Marketing Strategies for Agricultural Products Chapter 4 PDF

CHAPTER FOUR MARKETING STRATEGIES FOR AGRICULTURAL PRODUCTS Marketing Strategies 4.1 Marketing Strategy, Marketing plan and Policy Marketing should not be implemented only at the functional level. Rather, the business as a whole has to be directed by a strategy whose focus is the marketplace....

CHAPTER FOUR MARKETING STRATEGIES FOR AGRICULTURAL PRODUCTS Marketing Strategies 4.1 Marketing Strategy, Marketing plan and Policy Marketing should not be implemented only at the functional level. Rather, the business as a whole has to be directed by a strategy whose focus is the marketplace. In formulating such strategies, there has to be a careful matching of market opportunities with organizational resources; this is the task of strategic marketing planning. Thus, the subject matter of this chapter is strategy and planning coupled with the controls that need to be in place if strategies and plans are to be prevented from going astray. Corporate Strategy An organization’s corporate strategy is reflected in the statement of its overall objectives and the means by which these are to be met. Corporate strategy is usually stated in such a way as to convey the reason for its existence, i.e., its mission and the business it is in or wishes to be in. Whilst corporate strategy and marketing strategy are not one and the same. Baker argues that: “…the firm's selection of a marketing strategy will influence and affect everything which it does - to this extent then marketing strategy and corporate strategy are inextricably interlinked.” In market driven organizations, marketing will be allowed to influence other functional areas like R & D, production, finance and personnel these will each have individual, if concerted, strategies and collectively fall into the realm of corporate strategy. Business Policy Policies are bodies of rules established to guide managers in their decision making. In essence, a policy prescribes the boundaries of the alternative courses of action which the organization leaves open to him/her within a defined set of circumstances. Thus, for example, a manager whose soft fruit is losing sales in export markets because competitors are offering extended credit to importers may be constrained in his/her actions by company policy with respect to credit. That policy may be paraphrased as, “We will never be placed at a disadvantage by offering terms and conditions of sale that customers perceive to be inferior to those offered by competitors.” In other words, the manager will know that he/she has to at least match or if possible, better the terms and conditions offered by competitors. Marketing planning Basically, planning involves setting objectives, designing and implementing a program to achieve the organization’s objectives and having a monitoring and control mechanism to ascertain whether the planned program is on track or has achieved its desired objectives. Greenley differentiates between corporate planning, strategic planning and operational planning. He says that corporate planning is the organization’s overall planning system and its two principal constituent parts are strategic and operational planning. Strategic planning begins with an assessment of an organization’s internal and external environments. Operational planning can be further divided into short- and long-term planning. Short term operational planning is also known as tactical planning. Tactics and strategy differ in several important respects. Tactics relate to the following of a plan to achieve short term objectives. Thus, tactics equate to the marketing plan rather than marketing strategy. 1|Page Strategic marketing would establish policies for each element of the marketing mix and would specify how resources are to be deployed. Tactics deal with marketing problems in the short term. Consider the position of a fish supplier who has the competitive advantage of owning refrigerated trucks. The supplier might adopt a marketing strategy in which the price is set high in order to: recover his/her investment in expensive technology; establish a price-quality relationship in the mind of the consumer; and ensure that the level of demand does not greatly exceed the amount he/she is able to supply. Since this is his/her strategy, there would be no departure from the maintenance of prices which are high relative to those of other suppliers. However, there may be tactical maneuvering in order to overcome certain marketing problems. When the supplier, or the product, is new to the market there may be need to stimulate demand by offering discounts. This would probably be done through the use of special ‘money-off’ coupons, or vouchers, so that the discounts could be targeted at certain customer groups and also to underline the fact that discount prices will not be the normal practice with respect to the product and are for a limited time only. Similarly, when there is a glut of fish on the market or when the supplier wants to improve short term cash flow or release space in his/her storage facility to accommodate new product lines, the tactic of offering ‘20% extra free’ in a bag of white-bait or kapenta fish might be employed. Once again, the supplier would be careful to communicate to the market that these extra value packs would be available in the short term only. Thus, whereas marketing strategy focuses upon achieving long term organizational goals, tactics focus upon achieving annual marketing objectives. Before moving on, it should be said that corporate strategy, business policy and marketing planning have relevance to enterprises of all sizes. In smaller organizations these management activities are likely to be carried out in a less formal and less sophisticated way than in larger corporations but they need to be done, formally or informally, explicitly or implicitly. Even the small independent grain trader will have to give thought to such matters as his/her strategy for survival in a municipal market overcrowded with grain traders, will have to be consistent whilst remaining flexible - in his/her reactions to problems and opportunities and needs to be in a position to anticipate changes in the marketing environment so that he/she can identify and exploit emerging opportunities. The Need for Strategic Marketing Planning Strategic planning is also known as strategic market planning when its focus is upon the market environment within which the enterprise must operate. This reflects the fact that what an enterprise plans to do now, in order to prepare for future developments in the market. The following benefits of strategic market planning:  It focuses management's attention on external events, especially those representing threats and/or opportunities. All too often companies tend to be inward looking when, in reality, customers and competitors are external to the firm and profits are made outside not inside the organization.  It locks management into taking a long term perspective when the pressures are to adopt a short term focus with grave dangers of making strategic errors. The natural tendency is for managers to devote their time to dealing with the problems and opportunities of today, to the exclusion of consideration of the longer term. Strategic market management usually has a well-defined time- cycle when managers have to submit short, medium and long term plans. Such cycles instill a discipline that forces managers to devote a minimum amount of time giving thought to future developments. 2|Page   It changes the basis on which resource allocation decisions are made. Resource allocations are frequently dictated by financial professionals who understand accounting conventions and terminology and this is often employed to the disadvantage of managers less well informed on these matters. In other cases, resource allocations are made according to the ‘political’ strength of a group, department or individual manager rather than on commercial merit. Strategic planning seeks to match resources to opportunities (and/or threats).  