto stores.
But sometimes such pricing can erode the profit
of the firm if customers buy only the low price lea
ders.
 Bait pricing
v Bait pricing is setting some very low prices at
cost or even below to attract customers-but tryi
ng to sell more expensive models or brands on
ce the customer is in the store
For example, a furniture store may advertise a color TV of 2
1" for Birr 1600 or less
ü But here the seller doesn't plan to sell many at the low pr
ice.
 Discriminatory pricing
v Is the company selling a product/service at two or more pr
ices, where the differences in prices are not based on differ
ences in costs
v Discriminatory (unfair or biased) pricing takes one or sev
eral forms:
ü Product-form pricing & Time pricing
 3.2 Market research
Definition of Marketing Research
 Marketing research is the systematic and objective
identification, collection, analysis, dissemination
and use of information for the purpose of improving
decision making related to the identification and
seeking solution for problems and opportunities in
marketing
 The basic purpose of marketing research is to
facilitate the decision making process.
 Market research will give decision making the data
they need to identify and reach their target market
at a price customers are willing to pay.
188
Defining Marketing Research
Identificatio
Identifying and Sol
n of Informat
ving Marketing Prob
ion Needed
lems

Collection of
Data

Analysis of
Data

Dissemination o
f Information

Use of
Information
189
 Classification of Marketing Re
search
Problem Identification Research
Research undertaken to identify problems whic
h are not necessarily clear on the area and yet exi
st or are likely to arise in the future.
Examples: market potential, market share, market
characteristics, sales analysis, forecasting.
Problem Solving Research
Help to solve specific marketing problems. E
xamples: product, pricing, promotion, and distribut
ion research.

190
 The Marketing Research Process

191
 Chapter Five: Market integration

192
 Introduction
Smallholder farmers in developing countries
usually complain that they do not have power to
set prices for their products.
The likely reasons for this is that they do not
have easy access to markets due to lack of
information on prices and technology, weak
connection with market actors, absence of
input and output markets, credit constraints
and high transaction costs.
What should farmers do to overcome these
problems?

193
 Cont…
This requires close linkages between
farmers, processors, traders and
retailers to coordinat e supply and
demand and to access such services as
market information, input supplies and
transport services, is called market
integration

194
 Market integration
Integration shows the relationship of firms in a
market.
Is the expansion of firms by combining
additional marketing functions and activities
under a single management.
Integration influences market conduct of firms
and consequently their marketing efficiency.
Markets differ in the extent of integration

195
 Types of market integra
tion
Horizontal integration : is the result of the
merger or combination of two or more firms in the
same industry and which are engaged in the
same stage market function.
 Some marketing agencies (say, sellers) combine
to form a union with a view to reducing their
effective number and the extent of competition in
the market.
In this type of integration, some marketing
agencies combine to form a union with a view to
reducing the extent of actual competition in the
market.
196
Cont…
Horizontal integration is advantageous for the
members who join the group.
Example: If farmers join and form cooperatives, they
are able to sell their produce in bulk and reduce
their cost of marketing.

197
 Cont..
q Advantages of Horizontal integration
Ø Lower costs.
Ø Higher efficiency.
Ø Increased differentiation.
Ø Increased market power.
Ø Reduced competition.
Ø Access to new markets.
Ø Economics of scale.
Ø Economics of scope.
ØInternational trade.

198
 Cont…
q Vertical integration : It occurs when a firm
performs more than one activity in the sequence of
the marketing process.
Ø It occurs when one firm link with another firm in
the same industry but at another stage of the
production stage
q There are two types of vertical integration:
Forward integration: for example, wholesaler
assuming the function of retailing i.e. assuming
another function.
Backward Integration: e.g. processer assumes
function of assembling/ purchasing the produce
from villages.
.
199
 Cont..
q Conglomeration: Is A combination of agencies
or activities not directly related to each other
There are 3 main types:
Product Extension: two or more different but
re l a t e d p r o d u c t s a r e p r o d u c e d e . g . p o u l t r y
processing and meat packing
Market Extension: A given product is sold in two
different market areas, e.g. milk in two cities distant
from each other.
Pure Conglomerate: A firm that is engaged in
activities that are unrelated e.g. medicine and
bread making.

200