Marketing Efficiency: Concept, Types and Indicators

In this article we will discuss about:- 1. Concept of Marketing Efficiency 2. Types of Marketing Efficiency 3. Indicators.

Concept of Marketing Efficiency:

The concept of marketing efficiency is so broad and dynamic that no single definition at present encompasses all of its theoretical and practical implications.

Fred Waugh remarked that “an unsophisticated student might make two false assumptions, first, that is it easy to define and to measure the efficiency of agricultural marketing and, second, that almost everyone is in favour of efficiency.” Wells, confessing that he did not know precisely how to measure marketing efficiency, added “and I doubt whether our so-called efficiency experts know how.”

A simple textbook definition says “marketing efficiency is the maximization of input-output ratio.”

The inputs of marketing are the various resources of land, labour, capital and management which are employed in performing the various marketing services. The output or marketing refer to the satisfactions derived from the consumption of those goods and services.

The difficulties of employing an input-output ratio definition as a quantitative measure of marketing efficiency are obvious because of the intangible nature of marketing outputs. Most inputs of marketing are quantifiable in monetary units.

A corresponding conversions of outputs is difficult and impracticable due to lack of constancy in the value of money and the subjectively of utility functions. By its nature its definition requires a standard of comparison, the choice of which is a critical factor indeed.

The input-output definition is also subject to serious limitations due to the arbitrariness of the maximization ratio and the inability to specify the efficiency of any particular situation in the absence of any specified efficiency norms. Moreover, the definition has relevance only for static and micro aspects of marketing efficiency, while completely ignoring its dynamic and macro dimensions.

Another fairly similar approach to the measurement of marketing efficiency has been put forth by shepherd in the following formula:

Apart from its ambiguity in the absence of some standard of comparison, the formula apparently suggests that any increase in the marketing cost or any decreases in the value of products would result in inefficiency.

Actually, an increase in marketing cost will sometimes represent services to the consumer of a kind not easily reflected in the from of “increased value of products marketed.”

Similarly, a decrease in the value of product marketed may represent a decrease in consumer prices resulting simple from greater intensity of competition, of these situations suggests inefficiency in the marketing system. On the contrary, they usually lead toward greater efficiency.

Therefore, both of the definitions stated above suffer from theoretical ambiguity and lack of practicality. A truly comprehensive view of the concept of marketing efficiency should not only encompass the micro and the static aspect, but also the macro and the dynamic dimensions.

A third approach relates to the measurement of marketing efficiency through the analysis of the structure, conduct and performance of the market. This approach was developed in the United States as a way to analyse the market organization of the industrial sector; but it was later applied by the agricultural sector.

Market structure as defined by Bain refers to the organizational characteristics of a market and, for practical purposes, to those characteristic. Which determine the relations of sellers in the market to each other, of buyers in the market to each other, of sellers to buyers, and of sellers established in the market to potential new firms which might enter it.

Whereas market conduct refers to the patterns of behaviour that enterprises follow in adapting or adjusting to the markers in which they sell or buy, market performance implies the composite and results which firms in any market arrive at by pursuing whatever lines of conduct they espouse.

In the developed countries it is easy to translate the structure conduct performance approach from the industrial to the agricultural sector. The agricultural product markets in these countries approximate those of industry in their levels of complexity, due to the advanced stage of economic development, application of modern technology, sophistication of consumer tastes, organizational and market innovations leading to enlarged size of firms, and sophisticated managerial control.

However, the criteria evolved for analysis of the structure, conduct, and performance of agriculture marketing firms lose much of their relevance in the developing countries, where the farm product markets are in early stages of development, are technologically poor, involve fewer market services and are characterized by quantitatively biased consumer needs which can hardly be subjected to modern sophisticated tools of analysis.

The structure conduct performance approach presents a unique set of tools of analysis for the assessment of a market situation. Analysis of structure, conduct, and performance is used as a basis for evaluating a market situation as adequate or inadequate depending upon whether or not it is in conformity with optimum social welfare.

The major weakness of this approach lies in the extent of differences in the goals of developed, and developing countries, due to major differences in their value systems. Similarly, differences in socio-economics institutional, and technological conditions may give misleading results if there is an effort to apply in developing countries a body of criteria evolved primarily for the analysis of market situations in developed countries.

Types of Marketing Efficiency:

Marketing efficiency is usually segmented into two form, ‘technical efficiency’ and ‘economic efficiency’. As these concepts are frequently confused, it seems necessary to clarify the difference between them. Technical efficiency concerns the effectiveness or competent with which the physical aspects of marketing are performed. Economic efficiency requires the realization of maximum output in money terms or of a given output with minimum resources.

In other words, to be technically efficiency, a marketing system would have to utilize with maximum effectiveness the best technology available for every marketing job, regardless of cost. For instance, air transport may be technically the most efficient method of transporting commodities, and mechanical grading may be technically a better method of grading agricultural produce than manual grading.

On the other hand, to be economically efficient a marketing system would have to employ the methods of performing marketing jobs that were the most profitable. For example, in view of its high cost per unit of produce transported, air transport may be economically less efficient than railway. Due to the availability of cheaper labour, mechanical grading may not be profitable as manual grading.

