Final Agricultural Marketing and Value Chain MGT Handout. FSPT4201

Agricultural Marketing and Value Chain Management
HARAMAYA UNIVERSITY
COLLEGE OF AGRICULTURE AND ENVIRONMENTAL SCIENCES
SCHOOL OF AGRICULTURAL ECONOMICS AND AGRIBUSINESS
Agricultural Marketing and Value Chain Mgt. (FSPT4201)
Compiled by
Dilmeta A. (BSc)
Haramaya University, Ethiopia
UNIT ONE: INTRODUCTION

1.1. Marketing - What is all about it
Dear students, does marketing means just selling or advertising? Absolutely no! Perhaps selling
or advertising could be a sub-set of marketing.
Haramaya University, Department of Food Science and Post-Harvest

“Marketing is more than selling or advertising”
Most people, including some business managers, say that marketing means “selling and
advertising”. It is true that these are parts of marketing. But marketing is much more than selling
and advertising.
Many executives still think that marketing is just selling and advertising. They feel that the job of
marketing is to “get rid of” whatever the company happens to produce. In fact, the aim of
marketing is to identify customers’ needs and meet those needs so well that the product almost
“sells itself”. This is true whether the product is physical goods, a service or even an idea. If the
whole marketing job has been done well, customers don’t need much persuading. They should be
ready to buy.
If we have said that marketing is more than selling and advertising, what is then marketing?
To understand some other important points that are included in marketing, other than just selling
or advertising, it is better to give a simple example. Read the example below in box 1.
‘A knapsack sprayer market’
Think of a knapsack sprayer product used by farmers. The main function of this knapsack sprayer is to
spray different pesticides, herbicides and other chemicals. But all types of knapsack sprayers are not the
same even though their function might be. knapsacks differ from each other in the materials they are
made from, in their shapes, weights and sizes, in the types of handle they have, in their durability and
degree of corrosion, in the narrowness of holes, in their spray distance and area coverage, etc. A farmer
can choose from these wide assortments of knapsack sprayers.
If you were a manufacturer of knapsack sprayer, what kind of knapsack sprayer would you design to
produce? The following list shows some of the many things a firm should do before and after it decides to
produce knapsack sprayers.
 Farmers’ needs - analyze the needs of farmers who use knapsack sprayer and decide whether
farmers want more of the same knapsacks or different knapsack sprayer.

 Product type - predict what type of knapsack sprayers – nozzle type and spray mode, container
size and weights, handle type, durability, extent of corrosion, - different farmers want it for
different crops and decide which of these farmers the firm will satisfy.
 Current and future demand - estimate how many of the farmers will use knapsacks sprayer to
protect their crop from disease and pest over the next several years and how many knapsacks
farmer will buy.
 Time of supply - predict when farmers want to buy the knapsack sprayer.
 Channel of distribution - determine where these farmers will be - and how to get the firm's
knapsacks to them
 Pricing - estimate what price they are willing to pay - and if the firm can make a profit selling at
that price.
 Promotion - decide which kinds of promotion should be used to tell potential customers about the
firm’s knapsack sprayer.
 Competitors analysis - estimate the number of competing companies which will be producing
knapsack sprayer (including imported knapsack sprayers), the amount of knapsack sprayer they
produce, the type of knapsack and the price they will charge.
These things complicate the production and selling activities of knapsack sprayer.
The above example demonstrates that marketing is broader than what some people think it is. All
the above activities are not part of production - actually making goods or performing services.
Rather, they are part of a larger process called marketing - that provides needed direction for
production and helps make sure that the right goods and services are produced and find their way
to consumers (farmers). The above example shows that marketing is much more than selling or
advertising.
1.2. Definitions of Marketing and Agricultural Marketing
Before defining it is important to note that there is no universally accepted definition of

marketing.

Marketing can be defined in different ways and many writers used different definitions. There
are almost as many definitions as the number of marketing specialists. As such, there cannot be a
universally accepted definition. The definitions depend upon the role marketing is expected to
play and the perspective from which we view marketing.
Here are some of the definitions given by different scholars of the field.
Marketing is a total system of business activities designed to plan, price,

promote and distribute want - satisfying products to target markets to achieve
organizational objectives (Etzel et al., 1997).
This definition is customer oriented and gives the impression that marketing should start with an
idea of a want-satisfying product and should not end until the customers’ wants are completely
satisfied.
Marketing consists of a consumer oriented mix of business activities planned and implemented
by a marketer to facilitate the exchange or transfer of products, services or ideas so that both
parties profit in some way (Zikmund and D’Amico, 1984).
This definition mainly focuses on the effectiveness of the market.
Kotler (2003), distinguished between two definitions of marketing: a social definition and a
managerial definition.
A social definition
Marketing is a societal process by which individuals and groups obtain what they need and want
through creating, offering, and freely exchanging products and services of value with others.
Accordingly the role of marketing is to deliver a higher standard of living.
A managerial definition - the American Marketing Association offers the following managerial
definition:

Marketing is the process of planning and executing the conception, promotion, and distribution
of ideas, goods, and services to create exchange values that satisfy individual and organizational
goals.
In a similar but slightly different way, McCarthy and Perreault (1993), on the other hand viewed
marketing from the perspective of micro- and macro- marketing.
Micro-marketing
Marketing is the performance of activities that seek to accomplish an organization’s objectives

by anticipating consumer or client needs and directing a flow of need –satisfying goods and
services from producer to consumer or client.
Macro-marketing
Marketing is a social process that directs an economy’s flow of goods and services from
producers to consumers in a way that effectively matches supply and demand and accomplishes
the objectives of society.
Thomsen (1951), tried to address the marketing system as whole in the following definition.
Marketing comprises all the operations, and the agencies conducting them involved in the
movement of goods and services from producers to final consumers and the effect of such
operations on producers, middlemen, and consumers (Thomsen, 1951).
Others focus on the function of marketing.
Marketing is the series of services involved in moving a product (commodity) from the point of
production to the point of consumption (Dixie, )
This definition has two problems:

First, it emphasizes commodity marketing. Marketing is not only limited to commodity but it
also includes services, future marketing, marketing ideas, etc.
Secondly, it omits two key elements i.e., customer orientation and its inbuilt sustainability.
Agricultural marketing
Dear students: in the previous paragraphs, we defined what marketing in general means. Though
the basic principles are the same, marketing, when it is applied to agricultural sector, differs in
some ways from other types of marketing. Therefore, we now turn to defining what agricultural
marketing means.
Agricultural marketing, then, is the study of all the operations and the
agencies, involved in the movement of agricultural products from the
farmers to final consumers, and the effects of such operations on farmers,
and consumers.
Dear students: in addition to the above definitions, there are hundreds of definitions of
marketing. Perhaps it may be important to point out the following key points:
 Once again, remember that there is no universally accepted definition of marketing.

 Marketing in general is not limited to commercial or profit making enterprises.
 Marketing is not an activity to which an organization turns its attention at the end of the
production phase/operation. Rather, marketing needs to be directing production in
accordance with clear signals from the marketplace as what is needed by customers.
 Marketing is just as relevant to development projects, aid agencies, extension service
organizations, and the like, as it is to commercial enterprises. The marketing concept is
that an organization achieves its goals through the provision of customer satisfaction.
All these definitions vary in their scope that marketing attempts to address (micro-marketing and
macro-marketing); in the emphases marketing gives to its different activities; and the field of

study marketing stresses on (economics and management); the perspective from which one views
marketing (from societal or firm’s point of view); etc.
Although there are slight variations among the above definitions we find some core concepts of
marketing in common. Thus, to understand marketing it is better to know theses concepts of
marketing. What are the most important concepts?
1.3. Core Concepts of Marketing
Dear students, understanding the core concepts of marketing help you to understand the
marketing system and the key terms in the studying marketing.
Needs, Products Value, cost Exchanges
Relationships Markets
Figure 1.1 the core concepts of marketing
1.3.1. Needs, wants and demand
The starting point for the discipline of marketing lies in human needs, wants and demand. People
need, want and demand many varieties of things. The marketer must try to understand the target
market’s need, wants and demands.
Needs – are the basic human requirements. People need food, air, water, clothing, and shelter to
survive. People also have strong needs for recreation, education and entertainment.
It is the deficiency of something useful. Needs are not created by society or by marketers. They
exist in the very nature of human biology and the human condition. However, these needs
become wants when they are directed to specific objects that might satisfy the need.
Wants - are desires for specific satisfiers of the needs. A want for one person may not be a want
for another person. In other words, what is desired by one person may not be desired by another.