It provides a strategic management control system. Monitoring and control are an integral part of strategic management. This enables management to deal with problems as these emerge rather than allowing problems to become crises.  It provides a vertical and horizontal communication and coordination system. Strategic market management is a vehicle for communicating problems and proposed strategies with precision due to its vocabulary and explicit expression of expectations of the future.  It helps enterprises operating in rapidly changing and unpredictable environments to cope. Marketing Plan Control The purpose of the annual plan control is to ensure that the company achieves the sales, profits and other goals established by the marketing plan. It is, therefore, an operational control plan. This type of control applies to all levels of the organization and the process. Several measures may be taken in assessing performance in relation to the marketing plan, including sales analysis, market share analysis, marketing expenses to sales ratios, attitude, tracking, profitability and efficiency. Each of these will be briefly discussed. 1. Sales Analysis Actual sales can be compared to sales targets and budgets and an analysis of any variance between the two would be carefully examined. Sales analysis centers interest upon the relative contribution of different factors to a gap in sales performance. Say, for example, that the managing director of the National Canning Company is told by the marketing manager that sales are up half a million units on the target and that revenues are five percent above budget, this would be cause for celebration. Or would it? Before answering this question, the managing director would wish to look at these figures a little more analytically. It can readily be seen that, although sales have exceeded expectations, the planned price was not achieved and so the product made a lower contribution than expected. In this case the price mechanism would need investigating as would the estimates of market share. Whilst the Canning Company recorded an increase in sales of ten percent, the market as a whole was twenty percent above target. Seen in this light, there is more cause for concern than for celebration. 3|Page  This approach to sales analysis can be extended to specific products, market segments and/or sales areas, etc. to evaluate the profit contributions of each and to identify those that were poor performers. From there consideration can be given to the underlying reason for that performance. 2. Market Share Analysis Market share analysis shows how well the organization is doing vis-a-vis competitors. The first step is to determine market share, either by absolute measures (overall market share) or relative to main competition (relative share), or to leading competitor (relative to market leader share). The second step is to analyze market share movements in terms of the following: Where: CP = Percentage of all customers who buy from the company. CL = Purchases of this company by its customers expressed as a percentage of their total purchase from all suppliers of the same product. CS = Size of the average customer purchases from the company expressed as a percentage of the size of the average customer purchase from an average company. PS = Average price charged by this company expressed as a percentage of the average price charged by all companies. Example: If the CP = 3% and CL = 2% and CS = 2% and PS = 2%, then overall market share = 3×2×2×2 = 24%. 3. Customer Attitude Tracking Whilst most of the control techniques described so far have been quantitative in nature, customer attitude tracking studies give qualitative information. The main customer attitude tracking measures are complaint or suggestion schemes, customer panels or customer surveys. These can be very useful in revealing what customers feel about the organization, its products, services and behavior towards society as a whole. 4. Profitability Control Besides annual plan control, organizations need to measure the profitability of their various products, territories, customer groups, trade channels and order sizes. This information will help management determine whether any products or marketing activity should expand, reduced or eliminated. 5. Marketing Profitability Analysis This consists of starting from the target profit plan and then applying the control measure marketing profitability analysis. Assume the manager of a line of baked products is setting his/her annual plan. Further assume that it is believed that: demand conditions will be the same next year as this year there will be no change in marketing strategy the price set will reflect only changes in input costs and not competitive activity the manager's interest is in making “satisfactory” not “optimal” profits. 4.2 The Marketing Mix The marketing mix is a concept first introduced by McCarthy and comprises the product, price, place (distribution) and promotion decisions and is often called the 4Ps. 4|Page 4.2.1 Agricultural Product Strategies Many enterprises take too myopic a view of what their product actually comprises and, therefore, their view of how it can be marketed is similarly myopic. We should think of a given product on three levels: the core product, the tangible product and the augmented product. The basic level is the core benefit which, in essence, is what the customer really buys. It is productive to think of a product as merely the mechanism by which the benefit of the customer is demandingly delivered. The farmer doesn't buy fertilizer, he buys extra grain in the store; a mother does not buy baby food, she demonstrates the intrinsic worth of a loving and conscientious mother, and a buyer of premium priced foods is not simply satisfying his/her hunger for food but also, perhaps, a hunger for status. Hence the need to know what the customer is buying and market are those benefits, not products. Care must be taken that any benefit that is marketed is valued by the potential consumer. In the Philippines, an improved milling machine which produced a better-quality end product and reduced grain losses failed in the market place because broken and discolored rice seed were not perceived to be a problem by consumers, who were more interested in rice varieties and aromas. This example illustrates that it is the consumer and not the engineer, scientist or marketer who decides, in the market place, what is of benefit to him/her. The core benefit has to be converted into a tangible product to become the carrier of the benefit. Corn oil, cotton shirts, poultry feeds, seed planters and meat pies are all tangible products. According to Kotler tangible products have as many as five characteristics: a quality level, features, styling, a brand name and packaging. Figure: 4.1 Product levels Additional services and benefits might need to be offered to differentiate a product from that of competitors to give it a competitive edge. That is, an augmented product is offered. E.g., the tractor manufacturer/dealer that gives an extended warranty or performs a pre-delivery inspection is augmenting his product, and the food manufacturer who offers wholesalers/retailers a sale-or-return deal on products which they carry is augmenting the product offered. Product augmentation reflects a wider view of what the customer wants. Levitt suggests that: “The new competition is not between what companies produce in their factories, but between what they add to their factory output in the form of packaging, services, advertising, customer advice, financing, delivery arrangements, warehousing and other things that people value.” 