The aim of overall marketing efficiency is to provide goods to consumer in the required from, at the required time and place, and with the lowest possible marketing costs consistent with the interests of the producer. The principal means of ensuring that lower costs and/or improved services resulting from efficient marketing are passed on to producer and\or to consumer is the pressure of competition.

It is frequently argued that in the less developed economies, the large scale centralized and monopolistic marketing organization may, owing to its advantages of scale, be particularly conducive to efficient marketing. This argument does not, however, hold water for the following reasons.

First, technology progress in most cases is extraneous to the physical scope of marketing. “Most of the innovations applied in agricultural marketing are neither complex nor dependent upon costly research or, when they are usually the work of firms not directly involved in agriculture marketing.”

Second, in the less developed economies there is evidence that large monopolistic marketing organizations often are less economically efficient than their costs of operation might suggest.

Finally, these countries need to develop a class of entrepreneurs who will ultimately be capable of handling commercial organization that are technically and financially more complex than are at present managed by the indigenous population.

A variety of agriculture marketing firms of differing size and complexity should provide opportunities for more people to get more varied kinds of entrepreneurial experience than would be possible if there were only a few large centralized organizations.

These arguments imply that competitive marketing organizations may be more conductivity to marketing efficiency than monopolistic organizations are.

Where the economics of large-scale distribution are so great that monopoly or oligopoly (or similar situations) become the logical alternative to a large number of competitive units, direct control of the marketing industry might be necessary. But such as intervention should be restricted to this type of case and governments should endeavour to retain the main elements of free competition in agricultural marketing.

Indicators of Marketing Efficiency:

Due to the non-availability of standard efficiency criteria, the following indicators are sometimes identified with marketing efficiency.

1. Marketing margins

2. Consumer price

3. Availability of physical marketing facilities.

4. Market competition

1. Market Margins:

In most cases, high marketing margins are regarded a s prima facie evidence of gross inefficiency in marketing, and the middlemen who are blamed for being either inefficient, too numerous, or too monopolistic, are most often regarded as the major case of high marketing margins. Whether high marketing margins, necessarily imply inefficiency in marketing must be analyzed in light of the following considerations.

Firstly, marketing margins will appear high in relation to production costs of a commodity in any country or region in which those production costs are themselves quite low. The use of modern technology, which prodigiously lower costs of production, exhibits a magnifying effect on any given distributive margin.

Secondly, the extreme geographic specialization of production (especially in the developed countries) has resulted in a considerable increase in the cost of providing the ‘lace utility of farm goods. This in turn has served to increase transport costs and, therefore, marketing margins. But this may imply that opportunity costs of production are so low in areas far from the market that the low costs of production more than offset the high costs of marketing.

Thirdly, the increased amount of time utility embodied in food products (both perishable and non-perishable) has required extra storage and processing costs for their orderly marketing.

Fourthly, in all developed countries (and in a good number of developing countries, too) considerable changes have occurred with respect to farm utility of farm products.

Consumers today are increasingly demanding that their food and agricultural non-food requirements be met in more and more finished form. This has tended to multiply marketing margins, especially in the developed countries.

Finally, the high labour costs, especially in the retail trades, which are a special feature of the developed countries also contribute to high marketing. Self-Service shopping, which has gained a considerable momentum in recent years, endeavors to minimize the impact of high labour costs, but it is not a magical device to reduce the overall costs to a significant extent. It merely eliminates the small fraction of the costs due to those retail services that come to be performed mainly by the consumer.

The major marketing costs are those which result due to enhanced improved utilities of form time and place .They represent the costs of the services which the consumer demands and for which he is willing to pay.

In view of the above consideration, it could be safely concluded that distributive margins which form a longer and larger share of food expenditure have not been inconsistent with efficient marketing in the developed countries. In fact, these marketing margins has been a sine qua non for an efficient marketing system in developed countries.

This is not to say that the marketing system in developed countries is entirely efficient, and therefore, incapable of improvements. It merely argues that higher margins in the developed economies have characterized a marketing system which is, in fact, relatively more efficient than its counterpart in developing countries and relatively less in need of improvements.

On the other hand, high marketing margins in the less developed economies have not usually been associated with superior services rendered to the consumer, in spite of relatively cheaper labour, and this clearly indicate the existence of inefficiencies in marketing. In other words, there exists considerable scope for improvement in the marketing system of these countries.

With regard to the share of middlemen, the analysis of the composition of marketing margins in different countries shows that whereas in the developed countries the profit element accounts for a very insignificant proportion of the total marketing bill, in the developing countries it constitutes a dominant element.

What follows from the above illustration is that the size and composition of marketing margins can be used as a useful measure of efficiency, but to use it effectively requires an extremely sensitive weighing balance. The size of margin cannot be related to anything else until it is accurately related to the quantum and type of services yielded by it. Let us analyse this aspect briefly.

Marketing margin consists of two elements:

(a) Explicit costs paid for the performance of various marketing functions and

(b) The profit of the market intermediaries.