What is good for one person may be worse for another. For example, when a person feels
hungry, he needs food but the type of food he wants may be different.
Although people’s needs are few, their wants are many. Human wants are continually shaped and
reshaped by social forces and institutions including churches, schools, families and business
corporations.
Demands - are thus wants for specific product that are backed by an ability to buy them. Wants
become then demands when they are backed up by purchasing power. Many people want a
Mercedes; only a few are able to buy one. Companies must measure not only how many people
want their product but also how many would actually be willing and able to buy it.
These distinctions between needs, wants and demands shed light on the frequent criticism that
“market creates needs” or “marketers get people to buy things they don’t want.” Marketers don’t
create needs; needs pre-exist marketers. Marketers, along with other societal factors, influence
wants. Marketers want to promote the idea that a Mercedes would satisfy a person’s need for
social status. They don’t, however, create the need for social status.
1.3.2. Products
Products (goods, services and ideas)
Product is anything that can be offered to the people through the market for acquisition, use
and/or attention. A products can be; physical good, service or idea.
Physical goods - these constitutes the bulk of most countries’ production and marketing efforts.
This includes machinery, cloth, food, etc.
Services - intangible products such as hotels, technical advisory service, credit service, insurance
service, telephone service, etc. A service is deed performed by one party for another. When you
provide a service, the customer can’t keep it. Rather, a service is experienced, used or consumed.
Services are not physical – they are intangible – you can’t hold a service. And it may be hard to
know exactly what you will get when you buy it.

Most products are combinations of tangible and intangible elements. Goods are usually produced
in a factory or a farm and then sold. They may be stored in a warehouse or store waiting for a
buyer. By contrast, services are often sold first, then produced. And, they are produced and
consumed in the same time frame. You can’t perform a deed and then put it on the shelf. Thus,
goods producers may be far away from the customer, but service providers often work in the
customer’s presence.
Ideas - every marketing offering includes a basic idea. Products and services are platforms for
delivering some ideas or benefits. Social marketers are busy promoting such ideas as “say no to
drugs” – to convince people that drugs have side effects; “save the rainforest” – to promote
environmental protection; and “Exercise daily” – to promote gymnastics; etc. When the
Ethiopian HIV/AIDS Secretariat Office advocates, for instance, “One-to-One Sex relationship” -
it is selling ideas.
Marketing, Production and Utilities
Production is a very important economic activity. Whether for lack of skill and resources or just
lack of time, most people do not make most of the products they use. Imagine yourself, for
example, building a compact disk player or tape-recorded, TV, a watch, cloths, a pair of shoes,
different kinds of food items, a residential home, - starting from scratch: we also turn to others to
produce services -like health care, car, transportation, telephone service, and entertainment.
Dear students, assume you are a teacher, an extension agent, a driver, a trader, or a farmer. You
are producing a specialized goods or services. In spite of the fact that you are doing a specialized
activity or jobs; you are able to consume a large variety of goods and services. People mostly
specialize in production and they are able to consume a tremendous number of goods and
services. This is made possible due to the very existence of marketing.
Dear students: almost all people are doing a specific activity i.e., there is specialization in
production. But everybody is able to consume a variety of goods and services.

Although production is a necessary economic activity, some people overrate its importance in
relation to marketing. Their attitude is reflected in the old saying; "make a better mousetrap and
the world will beat a path to your door". In other words, they think that if you just have a good
product, your business will be a success.
In modern economics, the grass grows high on the path to the better mousetrap factory if the new
mousetrap is not properly marketed.
The point is that production and marketing are both important parts of a total business system
that aim at providing consumers with need-satisfying goods and services. Together with
production, marketing supplies five kinds of economic utility - form, task, time, place, and
possession utility - that are needed to provide consumer satisfaction. Here, utility means the
power to satisfy human needs.
Form utility - is provided when someone produces something tangible. Imagine a factory
produces cloth or a food processing industry creates form utility by changing, say, wheat grain
into spaghetti. These products have their own form that gives utility to consumers and we call
this form utility.
Task utility - is provided when someone performs a task for some one else - for instance when a
bank handles financial transactions. The bank is performing the task of transferring money or
depositing money, etc. It gives satisfaction because the consumers have no more worry of
performing these tasks; it will be done by the bank. The person will be satisfied – he is getting
task utility.
But just producing a cloth or handling bank accounts doesn't result in consumer satisfaction. The
product must be something that consumers want otherwise if there is no a need to be satisfied,
there is no utility.
Dear students: take a "mousetrap". Some customers don't want any kind of mousetrap. The
extent of the problem might be high and they may want someone else to produce a service and
exterminate the mice for them. Others may want to use other biological or chemical method to
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avoid the problem. Marketing is concerned with what consumers want and it guides what should
be produced and offered.
The above two utilities alone will not satisfy consumers. Even when marketing and production
are combined to provide form and task utility, consumers will not be satisfied until possession,
time, and place utility are also provided.
Possession utility means obtaining a good or service and having the right to use or consume it.
Customers usually exchange money or something else of value for possession utility.
Dear students: does a cloth in boutique give you any satisfaction unless you acquire it? A cloth
will give you satisfaction when you possess it. Thus, marketing gives you this utility by enabling
you to possess the cloth.
Time utility - means having the product available when the customer wants it. To understand how
marketing provide time utility, consider any agricultural product - take wheat or maize. These
grains are harvested only during a given period of time in a year. But consumers are able to
consume grain throughout the year. This is made possible due to storage which is one of the
marketing functions.
Place utility - means having a product at the right place where customer wants it. Cloths that stay
at factory don't do anyone any good. Time and place utility are very important for services too.
Stated simply, marketing provides time, place, and possession utility. It should also guide
decisions about what goods and services should be produced to provide form utility and task
Provided by production with
utility. Provided by marketing
guidance of marketing
Form Time
Utility value
that comes Place
Task from satisfying
Possessio
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Figure 1.2 Types of utility and how they are provided
Figure 1.2 summarizes the different kinds of utilities a product gives to consumers. As shown in
the figure, utilities provided by marketing functions are depicted at the left hand side of the
diagram.
1.1.1. Value, cost and satisfaction
How do consumers choose among the products that might satisfy a given need? A number of
products can satisfy the same need. The consumer has to decide on the most satisfying product
from among different alternatives.
Value is the consumer’s estimate of the product’s overall capacity to satisfy his or her needs.
Consumers, in order to maximize their satisfaction; they have to consider not only the value they
can acquire from owning or using a product, but also the cost they incur to acquire the product.
Therefore, consumers will have to consider the product’s value and cost before making a choice.
A rational consumer will choose the product that produces him the most value per Birr.
1.1.2. Exchange and transaction
Exchange is the act of obtaining a desired product from someone by offering something in
return. Exchange is frequently described as a value - creating process because exchange
normally leaves both parties better off.
Transaction: two parties are engaged in exchange if they are negotiating and moving towards an
agreement. When an agreement is reached, we say that a transaction takes place. Transaction
may be either monetary or barter transaction. Transactions are supported and enforced through
certain legal systems. Transaction differs from transfer in that in a transfer nothing is received in
return for an offer.
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1.2. Markets
The concept of exchange leads to the concept of market. Traditionally, a “market” was a physical
place where buyers and sellers gather to buy and sell goods. This is a traditional perspective
which views market as the place where buyers and sellers gathered to exchange their goods in
such places as a village square.
Economists now describe a market consists of all the potential customers sharing a particular
need or want who might be willing and able to engage in exchange to satisfy that need or want.
The size of the market depends on the number of persons who exhibit the need or want, have
resources that interest others and are willing and able to offer these resources in exchange for
what they want.
Accordingly, the term market refers to a collection of buyers and sellers who transact over a
particular product or product class as a housing market, stock market, financial market, etc.
Marketers, however, see the sellers as constituting the industry and the buyers as constituting the
market. As shown in Figure 1.3, sellers and buyers are connected by four flows. The seller sends
goods and services, and communications (advertisement, direct mail) to the market; in return
they receive money and information (attitudes, sales data). The inner loop shows an exchange of
money for goods and services; the outer loop shows an exchange of information.
Communication
Industry (a Goods/services Markets (a collection

collection of sellers) buyers)
Information
Figure 1.3 a simple marketing system
Modern economies abound in markets. There are five basic markets. Manufacturers go to
resource markets (raw-materials markets, labor markets, money markets), buy resources and turn
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into goods and services and then sell finished products to intermediaries, who sell them to
consumers. Consumers sell their labor and receive money with which they pay for goods and
services. The government collects tax revenue to buy goods from resource, manufacturer, and
intermediary markets and uses these goods and services to provide public services. Each nation’s
economy and the global economy consist of complex interacting sets of markets linked through
exchange processes.
Resources Resources
Resource market
Money Money
Services, money
Taxes,
goods
Services, money
Taxes
Manufacturer market Government market Consumers market
Services
Taxes, goods
Services, Taxes,
money goods
Money Money
Intermediary market
Goods and services Goods and services