5|Page The Product Mix Single product organizations are, in practice, fairly rare. We have already encountered the product life cycle concept and this alone should warn of the dangers of relying upon a single product. One reason for the rarity of single product firms is the inherent seasonality of agricultural products by their inputs or outputs. Another major reason is, most distributors will want to handle a product range rather than a single item. This is because the distributor's customers expect to be able to satisfy a number of their needs on the occasion of a single visit to the sales outlet. A product mix is an assortment of products and product lines. A product line is a series of related products. For example, a dairy company might offer a product line of full fat milk, semi-skimmed milk and skimmed milk. Product Line Extensions The decision as to whether a given product line should be extended is a strategic issue. There are several reasons why firms would consider adding to the number of product lines (breadth) and/or to the number of variants (depth) within a product mix. By extending the range of products offered, a company might gain entry to as a new segment of the market. It may be necessary to attract distributors who are interested in offering a full product line. Branding Agri-products According to the American Marketing Association a brand is “a name, term, sign, symbol or design, or a combination of them intended to encourage prospective customers to differentiate a producer's product(s) from those of competitors.” The initial decision is whether to brand or not. Historically, most unprocessed agricultural outputs have been sold as generic products i.e., unbranded. Agricultural product is frequently marketed as a commodity where within particular grade bands a product from one source is considered identical to that from another source. This is true, for instance, of black tea and green coffee beans. Why Should One Brand a Commodity? Why should one brand a commodity? It is a way to escape from merely competing on volume and price alone. Brands help to differentiate products as they enhance their value beyond their functional attributes. They build preferences versus competing products and therefore create long-term sustainable competitive advantage. Ways of Branding Branding at the firm/corporate level: Branding at the firm/corporate level, is probably the easiest and most extensively of the branding methods available for the agricultural products. There are numerous examples from the marketing world for successful agricultural commodities. E.g., Nestle fruit, Nestle Milk … Branding Through Value Addition: Transforming a product from its original state to a more valuable state is called value addition. It is the process of increasing the economic value and consumer appeal of an agricultural commodity. Farmers can create value by focusing on the benefits associated with the agricultural product or service that arise from quality, functionality, form, place and time. Geographical branding: Geographical Indicators indicates that the product is originated from a particular geographical area. Geographical identification is applicable to the agricultural produce which 6|Page has good qualities which are derived from their place of production, soil type and climatic condition. Consumers are to pay higher price for the products which are geographically branded. Geographical indicators can be used an effective branding tool in marketing of agricultural produce. Example, Yirga chefe coffee, Harar coffee, Adae woreda teff, Humera wight sesame…etc. Benefits of Branding Agricultural Produce  Help to increase Profit: Branded products are accepted by the customers and they are ready to pay more for it. It helps to increase sale and to get more profit from farm produce. Ultimately it gives good returns to the efforts of the farmer.  Help for Product Differentiation: Due to branding farmers can differentiate their farm produce from others produce. A brand provides a valid reason for the customer to buy a particular product. It helps to get good return to the farmer from the farm.  Help to convey Value: Consumers always think that branded products are of good quality, more reliable and give better value for money as compared to non-branded products. Consumers are ready to pay more for the branded products. Number one brand always demand more price premium as compared to number two and three.  Helps to Build Brand Loyalty: Brand loyalty is important for profit generation. Loyal customers do repeat purchases and they also help to increase referral sale. Making existing customers loyal is more important and less expensive than developing new customers. Branding helps to make customers more loyal.  Helps to Build Pride for Producer: Branded products invoke a sense of pride in producer, marketer, and distributor and also for those who are associated with branded products. Packaging of Agri- Products Packaging provides a means to market products. Proper packaging and branding of agricultural products by farmers would attract more consumers. Designing packaging from a marketing perspective also involves brand recognition. Brand recognition occurs when a consumer can identify a brand by its attributes. Packaging helps for ensuring longer shelf life of fresh fruits and vegetables. It remains fresh, juicy and delicious from harvest to store. Packaging materials helps to improve manufacturing process and do three packaging functions: proper ventilation, product protection and water loss reduction. It is very cost effective and provide optimal brand placement. Fruit and vegetable packaging is responsible for ensuring fresh fruit and vegetable. Shelf life of the fruits and vegetables can be improved by packaging and it helps to maintain it fresh, juicy and delicious from harvest to store. The Functions of Packaging The protective function of packaging: Packaging provides physical protection for the product. The typical product is handled many times between production and consumption. Perishable produce has to be protected from excessive moisture, heat or cold, ultra violet light, pathological, mechanical damage in transit, storage or when awaiting purchase. In the case of horticultural produce, the demands on packaging can be great. Some commodities are highly sensitive to ethylene gas and hence need to avoid gas build-up in transit (e.g., avocado). In these cases, the packaging must allow for effective air ventilation. Packaging also serves to protect the consumer: Product tampering has forced many food companies to develop tamper resistant packages, many of which warn consumers not to purchase packs which have 7|Page broken seals. Resealable packaging has been developed to preserve the product and keep it in good condition whilst it is in the process of being used. For example, Tetra Pak has recently developed resalable milk and fruit juice cartons. Improving the efficiency of the physical distribution function: members of the distribution channel are concerned with maximizing operational efficiency and reducing costs. Packaging helps reduce costs by making handling easier and/or reducing handling. Packaging and product differentiation: Product packaging also has a role in helping differentiate products where there are a large number of brands competing in the same market segment. Distinctive product packaging, be it in the form of shape, size, coloring, materials and/or print, can help in the positioning of a product and in its differentiation. Suppliers of fresh produce, such as fruits, find that it is difficult to effectively brand the product without packaging. 4.2 Agricultural Pricing Strategies Introduction: this topic tries to discuss the variant forces that influence the level and behavior of agricultural product prices. The change in agricultural product prices, in short, has an effect on the economy and poultices of the country. After indicating the distinguishing features of agricultural prices, more focus will be given to the demand side of the agricultural products. 