(a) The Cost Component:

The costs in marketing are incurred in the performance of various marketing functions of assembling, transportation, storage, processing, etc. or in other words, in the creation of various utilities. In order to minimize costs, the marketing facilities should operate at the maximum possible capacities with the least possible losses of produce.

We can decide whether the costs prevailing in the marketing system have any economic justification only after we have analyzed the following factors:

(1) The intensity of competition, especially in the light of various state policies.

(2) The extent of utilization of capacity of marketing facilities.

(3) The quantum and nature of services rendered in creating time, place and form utilities.

(4) The quantum of produce losses in distribution.

Efficiency in terms of cost would be positively related with No. 1-3 and negatively with No.4

(b) The Profit Component:

The subject of marketing profit has been rather extensively covered in the marketing literature of the developing countries. There are more abuses than appreciations attached to this subject. It is usually stated that the profit element predominates in the aggregate margin on agricultural commodities as a result of certain superfluous or inefficient intermediaries in the existing marketing channels.

Most of the studies relating to this topic do not, however, endeavour to quantify the cost of various direct and indirect services rendered by the intermediaries. Much of what is called profit in fact reflects middlemen costs.

For instance, studies of middlemen profit in the developing countries usually tend to ignore the following cost, items:

(a) The cost on the money loaned out by the intermediary to farmers, consumers, or other intermediaries;

(b) The cost of risks and uncertainties borne by the middleman in agricultural trade;

(c) The cost of social help extended to the farmers;

(d) The cost of entertainment at his business premises;

(e) The cost due to spoilage of produce; and

(f) The cost for bribes or gifts and for some kinds of levies, taxes and service charges not in fact related to actual services provided.

In order to arrive at the real profit figures the cost of these and other indirect services has to be quantified.

In determining the economic justification of various intermediaries the following factors would be carefully analyzed:

(i) The intensity of competition at all trade levels.

(ii) The amount of risks and uncertainties involved.

(iii) The size of business.

(iv) Alternative employment opportunities in the society.

(v) Restrictive state policies.

2. Consumer Prices:

Rising consumer prices are usually regarded as a measure of market inefficiency.

But the price of any commodity is a function of:

(i) Consumer income.

(ii) Available supplies in relation to effective demand.

(iii) Money supply

(iv) Prices of substitutes and complements.

(v) Seasonal factors.

(vi) Marketing margins and distributional patterns.

(vii) State price policies,

(viii) General Price level.

Increase in consumer prices are commonly attributed to manipulation by middlemen artificially restricting the distribution of commodities to their own advantage or creating artificial scarcities in the distribution of commodities. Actually, most marketing costs are relatively sticky and stend to change very slightly as compared to price changes caused by other factors.

Even when deficiencies in the distributional patterns affect the price structure, they are usually caused by state price and procurement policies. High consumer prices are, therefore., largely due to factors other than marketing inefficiencies, although marketing often becomes the scapegoat for ills it has not directly caused.

3. Physical Marketing Facilities:

The inadequacy of physical marketing facilities like transport, storage, processing, etc. is also a subject of criticism in discussions of the efficiency of the marketing system. This has been common especially since the recent agricultural breakthrough in many of the developing countries.

Although the availability of physical facilities has a direct bearing on marketing efficiency, to treat it as an important efficiency is questionable. The paucity of physical facilities may exist because of subsistence farming, the seasonal nature of agricultural production, the structure and wide dispersion of farm producing units, low quantum of marketable surplus, the stage of economic development, and the huge overhead expenditure involved in the provision of such facilities in the developing countries.

Where physical facilities do exit, they are seldom based on a pressessment of the economic potential and requirements of the area. In the developing countries the spatial distribution of physical marketing facilities is so unorganized that at certain places they are underutilized and at other over utilized. There is need to determine the exact demands and patterns of distribution, and the reallocation of existing facilities needed for their efficient use.

4. Market Competition:

Intensity of competition has been widely suggested as a major indicator of market inefficiency. Though competition is desirable in itself, the methods of its measurement lack uniformity, precision and objectivity.

It is conventional for researchers to blame the policy maker in a developing country for any lack of competition. On the other hand, where competition is intense the researcher who considers it the key to efficiency is hard put to indicate areas of possible improvement or to define relative degrees of efficiency.

Excessive focus on quality competition is likely to be found in a market that lacks progressiveness and growth orientation; excessive attention to private competition leads towards greater concentration among sellers and the development of monopolistic organization with all of its attendant evils.

Reliance on competition as a key indicator of efficiency is thus a static approach which disregards dynamic considerations, lacks a standard of comparison, and pays no attention to economic and social norms based on the value system of an economy. Use of competition as a measure of marketing efficiency would have to be selective and judicious to have any constructive influence on market performance.

Since market performance refers to the end results of market adjustment by buyers and sellers in the market, the intensity of market competition may be considered both as a performance norm and as the net outcome of a reorganization of the market structure and market conduct.

Thus the effective use of market competition as a measure of marketing efficiency would require an appropriate application of the criteria of workability for market structure, conduct and performance with all their interaction effects, so as to increase the intensity of competition to the extent socially desirable, while also moving towards such pre-designated social and economic goal.