Figure 1.4 structural flows in a modern exchange economy
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1.3. Marketing Links Producers and Consumers
Effective marketing means delivering the goods and services that consumers want and need. It
means getting products to them at the right time, in the right place, and at a price they are willing
to pay. That is not an easy job- especially if you think about the variety of goods and services an
economy can produce and the many kinds of goods and services consumers want.
As a country develops and its towns get larger, consumers will be separated more apart from
producers. Effective marketing, then, will be more difficult. Figure 1.4 shows, exchange between
producers and consumers as happened by spatial separation, separation in time, separation in
information and values, and separation in ownership. "Discrepancies of quantity" and
"discrepancies of assortment" further complicate exchange between producers and consumers.
That is, each producer specializes in producing and selling large amounts of a narrow assortment
of goods and services, but each consumer wants only small quantities of a wide assortment of
goods and services.
The purpose of marketing system is to overcome these separations and discrepancies. The
"universal functions of marketing" helps do this.
The universal functions of marketing are: buying, selling, transporting, storing, standardizing and
grading, financing, risk bearing, and market information. They must be performed in all
marketing systems. How these functions are performed-and by whom-may differ among nations
and economic systems. But they are needed in any marketing system. Each of the above function
of marketing system will be discussed in more detail in unit three.
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Production sector
Specialization and division of labor result in heterogeneous supply capabilities
Spatial separation
Discrepancies of quantity
Producers want to produce Producers tend to be located where it is
and sell in large quantities. economical to produce, while consumers are

located in many scattered locations.
Consumers prefer to buy and
Separation in time
consume in small quantities.
Consumers may not want to consume goods
Discrepancies of assortment and services at the time producers would prefer
to produce them.
Producers specialize in Marketing
needed to Separation of information
producing a narrow
assortment of goods and overcome Producers don't know who needs what,
services. discrepancies when, where and how much at what price.
and Consumers do not know what is available, from
Consumers need a broad separations whom, where, when, and how much at what
assortment.
price.
Separation of values
Producers value goods and services in terms of

costs and competitive prices. Consumers value
them in terms of economic utility and ability to
pay
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Separation of ownership Producers hold title to
goods and services that they themselves do not
want to consume. Consumers want goods and
services that they do not own.
Figure 1. 5 Marketing links producers and consumer
1.4. Importance of Marketing
Dear students, can you mention some of the importance of marketing? What does marketing
mean to you? What is the importance of marketing to individuals (consumers), to firms or to the
farmers (producers), to the country’s economy? The following paragraphs explain the
importance of marketing.
Marketing is an important social activity that offers benefits to all the parties involved. The
importance of marketing can be summarized as follows.
Marketing is important in that we as a consumer pay for the cost of marketing activities. In
advanced economies marketing costs about 50 cents of each consumer dollar. For some goods
and services, the percentage is even much higher. As a consumer every day we make such
marketing related decisions as what to buy, from which shop, which salesperson to contact, what
price to pay, etc. Marketing affects almost every aspect of our daily life. Some courses are
interesting when you take them but never relevant again once they are over. This is not so with
marketing, we will be a consumer dealing with marketing for the rest of our life.
Another importance of marketing is that there are many exciting and rewarding career
opportunities in marketing. Marketing is often the route to the top.
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As producers and businessmen, we usually make such marketing related decisions as finding out
who are our customers and what service to offer, and at what price. Marketing is important to
the success of every organization be it profit making or nonprofit organization. Many nonprofit
organizations have a marketing manager. And the same principles used to sell soap are also used
to “sell” ideas, politicians, health-care services, conservation, museums, and even colleges.
To the society, marketing plays an important role in economic growth and development.
Marketing stimulates research and new idea resulting in new goods and services. Marketing
gives customers variety of products. If these products satisfy customers, fuller employment,
higher incomes, and a higher standard of living can result. An effective marketing system is
important to the future of all nations.
Effective marketing system is the key to growth and development. In a country where agriculture
plays major role, the growth of the sector in particular and the economy in general depend on the
existence of effective and efficient agricultural marketing.
1.1. Marketing and Economic System
Marketing when viewed from the macroeconomic point of view, the way it functions depends up
on the way the economy functions. Thus, it is important to briefly see the economic systems.
There are three kinds of economic systems: planned economy, mixed economy and market
economy.
1.7.1. Planned economy
In a planned economic system, government planners decide what and how much is to be
produced and distributed by whom, when, to whom and why. Producers generally have little
choice about what goods and services to produce. Their main task is to meet their assigned
production quotas. Prices are set by government planners and tend to be very rigid - not changing
according to supply and demand. Activities such as marketing research, branding and advertising
usually are neglected.
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In such economies, marketing even though exists, it plays little role and it is the government that
attempts to satisfy consumers’ needs through planning. However, experience showed us that
planners were unable to satisfy customers’ needs. It was consumers’ dissatisfaction with
decisions made by government planners that had contributed for the breakdown of the system.
1.7.2. Market economy
In a market directed economic system, the individual decisions of the many producers and
consumers make the macro level decisions for the whole economy. In a pure market directed
economy, consumers make a society’s production decisions when they make their choices in the
marketplace. They decide what is to be produced and by whom - through their dollar “votes”. In
such markets, price is the driving force of production and consumption. When consumers are
willing to pay the market prices, then apparently they feel they are getting at least their money’s
worth. Similarly, the cost of labor and materials is a rough measure of the value of the resources
used in the production to meet these needs.
The mechanics of the price system - supply and demand – thus, provides important signals to
inform, direct and motivate both producers and consumers in answering the what, how and for
whom economic questions.
1.7.3. Mixed economy
This economic system is a mixture of planned and market economic system. Actually, no
economy is entirely planned or market directed. Most are mixtures of the two extremes. Thus, it
is a question of which system dominates more. If the market dominates in answering economic
questions, the economy can be classified as market economy. If planning and government plays
dominant role in answering economic questions, the economy can be classified as planned
economy. If, on the other hand, both planning and market play important role in guiding the
economy, the economy is said to be mixed. In most developing countries, including Ethiopia, the
market is in its infancy stage and hence, both market and government play important roles.
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UNIT TWO: AGRICULTURAL PRODUCTION AND MARKETING
Objective of agricultural marketing
The consumer wants a marketing system which will provide adequate quantities of food items
and fiber products, of appreciate qualities, conveyed to him on time at the lowest possible cost.
The agencies, which operate the marketing system, commonly referred to as ‘‘middlemen’’;
have as their primary objectives of deriving the largest possible net profit.
The farmer's objective is to have a marketing system which will give him the largest possible
returns for the products which he can produce most efficiently. The farmer wants to obtain the
highest possible prices for these commodities. But marketing affects the kinds and proportions of
products which can be sold, and these in turn affect the costs and efficiency of production.
Therefore, the ''perfect'' marketing system, from the farmer's standpoint, is one which will induce
him to produce those quantities of those products which, when sold to consumers, will result in
maximum returns after deduction of minimum marketing charges for these commodities and his
own production costs.
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From the public standpoint, the marketing problem is how the operations involved in marketing
can be rendered with maximum efficiency or minimum costs. It also focuses on that kind of
marketing system that contributes the maximum for the development of the sector.
Consumers Food and other agricultural products
Middlemen Higher profit
Producers/ Higher return
Public/society Efficient movement of agricultural
Figure 1.6 Interests of the different participants of agricultural marketing
There are, thus, economic conflicts among participants of agricultural marketing. Figure 1.6
shows the interests of the different participants of agricultural marketing. Farmers seek to earn
the maximum possible returns from the sale of their produce; consumers want to secure the
highest food value at the lowest possible price; and marketing middlemen, on the other hand,
strive to earn the greatest possible profits. The marketing system should therefore be efficient
enough to resolve these conflicts.
2.1. Approaches to Agricultural Marketing
In studying agricultural marketing, there are several approaches. This section discusses the basic
approaches in describing and studying agricultural marketing. Each approach has its own
importance. In order to fully understand agricultural marketing, it is important to know each
approach.
Dear students, there are several approaches to the description of agricultural marketing. The most
common ones are:
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1. Functional Approach,
2. Commodity Approach, and
3. Institutional Approach.
2.1.1. Functional approach
 In this approach the different functions performed by the marketing system are
enumerated and analyzed.
 The necessity of each function is shown, and
 Possible ways in which its performance might be improved are examined.
What are the functions of agricultural marketing? Agricultural marketing performs various kinds
of activities or functions. These functions can be categorized into three, namely: exchange
functions, physical functions and facilitating functions.
 The exchange functions refer to the selling and buying functions of marketing.
 The physical functions refer to the storage, transportation, processing, and packaging.
 These activities are carried out with the physical handling of the product.
 Marketing of agricultural products is impossible without these functions. Each
function would add value to the product and hence provides form, time and place
utility.
 For instance, storage provides time utility, transportation provides place utility and
processing and packaging provide form utility.
 Facilitating functions include such functions as standardization and grading, financing,

risk bearing and market intelligence. These functions are not associated with the physical
handling of the product; rather they facilitate the well-functioning of the other marketing
activities.
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2.1.2. The commodity approach
Another way of treating the subject is by describing the marketing of a specific commodity from
farm to consumers. This is called the ''commodity'' approach. In this approach, similar
commodities are sometimes grouped together and described as grain marketing, fruit marketing,
livestock marketing, vegetable marketing, etc, or even sometimes each grain crop can be
described independently as; wheat marketing, maize marketing, barely marketing, etc, each fruit
as; banana, orange, etc. each vegetable as; potato, tomato, etc marketing. This necessarily
involves a considerable amount of duplication because of many similarities among commodities
with respect to marketing processes.
2.1.3. Institutional approach
The ''institutional,'' approach is based on an examination of the different kinds of middlemen or