4.2.1 Concept, Definitions and Classifications of Agricultural Price Agricultural prices cover prices of agricultural products (output prices) and prices of requisites for agricultural production (input prices) at various stages of marketing. Agricultural prices are important economic variables in a market economy. Price relationships have a significant influence on decisions relating to the type and volume or agricultural production activity. Agricultural prices derive their meaning significantly, from the stage of marketing to which they relate. They may, therefore,  Prices Received By Farmers (Producer Prices)  Wholesale Prices  Retail Prices  Export Prices  Prices Paid By Farmers 1. Prices Received By Farmers (Producer Prices) Prices received by farmers for their produce are, in principle, the prices realized by them for that produce at the farm-gate. Thus, the costs of transporting agricultural produce from the farm to the market or to the first point of sale off-farm, and of selling it there (whether these activities are performed by the farmer himself or by specialized agents) are not, by definition, to be included in the farm-gate price. The cost of such activities, if included in the price realized at the market or the first point of sale must, therefore, be deducted from that price to arrive at the estimate of the farm-gate price. The concept normally used is that of the price actually or notionally received at the farm-gate. For agricultural products for which actual farm-gate prices are not available, notional farm-gate prices must be estimated by deducting transportation charges, marketing expenses and taxes, etc., paid by the farmer per unit quantity from the appropriate wholesale or retail price. 8|Page 2. Wholesale Prices After an agricultural product leaves the farm-gate, it may pass through one or even two wholesale markets and a chain of other “middlemen” before reaching the retailer from whom the ultimate consumer buys it. Where two wholesale markets are involved, the first may be only an assembling market and may be called a primary wholesale market; and the second may be a distributing market, called a secondary market. It is not necessary that the functions of assembly, distribution and export should necessarily be performed by three separate wholesale markets; a single wholesale market may perform one, two or all three of these functions. A wholesale market may thus be defined as a market situated somewhere between farm-gate and retail market, usually handling a large quantity of sales for a further stage of distribution of the commodity. Wholesale price accordingly is the rate at which a relatively large transaction, generally for further sale, is effect. Depending upon the extent to which the transportation charges and other expenses incidental to marketing are borne by the sellers and buyers in the wholesale market, and remembering also that the wholesalers include their profit margin in their price quotations, a wholesale price may take any of the following forms: a) In a primary wholesale market, the wholesale price of a product may refer to the price at which the wholesale buyer makes purchases from the producer-seller or his agents. This price would differ from the price the producer-seller gets, depending upon whether the buyer or the seller bears the incidental charges; and b) In a primary wholesale market, the wholesale price of a product may also refer to the price at which the wholesaler offers it for sale to the retailers, etc. This price should exceed the price in (a) above by the wholesaler's margin of profit. c) In a secondary wholesale market, the wholesale price of a product may refer to the price at which the wholesaler sells it to the retailers, etc. This price should exceed the price in (b) above by transportation charges, incidental expenses and margin of profit. 3. Retail Prices: Retail prices are established in transactions in which quantities dealt with are relatively smaller than in wholesale transactions and in which the final consumers of the agricultural product participate as buyers. 4. Export Prices: export prices are determined in export markets for products intended for delivery outside the customs boundary of the country. 5. Prices Paid By Farmers: The concept of prices paid by a farmer is the counterpart of prices received by a farmer and covers all prices paid by him as he participates in the transaction of goods and services in his capacity as a buyer of the means of agricultural production. Just as the price received by a farmer for his produce is the price realized by him for that produce at his farm-gate, so the price paid by a farmer for an agricultural production requisite is, in principle, the price paid by him for that item at his farm-gate or village site. If a requisite of agricultural production is bought off-farm, say, from a factory or a government store, the expenses incurred in transporting it to the farm must be added to arrive at the estimate of the price at the farm-gate. If, however, it is purchased from a local blacksmith or tradesman in the village, then the purchase price can be taken as the farm-gate price paid by the farmer. Prices take into account all-important factors, viz.  Cost of Production  Changes in Input Prices 9|Page   Input/output Price Parity  Trends in Market Prices  Inter-crop Price Parity  Demand and Supply Situation  Effect on Industrial Cost Structure  Effect on General Price Level  Effect on Cost of Living  International Market Price Situation  Parity between Prices Paid and Prices Received by farmers (Terms of Trade). Of all the factors, cost of production is the most tangible factor and it takes into account all operational and fixed demands. Agricultural price policy: The characteristics of agricultural product prices are presented below to design appropriate price policy.  Production and supply of agricultural products cannot be adjusted quickly to changes in prices or demand.  Variability in cost of production from region to region.  Wide variation in quality of products and hence prices.  The prices of farm products in general exhibit co-movement at least within a group.  The prices of farm products vary across space.  The prices of farm products in general remain low in the post-harvest period.  There are multiple prices in the same market at a point of time. Demands for Agricultural Products The laws of supply and demand The laws of supply and demand are widely known and understood. Price theory holds that ceteris paribus (i.e., all other things being equal), as prices increase so demand falls and supplies increase. For the purposes of illustration assume that the product is sunflower cooking oil. These schedules indicate the quantity of the product demanded and supplied at various prices within a given time period. At the intersection of these two curves is the point of equilibrium, the price at which the quantity supplied by sellers equates to the quantity demanded by buyers. In this example, the equilibrium price is $ 10 per liter. Since buyers can obtain all the sunflower oil they need at this price, no producer is able to levy a higher price than $ 10 per liter of sunflower oil. If, however, producers were to supply more than 20 million liters into the market then a new equilibrium point. Figure: 4.2 price equilibrium point for oil 10 | P a g e Elasticity of demand A key question for any trading organization is how the level of demand for its product will change in response to a price change. Consider the position of a miller contemplating lowering the service charge for grinding maize cobs into flour by 5 percent. The miller will be uncertain of the effect of such a price change on revenues. A 5 percent decrease in fees should attract more business from the millers, but, this increase in grain coming to be milled may or may not be enough to compensate for the smaller margin per unit sold. Total revenue could either rise or fall depending on how big the increase in demand is in relation to the size of the price cut. A 5 percent increase in milling fees is likely to result in a fall off in demand for the miller's services. A price cut will increase revenue only if demand is elastic and a price rise can only raise total revenue if demand is inelastic. Price elasticity of demand (or demand elasticity) is a measure of the responsiveness of buyers to price changes. The elasticity of demand is the percentage change in the quantity of a product demanded divided by the percentage change in its price. Factors Affecting the Price Elasticity of Demand  Availability of substitutes: the more possible substitutes, the greater the elasticity. Note that the number of substitutes depends on how broadly one defines the product.  