agencies or institutions involved in the marketing system, such as retailers, wholesalers, brokers,
etc. In this approach, the different institutions involved are classified as follows:
A. Merchant middlemen
 Retailers
 Wholesalers
B. Agent middlemen
 Brokers
 Commission men
C. Speculative middlemen
D. Facilitative organizations
Middlemen are those individuals or business firms that specialize in performing the various
marketing functions involved in the purchase and sale of goods as they are moved from
producers to consumers.
A. Merchant middlemen
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These middlemen have properties in common in that they take title to, and therefore own, the
products they handle. They buy and sell for their own gain. Merchant middlemen can be divided
into two:
Retailers – are those merchant middlemen that buy products for resale directly to the ultimate
consumer of the goods. He/she is the producer's personal representative to the consumer. As
such, his/her job is very complex. From the functional viewpoint, the retailer may perform all of
the marketing functions. They are mostly large in number.
Wholesalers – are those merchant middlemen or manufacturers that sell to retailers, other
wholesalers, and/or industrial users but do not sell a significant amount to ultimate consumers.
Wholesalers make up a highly heterogeneous group of varying sizes and characteristics.
One group of wholesalers are the local buyers or countryside assemblers who buy goods in the
producing area directly from farmers and ship the products forward to the larger cities where
they are sold to other wholesalers and processors. For example, an assembler may buy barley
from farmers in rural areas and transport the product in bulk to Addis Ababa and sell it to other
wholesalers in the city. These wholesalers/assemblers/ can handle different agricultural products
or can specialize in handling a limited number of products. They may be cash-and-carry
wholesalers or service wholesalers who will extend credit and offer delivery and other services.
Some wholesalers provide credit to producers for the purchase of input and even some times give
consumption credit by entering the farmer into contractual agreement to provide his product at
the time of harvest. It is a form of selling his product before harvest. Though such agreements
could minimize risk, the farmer, may also lose the opportunity of benefiting from price rise.
B. Agent Middlemen
Agent middlemen, as the name implies, act only as a representative of their clients. They do not
take title to and therefore do not own, the products they handle. While merchant middlemen
(wholesalers and retailers) secure their income from a margin between the buying and selling
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prices, agent middlemen receive their income in the form of fees and commissions. Agent
middlemen in reality sell services to their principals, not physical goods to customers.
In many instances, the power of agent middlemen is market knowledge and "know-how" which
they use in bringing buyers and sellers together. Though the names may differ somewhat, agent
middlemen can be broken down into two major groups, commission-men and brokers.
Commission-men are usually granted broad powers by those who consign goods to them. He
normally takes over the physical handling of the product, arranges for the terms of sale, collects,
deducts his fee, and remits the balance to his principal.
Broker, on the other hand, usually does not have physical control of the product. He usually
follows the directions of his principal closely and has less discretionary power in price
negotiations than commission-men. He just acts in between the sellers and buyers. Brokers link
sellers and buyers and assist in negotiation.
In agriculture, livestock commission firms and grain brokers on the grain exchanges are good
examples of those commission-men and brokers, respectively.
C. Speculative middlemen
Speculative middlemen are those who take title to products with the major purpose of profiting
from price movements. All merchant middlemen, of course, speculate in the sense that they must
face uncertain conditions. Usually, however, wholesalers and retailers attempt to secure their
incomes through handling and merchandizing their products and to hold the uncertain aspects to
a minimum. Speculative middlemen seek out and specialize in taking these risks and usually do a
minimum of handling and merchandizing. They often attempt to earn their profits from the short-
run fluctuations in prices. Purchases and sales are usually made at the same level in the
marketing channel. For example, livestock speculators buy goats or sheep today and sell them
back today or tomorrow in the same yards. Speculative middlemen often perform a very
important job as a competitive force in the maintenance of an adequate pricing structure.
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D. Facilitative organizations
Facilitative organizations aid the various middlemen in performing their tasks. Such
organizations do not, as a general rule, directly participate in marketing process as either
merchants or agents. One group of these organizations furnishes the physical facilities for the
handling of products or for the bringing of buyers and sellers together. They take no direct part in
the buying and selling of the products themselves. However, they establish "the rules of the
game" which must be followed by the trading middlemen, such as hours of trading and terms of
sale. They may also aid in grading, arranging and transmitting payment and the like. They
receive their income from fees and commissions from those who use their facilities. Another
group of organizations falling in this general category is the trade associations. The primary
purpose of a large majority of these organizations is to gather, evaluate, and disseminate
information of value to a particular group of trade. They may carry on research of mutual
interest.
1.2. Company Orientations towards the Marketplace
What philosophy should guide a company's marketing efforts? What relative weights should be
given to the interests of the organization, the customer, and society?
The philosophy of marketing which has evolved as marketing management has passed through
distinct stages. The orientations of the companies have been changing from production to
societal through product, sales, marketing and customer. Marketing activities should be carried
out under a well-thought-out philosophy of efficiency, effectiveness, and social responsibility.
However, there are six competing concepts under which organizations conduct marketing
activities: the production concept, product concept, selling concept, marketing concept,
consumer concept, and societal marketing concept. These concepts also reflect the historical
developments of marketing over the past decades.
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2.2.1. The production concept
The production concept is one of the oldest concepts in business. The production concept holds
that consumers will prefer products that are widely available and inexpensive. The firms in such
orientation concentrate on achieving high production efficiency, low costs, and mass distribution.
It assumes that consumers are primarily interested in product availability and low prices. This
orientation makes sense in developing countries, where consumers are more interested in
obtaining the product than in its features. It is also used when a firm wants to expand the market.
The firm’s emphasis is on the production than on the marketing.
2.2.2. The product concept
Firms guided by the product concept hold that consumers will favor those products that have the
most quality, performance, or innovative features. Firms focus on making superior products and
improving them over time. They assume that buyers admire well -made products and can
evaluate quality and performance. (Remember the mousetrap example discussed previously).
Such firms often rely on their product and get little or no customer input and very often they will
not even examine competitors' products. The philosophy of the firm in this concept is ‘produce
the best mousetrap, the world will beat a path to your door’. Make the best mousetrap, you will
get it sold.
2.2.3. The selling concept

The selling concept is another common business orientation. It holds that consumers and
businesses, if left alone, will ordinarily not buy enough of the organization's products. The
organization must, therefore, undertake an aggressive selling and promotion effort. Most firms
practice the selling concept when they have over capacity. Their aim is to sell what they make
rather than make what the market wants.
Marketing based on hard selling carries high risks. It assumes that customers typically show
buying inertia or resistance and must be coaxed into buying. It also assumes that the company
has the whole battery of effective selling and promotion tools to stimulate more buying.
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The selling concept is practiced most aggressively with unsought goods, goods that buyers
normally do not think of buying, such as insurance, education on unfamiliar fields, etc. The
selling concept is also practiced in the non-profit area by fund raisers and political parties. In this
concept the objective of the firm is to put a smart seller and get her product sold.
2.2.4. The marketing concept
The marketing concept emerged in the mid-1980s and challenged the preceding concepts.
Instead of a product-centered, "make-and-sell" philosophy, we shift to a customer-centered,
"sense-and-respond" philosophy. Instead of "hunting", marketing is "gardening". The job is not
to find the right customers for your product, but the right products for your customers.
The marketing concept holds that the key to achieving its organizational goals consists of the
company being more effective than competitors in creating, delivering and communicating
superior customer values to its chosen target markets.
The following table summarizes the two concepts: selling concept and marketing concept.
Table 1 Comparison of selling and marketing concepts
Selling Marketing
1. Emphasis is on the product 1. Emphasis on consumer needs and wants
2. Company manufactures the 2. Company first determines customers’ needs and wants and
product first then decides out how to deliver a product to satisfy these
wants
3. Management is sales volume 3. Management is profit oriented
oriented
4. Planning is short-run-oriented 4. Planning is long-run-oriented in today’s products and
in terms of today’s products terms of new products, tomorrow’s markets and future
and markets growth
5. Stresses needs of seller 5. Stresses needs and wants of buyers
6. Views business as a good 6. Views business as consumer producing product satisfying
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producing process process

7. Emphasis on staying with 7. Emphasis on innovation on every existing technology and
existing technology and reducing every sphere, on providing better value to the
reducing costs customer by adopting a superior technology
8. Different departments work 8. All departments of the business integrated manner, the
as in a highly separate water sole purpose being generation of consumer satisfaction
tight compartments
9. Cost determines Price 9. Consumer determine price, price determines cost
10. Selling views customer as a 10. Marketing views the customer last link in business as the
last link in business very purpose of the business
2.2.5. The customer concept
Dear students, today many companies are moving beyond the marketing concept to the customer
concept. Whereas, companies practicing the marketing concept work at the level of customer
segments, a growing number of today's companies are now shaping separate offers, services and
messages to individual customers. These companies collect information on each customer's past
transactions, demographics, psychographics, and media and distribution preferences.
They hope to achieve profitable growth through capturing a larger share of each customer’s
expenditure by building high consumer loyalty and focusing on consumer lifetime value. A
company that sells products that requires periodic replacement or upgrading focuses on the
characteristics of individual buyer.
2.2.6. The societal marketing concept
Some have questioned whether the marketing concept is an appropriate philosophy in the age of
environmental deterioration, resource shortages, explosive population growth, world hunger and
poverty, and neglect social services. Are companies that do an excellent job of satisfying
consumer wants necessarily acting in the best long-run interest of consumers and the society?
For instance, some companies might be producing products that hurt consumer health and they
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may affect the environment. The marketing concept sidesteps the potential conflicts among
consumer wants, consumer interests, and long-run societal welfare.
Societal marketing concept – the idea that the organization should determine the
need, wants, and interests of target markets and deliver the desired satisfaction
more effectively and efficiently than do competitors in a way that maintains or
improves the customer’s and society’s wellbeing.
This concept is in fact new and especially in developed countries, it is getting a momentum due
to the society’s concern about environment.
The societal marketing concept calls upon marketers to build social and ethical considerations in
to their marketing practices. They must balance and juggle the often conflicting criteria of
company profits, consumer want satisfaction, and public interest.
The above concepts can be summarized as follows
Production concept Consumers prefer products that are widely available and
inexpensive
Product concept Consumers favor products that of fer the most quality,
performance, or innovative features
Selling concept Consumers will buy products only if the company
aggressively promotes or sells these products
Marketing concept Focuses on needs/wants of target markets & delivering
value better than competitors
Societal marketing Focuses on needs/ wants of target Concept markets and
delivering value better than competitors that preserves the
consumer’s and society’s well-being
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2.3. Basic Feature of Agricultural Production and Products
Dear students: Would you please compare the marketing of two products, say soap and fruit?
Can we consider the marketing of ‘CD cassette’ just as the same as that of marketing of fruit or
vegetable? Hopefully, you found many differences in the marketing of these two products.
Agricultural marketing has unique features as compared to other industrial products. Marketing
of ‘CD cassette’ is different in many ways from the marketing of agricultural product such as
‘fruit and vegetables’. But what make them special? The next section deals with the basic
features of agricultural marketing.
This section deals with the nature of agricultural production: the product and the production
process. Many of the operations of marketing firms and the marketing system’s organizational
arrangements can be explained only by considering the nature of the initial raw product and its
production. It is this raw product which must be assembled by buyers, moved and stored.
In developing countries much of the productions go to consumers in relatively unchanged forms,

the remainder small proportions become the raw material for food, textile, and other processing
industries. The marketing of farm products is conditioned by the volume and characteristics of
consumers. It is important, therefore, that students of agricultural marketing have at least a
general idea of agricultural production conditions in the country if they are to understand the
marketing problems of the sector.
2.3.1. Production unit
In developing countries, like Ethiopia, the principal unit of agricultural production is the so-
called family farm. These family farms are very small, and in most cases they produce various
kinds of crops and livestock’s. In pastoral areas, the main product is livestock and livestock
products, and still in some areas commercial crops such as coffee, ‘khat’, cotton, etc are the main
crops.
In family farms the operator is both manager and laborer. The sale of farm products is largely
done by the operator who must know something about both production and marketing. In most
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farm families, the amount of products sold in any one year from the vast majority of farm is very
small and hence the sector is characterized by subsistence agriculture.
 At the existing condition, due to its subsistent nature, most crops are produced mainly to
meet family food and thus there is no specialization. Nevertheless, as the country
liberalize the market and as trading opportunities open up with the rest of the world, there
will be a tendency of specializing on one or a few products and the amount of production
from each farm would increase. Moreover, as the country develops, as evidenced by most
developed countries, the number of population involved in the agricultural production
would decline.
 These characteristics of the agricultural productions in developing countries have
important marketing implications.
 First, much of our production is made available to the marketing machinery in

relatively small lots from a large number of relatively unspecialized individual
units.
 The second observation is that the farmer is by nature and probably by necessity,
a man primarily interested in production and only secondarily interested in
marketing. As a marketer, he/she either sells very small amounts at a time or very
few times a year.
2.3.2. Characteristic of the product
Dear students: before you read this section, think for a while and attempt to list down the
different agricultural products and similarly list down industrial products. Then try to compare
the two groups of products. What are the differences? What are the similarities?
The following sub-section summarizes the main features of agricultural products and explains
their implications on agricultural marketing.
A raw material
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The output of agriculture is largely a raw material which will be used for further processing. This
processing may be limited, as in the case of converting livestock into meat. It may be highly
complex as in converting wheat into ‘spaghetti’, ‘Biscuit’, etc. Regardless of the complexity,
however, the product sold by the farmer soon loses its identity as a farm product and simply
becomes “food.”
Bulky and perishable products
Compared to most other products, agricultural products are both bulkier and more perishable.
Bulk affects marketing functions concerned with physical handling. Products that occupy a lot of
space in relation to value almost automatically raise unit-transportation and storage costs. A
truckload of drugs would be considerably more valuable than a truckload of wheat. In this sense,
fruits, vegetables, and are all quite bulky. Thus, the marketing costs of agricultural products are
relatively large.
Perishability can be measured only in relation to other products. All products ultimately
deteriorate. Some agricultural products like fresh banana must move into consumption very
quickly, or they completely lose their value. On the other hand, such products as cattle continue
to grow and change if they are handled properly. Still others such as wheat, on the other hand,
can be stored for a considerable length of time without much deterioration.
But in general, even the most storable agricultural products are virtually more perishable
than other industrial products.
These characteristics have their effect on the facilities necessary to market farm products.
Perishable products require speedy handling and often special refrigeration. Quality maintenance
often becomes a real and costly problem for agricultural products. Agricultural products need
more efficient marketing services than industrial products.
The bulkiness and perishability, of agricultural products affect the marketing cost more than
industrial products do.
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 The marketing cost would be higher because the storage, transportation, handling,
and transaction costs per one Birr value of output are very high. Dear students,
please compare a 10,000 Birr value of ‘Drug’ with an equal value of ‘egg or milk’.
Which product would require more transportation, handling, storage, etc costs? Have you
recognized the difference? Good!
Quality Variation
The general quality as well as the total production of agricultural commodities varies from year
to year and from season to season. During some years the growing conditions are such that the
crop in general is of high quality. In other years unfavorable conditions prevail and the crop is of
much lower quality.
Such variations in the quality of production make it very hard to apply uniform standards for
grades from year to year. If the quality of the apple crop is uniformly high, the standards for top
grade apples may be strictly adhered to. On the other hand, if the quality of the apple crop is
poor, grading standards may be relaxed somewhat to permit some apples to be marketed as top
quality. The bottom line is it is highly difficult to have uniform standard that can be used over
long time.
2.3.3. Characteristics of production
Annual variability in production
Total agricultural output, in developing countries is relatively unstable from year to year.
However, marketing agencies do not handle totals – they are generally specialized to handle
individual commodities or groups of commodities. The amount of production variation of
individual commodities, that is of importance to marketing. In general, livestock products are
more stable in their output than crops.
The amount of output of a given commodity varies from year to year and it is also difficult to
predict what amount of output of a given agricultural product will be produced in any given year.
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As mentioned repeatedly, agricultural production is highly influenced by nature; the climate, the
rainfall, humidity, prevalence of disease and pest, etc. Thus, agricultural products are more
unstable than industrial products. At times, there is shortage and at other times there is excess
supply. The amount of total output varies from year to year. In such cases, especially if the
market is not efficient, farmers would face problems due to high decline in price when there is
excess supply and enjoy high price when there is shortage. Their income would then be unstable.
Seasonal variability in production
In addition to the annual production variability, much of agricultural production is highly

seasonal. The seasonality will be substantially important when the country’s agriculture is solely
dependent on rainfall. To the extent that the product is storable, facilities must be furnished to
keep the product until it is consumed. This means that during part of the year storage will be
used at near capacity. At other times it will be almost empty. If the product cannot be stored, it
must either be processed or consumed immediately. This may result in processing plants running
at capacity for some periods and well below - capacity or even shutdown - for other periods. If
the product must move directly into consumption, transportation and refrigeration facilities must
be immediately available. All of these situations mean increased costs in the marketing process.
Geographic concentration of production
There is high concentration of agricultural production. Some products are specific to some areas .
Such concentration may be advantageous from the view point of marketing in that it would be
feasible to develop specialized marketing services. On the other hand, it is disadvantageous in
that firms specialized in a specific agricultural output cannot operate throughout the year. Thus,
geographic concentration makes the marketing functions of processing, transporting, storing, etc.
more important.
Adjustment of production to changing conditions
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Agricultural products come from many small units operating independently. The production is to
a great extent dependent on weather and biological pattern of reproduction. The farmer may wish
to change his output and attempt to do so by planting more or fewer hectares or by breeding
more or fewer cows. However, the final output is considerably beyond his control, as weather,
disease and other relatively uncontrollable factors affect yields per hectare and the productivity
of his animals. The fact must be faced that it is not possible quickly to shut off or turn on
agricultural production.
 This means that marketing agencies in general must adjust themselves to the supplies
rather than adjust supplies to suit their needs. Short-run adjustment is almost impossible.
Dear students: a manufacturer of say soap can produce as many bars of soap as its capacity
allows within a very short period if there is an increment in demand for its products. Is such
production/ supply response possible in agriculture such as production of banana? (NO! bcoz it
take months minimum to produce).
All these distinctive features of agricultural products, production unit, and production process,
affect the marketing processes and marketing costs.
UNIT THREE: MARKETING FUNCTIONS