Degree of necessity or luxury: luxury products tend to have greater elasticity. Some products that initially have a low degree of necessity are habit forming and can become "necessities" to some consumers.  Percentage of income: the higher the percentage of the consumer's income that the product's price represents, the higher the elasticity tends to be, as people will pay more attention when purchasing the good because of its cost. The income effect is substantial. When the goods represent only a negligible portion of the budget the income effect will be insignificant and demand inelastic.  Duration: for most goods, the longer a price change holds, the higher the elasticity is likely to be, as more and more consumers find they have the time and inclination to search for substitutes. When fuel prices increase suddenly, for instance, consumers may still fill up their empty tanks in the short run, but when prices remain high over several years, more consumers will reduce their demand for fuel by switching to carpooling or public transportation, investing in vehicles with greater fuel economy or taking other measures. This does not hold for consumer durables such as the cars themselves, however; eventually, it may become necessary for consumers to replace their present cars, so one would expect demand to be less elastic.  Who pays: where the purchaser does not directly pay for the good they consume, such as with corporate expense accounts, demand is likely to be more inelastic. The Determinants of Demand (1) Income Consider the demand for new homes. You want a new home and choose one you like. The price is $1,000,000. You don't buy. One reason is that your income is not large enough to be able to afford this amount. Therefore, income must be one of the factors that affect the demand for a given product. Normally, we expect that as one's income rises (falls), the demand for a product will rise (fall). Because we normally expect this to be true, a good for which this statement is true is called a normal good. 11 | P a g e Occasionally, we shall encounter a good for which the statement is not true. These are called inferior goods; for these goods, as income rises (falls), the demand for the product falls (rises). 2) The Price of a Complement A complement is a different good that goes together with the one under consideration. Homes and borrowing money tend to go together. So do bread and butter, coffee and sugar, gasoline and automobiles, homes and furniture, peanut butter and jelly, and many other examples. 3) The Price of a Substitute Good Complements are different goods that are related to the one we are considering. There is another kind of relationship: the products may be substitutes. Substitutes are different goods that compete with the one under consideration. Coca-Cola and Pepsi Cola are substitutes, It is also likely that the demand for Coca Cola would rise (fall) if the price of Pepsi Cola rises (falls), the demand for American cars would rise (fall) if the price of Japanese cars rises (falls), the demand for Wendy’s burgers would rise (fall) if the price of Burger King Burgers rises (falls), and so on. Therefore, our relationship is: as the price of the substitute (apartments) rises (falls), the demand for the product (homes) rises (falls). (4) Tastes or Preferences It involves the fact that there are certain psychological reasons for liking or disliking a particular good. Our principle is: the more (Less) we like a good or service, the greater (less) is our demand for it. (5) Population The market demand is simply the sum of the individual demands. If, at the price of $1.99, Bill wants to buy. The demand for a given product will rise if: 1. Incomes rise for a normal good or fall for an inferior good 2. The price of a complement falls 3. The price of a substitute rises 4. People like the product better 5. People expect the price to rise soon 6. People expect the product not to be available soon 7. People expect their incomes to rise in the near future 8. There are more buyers. The four basic laws of supply and demand are:  If demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity.  If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity.  If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.  If supply decreases and demand remains unchanged, then it leads to higher price and lower quantity. Pricing strategies Pricing strategies are of two generic types: those that are based upon the organization’s costs and those to which some margin is added. The choices in this approach are confined to establishing a basis for arriving at the margin to be added. 12 | P a g e 1. Cost-plus methods of price determination The cost-plus approach to pricing is possibly the most used method. This involves calculating all the costs associated with producing and marketing a product on a per unit basis and then adding a margin to provide a profit. The per unit profit can be expressed either as a percentage of the cost, in which case it is referred to as the mark-up, or as a percentage of the selling price, when it is referred to as the mark-on, or margin. The two most common cost-oriented pricing procedures are full-cost pricing and incremental- cost pricing. Full-cost pricing: All the direct costs of production are assigned to the product and, in addition, the indirect costs are apportioned according to a formula adopted by the manufacturer. Under the full-cost method, if a production batch accounts for 0.000005 per cent of the plant's total production, then 0.0000005 per cent of the firm's overhead expenses are charged to that batch. This approach permits the recovery of all costs plus the amount added as a profit margin. There are two principal weaknesses in this approach. First, there is no consideration of competition or of demand for the product. Second, any method of allocating overheads is arbitrary and may be unrealistic. In manufacturing, overhead allocations are often tied to direct labor hours. In retailing, the square footage occupied by a certain group of products is sometimes used. Incremental-cost pricing: The arbitrary allocation of fixed expenses can be overcome by using incremental-cost pricing which seeks to use only those costs directly attributable to a specific output in setting prices. For example, suppose a fruit juice manufacturer has the following costs and sales: Sales (10,000 units @ $10 each) $100,000 Expenses: Variable $50,000 Fixed 40,000 (90,000) Net Profit $10,000. Suppose the juice manufacturer is offered a contract for an additional 5,000 units. Since the peak season is over, these items can be produced at the same average variable cost. Assume that the labor force would be idle otherwise. The firm now has to decide how low to price its product in order to get the contract. Using the full-cost method would give us a lowest price of $9 per unit. This figure is a product of dividing the $90,000 in expenses by a production of 10,000 units. By contrast, the incremental method would allow us to price as low as $5.10 per unit. This price would be composed of $5 variable cost plus a $0.10 per unit contribution to fixed expenses and overheads. With a price of $5.10 the financial position would look like this: Sales (10,000 units @ $10 each) + (5,000 units @ $5.10) = $125,500 Expenses: Variable -15,000 × $5 $75,000 Fixed 40,000 115,000 Net Profit $10,500 Thus, profits are increased under the incremental approach. The example does assume that the two markets are sufficiently well segmented that selling at a lower price in one will not affect the other. Having decided upon the approach to the costing of products that is to be employed, attention 2. Breakeven analysis The breakeven point is where the number of units of the product sold, at a given price, is just sufficient to cover both the fixed and variable costs incurred. At sales volumes above the breakeven point the firm moves into profit and at sales volumes below the breakeven point the firm is making losses. 