Dear students, the basic functions provided by agricultural marketing are divided into three
major categories: exchange, physical and facilitating functions. All of these functions add value
to the product and they require inputs and thus they would incur costs. As long as the value
36

added to the product is positive, most firms or entrepreneurs will find it profitable to compete in
supplying the service.
3.1 Exchange Functions

The exchange functions of marketing, buying, and selling are the heart of marketing. As goods
move through many hands before reaching the final user, title changes several times. Each time
title changes, a price must be decided upon. This means that pricing is an integral part of
marketing.
3.1.1 Buying
The marketing concept holds that the needs of the customer are of paramount importance. A
producer can be said to have adopted a market orientation when production is purposely planned
to meet specific demands or market opportunities. A contract farmer, who wishes to meet the
needs of a food processor, manufacturing wheat flour and pasta, will produce only improved
bread wheat variety seeds. He will avoid any inputs likely to adversely affect the storage and/or
processing properties of the wheat and will continually seek new and better inputs which will
add further value to his product in the eyes of the customer the processor. The processor on the
other hand, in making his buying decisions, his underling considerations will be the effect upon
the attractiveness of his output to the markets he is seeking to serve.
If the need of final consumers is to get quality bread, the buying and other functions will be
geared toward maintaining quality. Consumers place high value to quality implies that they will
be willing and able to pay higher price for any improvements in quality. Thus maintaining
quality will be profitable to markets and producers. Sometimes, however, consumers may not
place as such high value to quality and their main interest is to get the item at any quality
standard it may be.
In fact, the seller's motive is the opportunity to maintain or even increase profits and not
necessarily to provide, for example, the best quality. Improving quality inevitably increases the
associated costs. In some cases the market is insensitive to improvements in quality, beyond
some threshold level, and does not earn a premium price. Under such circumstances, the grower
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who perseveres and produces a ‘better product’, is not market oriented since he/she is ignoring
the real needs of the consumer. The most successful agribusiness is the one which yields the
largest difference between prices obtained and costs incurred.
3.1.2 Selling
Of the three major functions listed, this is probably the one which people find the least difficult
in associating it with marketing. Indeed to many the terms marketing and selling are
synonymous.
Kotler suggests that: “Most firms practice the selling concept when they have over capacity.
Their immediate aim is to sell what they can make rather than to make what they can sell.”
Most firms first make the product in the way others are producing, or in the way the firm thinks
it good. Then it makes much effort to sell it. But there is another and better way of producing and
selling the firm’s product. First, before production, it is better to study and identify the interests
of the users of that product then it would be very easy to sell the product or the service.
There is no denying that ‘high pressure selling’ is practiced, where the interests of the consumer
are far from foremost in the mind of the seller. This is not marketing. Enterprises adopt the
marketing philosophy as a result of becoming aware that their own long term objectives can only
be realized by consistently providing customer satisfaction.
While selling might create a consumer, marketing is about creating a customer. The difference is
that marketing is about establishing and maintaining long term relationships with customers.
Selling is part of marketing in the same way that promotion, advertising and merchandising are
components, or sub-components of the marketing mix. These all are directed towards persuasion,
and are collectively known as marketing communications - one of the four elements of the
marketing mix.
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3.2 Physical Functions

The physical functions are those activities which involve handling and movement of the actual
commodity itself. The physical function includes: processing, packaging, storage and
transportation. They are involved in solving the problems of when and where in marketing.
3.2.1 Processing
Most agricultural products are not in forms suitable for direct delivery to the consumer when
they are first harvested. Rather they need to be changed in some way before they can be used.
Kohls and Uhl observe that: “The processing function is sometimes not included in a list of
marketing functions because it is essentially a form changing activity.”
It is for this very reason that processing ought to be included as a marketing function. The form
changing activity is one that adds value to the product. Changing green coffee beans into roasted
beans, cotton into cloth, wheat into flour and bread, flaxseed into oil or sugarcane into sugar
increases the value of the product because the converted product has greater utility to the buyer.
To what form the produce is to be changed and the methods to be used in bringing about such
changes are marketing decisions. For example, some years ago when Ethiopia was looking to
expand its tea business, a prototype manufacturing plant was established. The plant was capable
of curing the tea and packing it in individual tea bags. At that point, tests were undertaken in
which the product was compared with others already on the market.
The results were encouraging. However, in the course of the marketing research, it was also
discovered that ninety percent of the black tea consumed is blended and not the pure variety
placed in tea bags by the Ethiopians. By going past the point of changing green leaf into high
quality black tea, the Ethiopians were entering a nice market which is not what they intended at
all. Timely marketing research would have directed Ethiopia to stop the form changing activity
short of bagging since, at that time; Ethiopia did not have the acreage of tea, nor the resources, to
develop a tea blending facility of its own. In the same way, a producer of fresh fruits may have
pulping and/or canning facilities but if potential buyers want the flexibility of using the fruits in a
39

variety of ways, then these stages of processing serve to reduce utility and value, rather than
increasing them.
Processing food products is becoming more important as societies culture and feeding habit
changes and as the country enters more into international market. High growth rate of urban
population and expansion of towns makes important the marketing activity in general and the
processing functions in particular more important than ever before.
3.2.2 Packaging
Packaging is enclosing commodity in a container. This is a requirement for nearly all farm
products, in all stages of marketing.
The container used in different stages of marketing a single commodity may be quite different.
We may distinguish three general types of packages or containers:
1. Containers for handling from the farm to and through assembly and processing facilities.
2. Shipping containers
3. Consumer packages
Technological developments in packaging of bulk foods such as meats, dairy products, and fruits
and vegetables, have important implications in reducing the costs of shipping. And hence, these
technologies will reduce the marketing costs.
Packaging contributes to more efficient marketing by:
1. Reducing bulk (e.g. cotton balling and compression);