13 | P a g e The formula that needs to be applied to obtain the breakeven point is: Deducting the variable costs from the selling price gives us the contribution each unit sold makes towards the fixed costs. Example: A fertilizer manufacturer's ABC production facility carries fixed costs of $500,000. Assume that the variable cost of production, per bag of ABC, is $10 and that the company is considering selling to wholesalers at $20. It can be shown that, given these figures, the company needs to sell 50,000 bags of ABC before it breaks even. The company will wish to estimate total sales, and therefore total profitability, at a selling price of $20 per bag. In many cases, marketing managers will repeat the same calculations for several possible selling prices. 3. Market-oriented pricing Up to this point, the approaches to pricing that have been discussed are those which begin from a consideration of the internal factors, i.e., the company's costs structures and target profit margins. In this section, market-oriented approaches to pricing are described. Market-oriented pricing begins from a consideration of factors external to the organization, i.e., the marketplace. 4. Psychological pricing Pricing has psychological as well as economic dimensions and marketers should take this into account when making pricing decisions. Quality pricing, odd-pricing, price lining and customary pricing are each form of psychological pricing designed to appeal to the emotions of buyers. Quality pricing: When buyers cannot judge quality by examining the product for them or through previous experience with it, or because they lack expertise, price becomes an important quality signal. Consequently, if the product is priced at too low a level, then its quality may be perceived to be low as well. 14 | P a g e Many products are marketed on the basis of their quality and the status which ownership or consumption confers on the buyer. The prestige of such products often depends upon the maintenance of a price which is high relative to others within the product category. It can happen that if the price is allowed to fall then buyers will perceive an incompatibility between the quality/prestige image being projected and the price. Odd pricing: odd pricing can create the illusion that a product is less costly than it actually is, for the buyer. An odd numbered price, like $9.99, will be more appealing than $10, supposedly because the buyer focuses on the 9. Price Lining: Since most organizations market a range of products, an effective pricing strategy must consider the relationship among all of these product lines instead of viewing each in isolation. Product line pricing is the practice of marketing merchandise at a limited number of prices. For instance, a wine company might have 3 lines of wine, one priced at $15, a second at $25 and a third at $45. These price points are important factors in achieving product line differentiation and enable the company to serve several market segments. Customary pricing: In some markets and in the case of certain low-cost products, such as confectionery, root vegetables and, in some instances, staple foodstuffs, there is widespread resistance to even modest price increases. Under such circumstances a common strategy is to maintain the unit price as far as is possible whilst reducing the size of the unit. This is termed customary pricing”. Thus, although the price of a chocolate bar is held for a long period of time, during that same period the size of the bar might have been reduced several times. When prices must be raised, an often-used compensatory strategy is to increase the size of the pack, bunch, bar or lot, but by less than a pro rata amount. 4.3 Agricultural Marketing Channels Agricultural commodities move in the marketing chain through different channels. The channels are distinguished from each other on the basis of market functionaries involved in carrying the produce the farmers to the ultimate consumers. The length of the marketing channels depends on the size of market, perishability of the commodity and the nature of demand at the consumer level. Marketing Channel is defined as independent marketing agencies, marketing institutions and marketing channels through which farm products move from producers to consumers. A very small proportion of farm produce moves directly from farmers to consumers. The production of a produce is complete only when it reaches the hands of those who need it – the consumers. All the commodities cannot be produced in all the areas because of variations in agro-climatic conditions. Hence, there is a need for their movement from producers to consumers. There are two main routes through which agricultural commodities reach the consumers: (i) Direct Route: Sometimes, agricultural commodities directly pass from producers to consumers. There is a complete absence of middlemen or intermediaries. But it is only a very small proportion of the agricultural commodities which moves directly from producers to consumers. (ii) Indirect Route: Agricultural commodities generally move from producers to consumers through intermediaries or middlemen. The number of intermediaries may vary from one to many. In the modern era of specialized production, both the horizontal and vertical distance between the producer and the consumer has increased, resulting in a reduction of direct sales. The role of market middlemen has increased in the recent past because a substantial part of the produce moves 15 | P a g e  through them. The role, functions and other details of some of these institutions have been discussed in relevant chapters. Marketing channels are routes through which agricultural products move from producers to consumers. The length of the channel varies from commodity to commodity, depending on the quantity to be moved, the form of consumer demand and degree of regional specialization in production. Factors Affecting Channels Factors affecting channels: There are several channels of distribution depending upon type of produce or commodity. Each commodity group has slightly different channel. The factors are: 1. Perishable nature of produce. e.g., fruits, vegetables, flowers, milk, meat, etc. 2. Bulk and weight–cotton, fodders are bulky but light in weight. 3. Storage facilities. 4. Weak or strong marketing agency. 5. Distance between producer and consumer. Whether local market or distant market. 6. Price of the product. 7. No. of units of sale.  Low priced articles with small units of sale are distributed through retailers.  High price special items like radios, sewing machines etc. are sold by manufactures and then agents.  Public services like gas, electricity and transport are usually sold directly to the consumer. Types of Market Channels The marketing channels for agricultural commodities in general can be divided into following four broad groups: 1. Direct to consumers 2. Through wholesalers and retailers 3. Through public agencies or cooperatives, and 4. Through processors Power and Conflict in Distribution Channels Within a distribution channel there is usually a balance of power, and the characteristics of the channel are shaped by the manner in which power is exercised. Sometimes the balance of power in a channel lies with the producer/manufacturer and in other it lies with the intermediary. Moreover, there is always the potential for conflict between channel members. Conflict between channel members can arise for one or more of the following reasons: Incompatibility of goals: Organizations can have conflicting goals. A grower may want to grade the produce in order to achieve a price premium for the top-quality produce or to develop a brand image, but the wholesaler may only be interested in selling large volumes of undifferentiated produce. Confusion over roles and rights: For example, a grower may sell part of the produce through local agents and part direct to supermarkets. This may cause conflict because the local agent believes that all sales should go through him/her. 16 | P a g e Differences in perceptions: Among the many potential differences in perceptions, which can result in conflict, are: who the customer is; what the market wants; the objectives of other channel members in participating in the market; and the role which other channel members play in helping the organization achieve its own objectives. Degree of interdependence: The greater the degree of interdependence between two members of the distribution channel, the greater the potential for conflict. This is because the actions of one directly impinge upon the performance of the other. 4.4 Agricultural Marketing Communications Marketing communications are intended to both inform and persuade a target audience, with a view to influencing the behavior of that group. The behavior of interest to agribusinesses can range from encouraging farmers to adopt improved husbandry practices or to grow a particular crop (or variety of crop), to encouraging industrial or consumer buyers to try a product or service. As has been said on other occasions, each element of the marketing mix must be designed so as to further the overall marketing strategy, and this includes marketing communications. In fact, without effective marketing communications the consumer remains unaware of products and services they need, who might supply them and the benefits which both product and suppliers can offer. Moreover, it is impossible to develop effective and efficient marketing systems without first establishing channels of communication. Even the best products do not sell themselves. Marketing communications serve five key objectives:  the provision of information  the stimulation of demand  differentiating the product or service  underlining the product's value Marketing communications takes four forms - advertising, sales promotion, personal selling and publicity. These must be formulated within a coordinated marketing communications plan. If there is more than one target market then there will need to be more than one communications program. Like all other elements of the marketing mix, it must be tuned to the characteristics and needs of the target market. Advertising: Advertising is the most visible element of the communications mix because it makes use of the mass media, i.e., newspapers, television, radio, magazines, bus hoardings and billboards. Mass consumption and geographically dispersed markets make advertising particularly appropriate for products that rely on sending the same promotional message to large audiences. Since the effects of advertising are only evident in the longer term it should be treated as a strategic rather than tactical tool of the marketing communications mix. Advertising does not have the immediate impact of creating a customer. Instead, it has a hierarchy of effects. Hierarchy of effects model describes communication as a process rather than a simple outcome in the form of a sale. 17 | P a g e Figure 4.4 the hierarchy of effects model Awareness Knowledge Linking Preference Conviction Adoption Awareness: Consider the task facing a government which is attempting to persuade farmers in a frequently drought-stricken area to switch some of their production from maize to more drought-resistant sorghum. The initial step is for advertising to create an awareness of both the economic and technical benefits of sorghum which would accrue to farmers within drought-stricken areas. There may also be an awareness task to be accomplished with respect to new sorghum varieties whose higher yields help compensate for the superior economic rewards of growing maize in a good season. Levels of awareness can be measured and thereby used as a measure of the effectiveness of advertising. For example, prior to beginning a planned advertising campaign a target such as the following might be set: ‘Within 3 months of the campaign running, we expect at least 30 percent of farmers in region X to be aware of the new sorghum variety and to be able to recall the 3 main technical benefits that are claimed for the variety in the campaign.’ Subsequent research among the region's farmers would permit management to determine whether the advertising had accomplished this target or not. Knowledge: The next step is to instill, in farmers, a given level of knowledge about, for instance, how to choose economically viable sorghum varieties and the best husbandry practices to maximize yields; and economic results, the technical and commercial benefits of the new variety and how these are achieved. It is unlikely that advertising alone can communicate this type of information. The technical nature of the information would suggest that farmers would wish to put questions to sales personnel and/or extension agents in order to obtain further explanation. Once an awareness and understanding has been built up among the target audience the marketer can then focus on establishing a liking or positive attitude towards the crop. This might be done, for instance, by promoting the virtues of the new variety, e.g., drought- resistant, high-yielding and palatable. Preference: Even though the campaign may create a positive predisposition towards the product or service, the product may not be preferred to the alternatives. In the case of the hypothetical new sorghum variety, the target audience may like what it hears about the variety but this may not yet be preferred to existing varieties or to planting maize. Preference can be created by promoting the comparative advantages of the new product or service over its alternatives. To create preference the promotional message must convey benefits which alternatives do not possess. Conviction: It is possible that whilst the target audience has developed a preference for a product or services their conviction about that product or service is not yet strong enough to actually cause them to adopt it. Here, the role of communication is to convince the target audience that the claimed benefits of the product or service are both real and sufficiently great to warrant a change in their behavior. For 18 | P a g e example, prospective growers of the new sorghum variety will want to see the benefits for themselves through field trails and demonstration plots, and will perhaps want to converse with farmers who have already grown the new variety. Adoption: The final step is for the target audience to adopt the crop, husbandry practice, product or service. The original hierarchy of effects model had purchase as its final step but here the term adoption is preferred because it emphasizes that the ultimate objective of promotion is to encourage a long-term change in behavior and not a one-off trial or purchase. To facilitate the initial purchase or trail of the product or service the promotional campaign might center on a low introductory price or enable potential customers to try it on a limited basis. Prospective growers of the new sorghum variety could be offered seed at a discounted price or the seed might be specially packed in small sample sachets so that it could be sown on a trial plot of land. “Mass media channels are relatively more important at the knowledge stage and interpersonal channels are relatively more