2. Facilitating handling;
3. Reducing shrinkage and spoilage (canned meats);
4. Facilitating quality identification and product selection by consumers (eggs in cartons);
5. Assisting in advertising and better merchandising (cheese in cartons);
6. Helping to reduce other marketing costs by facilitating self-service retailing and modern
handling methods throughout the marketing system.
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Some economists argue that packaging simply add to costs without contributing much to the
essential functions of marketing. Undoubtedly some packaging has been of the type, appealing
consumers fancy without adding significantly to the utility of the product itself. For example, a
processor may use, for selling purpose only, an expensive foil wrap which looked handsome and
pressed the consumer but does not preserve the product better than considerably cheaper
wrapping films. There can be other similar examples of fancy packaging which appear to add
more to marketing costs than to the utility of the products.
These instances, however, are insignificant in total compared with those in which packaging
makes real contribution to marketing efficiency and reduction in marketing costs.
Consumers packaging of biscuits, cheese, meats and fruits and vegetables, does add to marketing
costs in one way but may eventually make it possible to reduces other costs substantially by
permitting self-service selling in retail stores of products which otherwise would require
expensive personalized selling.
It is evident that consumer packaging of textiles greatly facilitates brand selling of some items,
promotes standardization of quality, makes consumers selection and identification of quality
easier, reduces soiling of merchandize through handling on the counters, and makes possible a
connection between merchandize displayed in the store and advertisements in mediums reaching
consumers.
All participants in the supply chains for agricultural and food products are interested in any
contribution packaging can make to improving profitability and the efficiency of the physical
distribution function. Packaging design is capable of contributing to the improved performance
of the supply chain in a variety of ways. By altering the shape and dimensions of the packaging
more product can be displayed on retailers' shelves (e.g. changing from round to square jars
helps maximize the use of limited retailing space since far more square glass jars can be placed
on a given area of retail display space than can round shaped jars).
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The package must be capable of performing under all the temperature and humidity conditions
that are likely to be encountered by the produce as it passes through the channels of distribution.
This means that to select or design appropriate packaging for particular products/produce, the
chosen distribution channel and its environmental conditions must be thoroughly described and
understood.
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.
Packaging has aesthetic properties in that attractively shaped and brightly colored packages can
enhance the product's appeal. Moreover, the quality of the packaging is often used by the
prospective purchaser as an indication of the quality of the contents. A good deal of market
research has to go into packaging if it is to be used to best effect as a marketing tool.
3.2.3 Storage
Dear students, virtually all agricultural products are biological and seasonal. While the demand
for agricultural products are generally continuous throughout the year. Much of the output of
agriculture is harvested during relatively short periods of the years. The grains, cotton, tobacco,
fruits, and vegetables are all highly seasonal in nature. Even the production of livestock, eggs,
and dairy products, though continuous throughout the year, has wide variations between the high
and low periods of production. The desire for these products by consumers, however, is often
quite constant throughout the year.
Hence the need for storage to allow a smooth and as far as possible, uninterrupted flow of
product into the market is very essential. Because she is dealing with a biological product the
grower does not enjoy the same flexibility as her manufacturing counterpart in being able to
adjust the timing of supply to match demand. It would be an exaggeration to suggest that a
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manufacturer can turn production on and off to meet demand - they too have their constraints -
but they have more alternatives than does the agricultural producer. A manufacturer can, for
example, work overtime, sub-contract work, and over a longer time horizon, the manufacturer
can increase or decrease productive capacity to match the strength of demand.
To the extent that products are not perishable, they can be placed in storage at harvest, and then
released little by little as the year progresses. In agriculture, and especially in LDCs, supply often
exceeds demand in the immediate post-harvest period. The glut reduces producer prices and
wastage rates can be extremely high. For much of the remainder of the period before the next
harvest, the product can be in short supply with traders and consumers having to pay premium
prices to secure whatever scarce supplies are to be had. The storage function is one of balancing
supply between and demand.
Both growers and consumers gain from a marketing system that can make produce available
when it is needed. A farmer, merchant, co-operative, marketing board or retailer who stores a
product provides a service. That service costs money and there are risks in the form of wastage
and slumps in market demand, and prices, so the provider of storage is entitled to a reward in the
form of profit.
3.2.4 Transportation
Dear students, imagine the types of products you consume each day. You are able to consume
varieties of products coming from different corners due to transportation. Products must be
moved from where they are produced into the area where they will be processed and
consumed .The transport function is chiefly one of making the product available where it is
needed, without adding unreasonable cost to the product. Adequate performance of this function
requires consideration of alternative routes and means of transportation, with a view to achieving
timeliness, maintaining produce quality and minimizing shipping costs.
The wide variety of food available in our grocery stores at all times of the year would not be
possible without modern transportation. Effective transport management is critical to efficient
marketing. Whether operating a single vehicle or a fleet of vehicles, transportation has to be
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carefully managed, including cost monitoring - operations on different road types, fuel and
lubrication consumption and scheduled and remedial maintenance and repair.
3.3 Facilitating Functions
The facilitating functions include product standardization, market promotion, financing, risk
bearing and market intelligence. Facilitating functions are those activities which enable the
exchange process to take place. Marketing, in simple terms, is the act of supplying products to
someone in exchange for something perceived to be of equal or greater value, (usually, but not
always, a given sum of money). Facilitating functions are not a direct part of either the exchange
of title or the physical movement of produce.
3.3.1 Standardization and grading
Standardization is concerned with the establishment and maintenance of uniform measurements

of produce quality and/or quantity. This function simplifies buying and selling as well as
reducing marketing costs by enabling buyers to specify precisely what they want and suppliers to
communicate what they are able and willing to supply with respect to both quantity and quality
of product. In the absence of standard weights and measures trade either becomes more
expensive to conduct or impossible altogether. Among the most notable advantages of uniform
standards, are:
 Price quotations are more meaningful

 The sale of commodities by sample or description becomes possible
 Small lots of commodities, produced by a large number of small producers, can be
assembled into economic loads if these supplies are similar in grade or quality
 Faced with a range of graded produce the buyer is able to choose the quality of product
he/she is able and willing to purchase.
Quality differences in agricultural products arise for several reasons. Quality differences may be
due to production methods and/or because of the quality of inputs used. Technological
innovation can also give rise to quality differences.
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In addition, a buyer's assessment of a product's quality is often an expression of personal

preference. Thus, for example, in some markets a small banana is judged to be in some sense
‘better’ than a large banana; white sugar is considered ‘superior’ to yellow sugar and white
maize is ‘easier to digest’ than yellow maize. It does not matter whether the criteria used in
making such assessments are objective or subjective since they have the same effect in the
marketplace. What does matter in marketing is to understand how the buyer assesses ‘quality’. If
an objective standardization is not perceived by consumers, it is the same as those items which
are not graded.
3.3.2 Financing
In almost any production system there are inevitable lags between investing in the necessary raw
materials (e.g. machinery, seeds, fertilizers, packaging, flavorings, stocks etc.) and receiving the
payment for the sale of produce. During these lag periods some individual or institution must
finance the investment. The question of where the funding of the investment is to come from, at
all points between production and consumption, is one that marketing must address.
Consider the problem of a food manufacturer who wishes to launch a range of chilled products in
a developing country where few retail outlets have the necessary refrigeration equipment. This is
a marketing problem. It might be solved by the food manufacturer buying refrigerators and
leading these to retailers.
A common marketing problem, in developing countries, is the low level of incomes leading to
low levels of effective demand for many products. The challenge to marketing is to somehow
channel what income is available into effective demand. In the case of agricultural equipment
marketing this might involve offering hire-purchase schemes where the prospective buyer makes
payment in regular installments. During this time he/she is deemed to have hired the machine. If
payments are not forthcoming, the machine can be recovered since its ownership remains with
the seller up until the final payment is made, at which point the farmer is considered to have
purchased the machine.
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Alternatively, the seller might set up leasing, rather than purchasing schemes where again the
farmer is making regular payments but never takes title to the machine.
Marketing is also concerned with the financing of the enterprise itself. Here again some creative
solutions can be developed. Where internal financing is insufficient for the purposes in view, an
enterprise in a developing country can look to several alternatives including:
 Development banks
 Commercial banks
 Shares issues
 Credit co-operatives and/or credit unions
Where these sources of finance are considered inappropriate, or are simply not available or not
sufficient to a particular enterprise, a strategic alliance in the form of a joint venture could be the
answer. These are partnerships formed to exploit market opportunities more effectively and/or
efficiently than either party can on its own. An enterprise, in a developing country, may engage
in a joint venture with either an indigenous partner and/or with a foreign partner. The agreement
between parties to a joint venture normally specifies their respective contributions of resources,
share of management control, profit and risk.
Whatever the source of finance under consideration marketing has a role to play in searching for
appropriate sources of finance. Moreover, the marketing department together with other
departments or specialties should prepare and analyze such marketing projects that will expand
the activity of the enterprise. Those responsible for developing these proposals are best placed to
evaluate the compatibility between the market opportunity under consideration and the
alternative modes of financing it.
3.3.3 Risk bearing
In both the production and marketing of produce the possibility of incurring losses is always
present. Physical risks include the distraction or deterioration of the produce through fire,
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excessive heat or cold, pests, floods, earthquakes etc. Market risks are those of adverse changes
in the value of the produce between the processes of production and consumption.
Adverse changes in demand structure due to say change in consumer tastes towards other
company’s product, expectation of consumers that may adversely affect demand, substitution by
consumers of other company’s product for the company’s product under consideration, etc are all
risks associated with the marketing. Not only on the output side, risks also arise in the input
market. Input prices can increase to a high level that may affect the affordability of the item.
There could also be shortage and delay in the supply of raw materials and other inputs. All of
these risks are borne by the organization and consumers.
Risk bearing is often a little understood aspect of marketing. For example, when making
judgments as to whether a particular price is a ‘fair price’ the usual reference point is the
producer or supplier's costs. However the risks borne are rarely taken into account by those
passing judgment and yet, almost inevitably, there will be occasions when the risk taker incurs
losses. Stocks will spoil, markets will fall, cheaper imports will enter the country, consumer
tastes will change, and so on.
Risk from the time an agricultural product is harvested until it is in the hands of consumers, there
is risk of financial loss due to destruction, quality deterioration, price declines. This risk is a cost,
which must be paid for by someone.
Risk is relatively more important in agricultural sectors in contrast to other sectors. Agricultural
products are biological and are highly affected by natural conditions as weather, rainfall, natural
hazards, etc. Moreover, agricultural products are perishable and maintaining their quality for
long time may be costly and sometimes be impossible. Thus, the danger of loss due to quality
deterioration is very high.
The other reason that agricultural marketing is more risky is in that agricultural product prices
are likely to fluctuate substantially and hence prices are highly volatile. The main reason may be
that for most agricultural products the price elasticity of demand and income elasticity of demand
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are below one inelastic. The presence of such substantial risk contributes to higher margins and
other unsatisfactory conditions as a direct cost factor, such as cost of insurance premium.
3.3.4 Market intelligence
As for as is possible marketing decisions should be based on sound information. The process of
collecting, interpreting, and disseminating information relevant to marketing decisions is known
as market intelligence. The role of market intelligence is to reduce the level of risk in decision
making. Through market intelligence the seller finds out what the customer needs and wants.
The alternative is to find out through sales, or the lack of them. Marketing research helps
establish what products are right for the market, which channels of distribution are most
appropriate, how best to promote products and what prices are acceptable to the market. As with
other marketing functions, intelligence gathering can be carried out by the seller or another party
such as a government agency, the ministry of agriculture and food, or some other specialist
organization. What is important is that it is carried out.
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UNIT FOUR: MARKETING MIXES