important at the persuasion stage…” It should also be recognized that since promotion has a number of intermediary goals its performance cannot be measured simply in terms of sales volumes. Sales Promotion: It is usually applied to create an immediate impact, but one which is unlikely to be sustained in the longer term. Thus, marketers tend to use promotion to address short term problems such as reducing the cash burden of overstocked products, stimulating demand during what is traditionally the low season, selling off stocks which are becoming obsolete or are likely to spoil if they remain in storage. Sales promotions may be targeted at consumers, industrial buyers (e.g. crop processors or food manufacturers), channel intermediaries (e.g. traders, wholesalers or retailers) or the organizations’ own sales force. Public relations: The ‘public’ referred to in this definition is any group having an actual or potential interest in, or impact upon, an organization’s prospects of achieving its goals. The objectives of public relations tend to be broader than those of other components of promotional strategy. It is concerned with the prestige and image of the organization as a whole among groups whose attitudes and behavior can impact upon the performance and aims of the organization. Such publics would be: The community: An organization needs to be accepted by the local community. To this end, a community relations program should be established. Such a program should devise ways for the organization to become involved in community activities. A public relations program can give an organization a ‘personality’ and, hopefully, one which the local community likes. Consumers: Public relations should be used to nurture a positive image of the organization and its products and services, a belief in its intrinsic fairness in dealings with customers and the perception that the organization values loyal customers. Other channel members: Wherever the organization is placed within the marketing channel (as a grower, processor, wholesaler, retailer etc.) it should take cognizance of the need to develop and maintain positive relations with its partners within the marketing system. The public relations program should make them feel like partners, e.g., by making them privy to privileged information about the organization’s products, promotional program, marketing plans, future developments and/or policies. 19 | P a g e Government: The lobbying of politicians is a sensitive issue but in most countries around the world it is accepted as a reality. Public relations programs should be designed to create a two-way flow of communications between industry and government (or between a trade association, such as farmers' union, and government). Financial institutions: Bankers, finance brokers, investment analysts and other lending institutions are an important public for all commercial organizations. They need to have confidence in the financial stability and prospects for growth since directly or indirectly they will affect the organization’s access to debt capital. Public relations programs targeted at this group are therefore very important. Media: Sound press relations can give an organization access to the ‘news’ channel of communication through which it can disseminate positive information to all of its publics. Through its public relations program, the press should be given a ready response to all reasonable requests for information within the limits of commercial confidentiality, that the organization is candid about its intentions and actions. Employees: Organizations must recognize the need to ‘market’ themselves to their own employees as much as to other publics. Internal public relations often suffer from neglect. The loyalty and commitment of employees to the organization and its goals cannot be taken for granted. An internal public relations program can also help build an understanding between the organization and its personnel as well as helping develop an enduring trust between them. The methods employed by public relations professionals include: Open days Sponsorship, In-house publications, Community projects, Press releases, Video films, Training courses. Personal selling: This can be described as an interpersonal influence process involving an agribusiness' promotional presentation conducted on a person-to-person basis with the prospective buyer. It is used in both consumer and industrial marketing and is the dominant form of marketing communication in the case of the latter. Factors Influencing the Communications Mix There are at least 5 major influences on what makes a given mix of promotional techniques appropriate. These are: the nature of the market, the nature of the product, the stage in the product life cycle, price and the funds available for promotional activities. Nature of the market: An organizations’ target audience greatly influences the form of communication to be used. Where a market is comprised of relatively few buyers, in reasonable proximity to one another, then personal selling may prove efficient as well as effective. Conversely, large and dispersed markets are perhaps unsuitable for personal selling because the costs per contact will be high. The customer type also has an impact. A target market made up of industrial purchasers, wholesalers or retailers is more likely to be served by organizations which employ personal selling than is a market of consumers. Nature of the product: Highly standardized products, with minimal servicing requirements, are less likely to depend upon personal selling than are custom designed products that are technically complex and/or require frequent servicing. Standardized, high sales volume products, especially consumer products, will probably rely more on advertising through the mass media. Where the product is targeted at a narrow market segment or where those who can use the product effectively are few in number then 20 | P a g e personal selling will prove the more cost-effective method of communications. For instance, in areas such as Pakistan and Sri Lanka, field sizes are too small for four wheeled tractors to work effectively. However, there may be a relatively small number of farmers who have larger fields and who can use such a tractor both effectively and efficiently. In these circumstances, a more direct approach to the target group of farmers would be advisable. Stage in the product life cycle: The promotional mix must be matched to a product's stage in the product life cycle. During the introductory stage, heavy emphasis is placed upon personal selling to convey the attributes and benefits of the product. Intermediaries are personally contacted to engender awareness, interest and, if possible, commitment to the product. Trade shows and demonstrations are also frequently used to inform and educate prospective dealers/retailers and, sometimes, consumers. Advertising at this stage is chiefly informative and sales promotion techniques, such as product samples and money-off coupons, are designed to achieve the goals of getting potential customers to try the product. Price: The fourth factor impinging upon the promotional mix is that of price. Advertising and/or sales promotions are the dominant promotional tools for low unit value products due to the high per contact costs in personal selling. Higher value products can justify, usually require, personal selling. Promotional budget: A real barrier to implementing any promotional strategy is the size of the promotional budget. Mass media advertising tends to be expensive although the message can reach large numbers of people and hence the cost per contact is relatively low. For many new or smaller firms, the costs are prohibitive and they are forced to seek less efficient but cheaper methods. Ideally, a promotional strategy should first be developed and then cost rather than designing a promotional strategy around a preset budget. END OF THE CHAPTER! 21 | P a g e