The term "marketing mix" became popularized after Neil H. Borden published his 1964 article,
The Concept of the Marketing Mix. Borden began using the term in his teaching in the late
1940's after James Culliton had described the marketing manager as a "mixer of ingredients".
The ingredients in Borden's marketing mix included product planning, pricing, branding,
distribution channels, personal selling, advertising, promotions, packaging, display, servicing,
physical handling, and fact finding and analysis. E. Jerome McCarthy later grouped these
ingredients into the four categories that today are known as the 4 P's of marketing.
There are many possible ways to satisfy the needs of target customers. A product can have many
different features and quality levels. Service levels can be adjusted. The package can be of
various sizes, colors, or materials. The brand name and warranty can be changed. Different
advertising media – newspapers, radio, television, billboards may be used. A company’s own
sales force or other sales specialists can be used. Different prices can be charged. Price discounts
may be given, and so on.
To organize all these decisions, it is useful to reduce all the variables into what are called the
four marketing mix. The marketing mix is the set of marketing tools the firm uses to pursue its
marketing objectives in the target market.
 Product
 Price
 Promotion
 Place
These marketing mixes are sometimes called the ‘four P’. Note that the four P’s represent the
seller’s view of the marketing tool available for satisfying and influencing buyers. From the
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buyer’s point of view, each marketing tool is designed to deliver a customer benefit. Robert
Lanrterborn suggested that sellers’ four P’s correspond to the customer’s four C’s
Four P’s Four C’s
Product Customers solution

Price Customer cost
Place Convenience
Promotion Communication
All the marketing mixes are for better customer satisfaction. Based on the marketing concepts,
the whole activities of marketing are centered on customer value. Hence, customer is not part of
the marketing mix. The customer is surrounded by the four Ps as shown in Figure 4.1 below.
Product Place
C
Price Promotion
Figure 4.1 Marketing mixes

Some students assume that the customer is part of the marketing mix-but this is not so. The
customer should be the target of all marketing efforts. To show this the customer is placed in the
center of the diagram.
Dear students, the following sections discuss the marketing mixes in detail. It describes the
different elements that must be considered in the design of each marketing mix. We start with
product.
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4.1. Product
The product is concerned with developing the right “Product” for the target market. This offering
may involve a physical good, a service, or a blend of both. Thus, product is not limited to the
“physical goods”. The important thing in the product is that the goods and/or service should
satisfy some customers’ needs.
Dear students, what is product? First, we have to define what we mean by “product”. When a
firm sells its product or service, it is not selling parts or physical material, rather it is selling the
satisfaction, use or benefits the customer wants.
In the same way when producers and middlemen buy a product, they are interested in the profit
they can make from its purchase through use or resale not how the product was made.
Product means the needs-satisfying offering of a firm. The idea of “product” as potential
customer satisfaction or benefits is very important. Many business managers focus on the
technical details of a product. They think of product in terms of physical components, like
protein content and size of egg. These are important to them, but components have little effect on
the way most customers view the product. Most customers just want a product that satisfies their
needs.
Because consumers buy satisfaction, not just parts, marketing managers are constantly concerned
with product quality. From a marketing perspective, quality means a product’s ability to satisfy a
customer’s needs or requirements. This definition focuses on the customer and how the customer
thinks a product with more features - or even better features - is not a high quality product if the
features aren’t what the target market wants or needs.
Quality and satisfaction depend on the total product offering. If potato chips get stale on the shelf
because of poor packaging, the customer will be dissatisfied. A broken button on a shirt will
disappoint the customer even if the laundry did a nice job cleaning and pressing the collar. A
powerful computer is a poor quality product if it won’t work with the software the customer
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wants to use – or if the seller doesn’t answer the phone to respond to customer’s questions about
how to turn it on.
The central point in understanding and designing a product is we have to think of a product in
terms of the needs it satisfies. If a firm’s objective is to satisfy customer needs, services can be
part of its product – or service alone may be the product – and must be provided as part of a total
marketing mix.
The other strategic decision in the product is branding. But what is branding? Branding - means
the use of a name, form, symbol or design or a combination of these to identify a product. It
includes the use of brand names, trademarks, and practically all other means of product
identifications.
According to the American Marketing Association 6 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.”
Murphy7 defines a brand as:
“A symbol or name which … comes into the mind of the consumer to embrace a particular and appealing
set of values and attributes, both tangible and intangible. It is therefore much more than the product
itself; it is much more than merely a label. To the consumer it represents a whole host of attributes and a
credible guarantee of quality and origin. To the brand owner it is in effect an annuity, a guarantee of
future cash flows.”
Branding can add value to a product and is, therefore, an important aspect of product
management. For example, most farmers would perceive a given herbicide brand as a quality
product from a reliable company; but the same chemical formulation in an unmarked drum is
unlikely to gain the same level of farmer confidence. Branding can also provide the basis for
non-price competition. In fact, branding is not common in agricultural products as compared to
most non-agricultural products. But as the market for agricultural products develops, branding
becomes important component of product development.
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Dear students, don’t you have special preference for a particular Brand name. Some people
prefer Nokia and others prefer Samsung and till others prefer Motorola, etc. Branding can help
consumers in a number of ways. Brand names tell the consumer something about the product's
characteristics and assure them that if they buy the same brand they will get the same product
characteristics each time. As the number of competing products increases branding can increase
the shoppers' efficiency by helping them to differentiate between products and identify that
which best meets their needs. Brand names also help draw consumers' attention to new products
which might meet, or better meet, their needs.
Producers and suppliers can also benefit from branding their products. Branding makes it easier
for a producer or seller to match his/her products to the customers' needs. For instance, if a food
manufacturer produces three blends of instant coffee (1) 70% robusta, 30% arabica, (2) 80%
robusta, 20% arabica, and (3) 85% robusta, 15% chicory, if each has a distinctive brand name it
is easier for the buyer to indicate the nature of the product he/she wants. The ultimate objective is
to establish a measure of loyalty among consumers towards the brand. After all, a product will
only prove profitable if a sizeable proportion of the market can be persuaded to repeatedly
purchase it.
There are also potential disadvantages attached to branding, for both producers and consumers.
In the case of the consumer, there are at least two possible disadvantages. These are:
1. Higher prices: In most cases branded products carry higher retail prices than their generic
equivalents. In part, the higher price is explained by the additional production costs and
marketing expenditures incurred by the supplier in developing and supporting the brand.
The higher price sometimes also carries a premium for the unique benefits and/or features
of the brand. Whether or not these higher prices can be justified depends on the customer's
perception of the added value he/she receives in return for the price premium.
2. Brand proliferation: Whilst consumers generally like to have a degree of choice when
buying products, does encourage a proliferation of products. There is a real danger that so
many brands are on offer that the consumer becomes confused thus negating some of the
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benefits of branding mentioned previously, especially shopping efficiency aiding to

product differentiation. The dangers of brand proliferation are only realized when the
differences between brands are either marginal or are not meaningful to the consumer and
yet, the supplier continues to support the brand rather than let market forces dictate that it
ought to be deleted from the organization’s product portfolio.
The possible disadvantages of branding for manufacturers, producers or suppliers include;
1. Higher costs: Branded products tend to require heavy promotional support and more
stringent quality control to ensure the consistency of the brand. Moreover, both production
and marketing costs are higher where several brands of a product type are offered rather
than a single product. However, if the brand is truly distinctive and offers potential buyers
benefits and/or features which they value, then additional costs can usually be recovered
through premium pricing.
2. Adverse publicity: The relationship between the product and the enterprise which produces
and/or markets it is all the more apparent when that product is branded. Brands which fail
in the market place can place a stigma on an organization which makes distributors and
consumers cautious about handling or purchasing new products/brands which that
organization subsequently launches. It is for this reason that pre-market testing must be all
the more rigorous in the case of branded products.
Trademark is legal term. A trademark includes only those words, symbols, or marks that are
legally registered for use by a single company. A service mark is the same as a trademark except
that it refers to a service offering. A trade mark need not be attached to the product. It need not
even be a word it can be a symbol.
For example, ‘TOYOTA’ is the brand name for all cars made by Toyota Company. The symbol,
represent the trade mark of the product. There are many examples of this type.
Think about the whole product
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Providing the right product – when and where and how the customer wants it – is a challenge.
This is true whether the product is primarily a service, primarily a product, or as it usually the
case, a blend of both. Marketing managers must think about the “whole” product they provide
and then make sure that all of the elements fit together – and work with the rest of the marketing
strategy. Sometimes a single product is not enough to meet the needs of target customers. Then,
assortments of different products may be required.
A product assortment is the set of all product lines and individual products that a firm sells. A
product line is the set of individual products that are closely related. The seller may see them as
related because they are produced and/or operate in a similar way, sold to the same target market,
sold through the same types of outlets, or priced at about the same level. An individual product
is a particular product within a product line. It usually differentiated by brand, level of service
offered, price, or some other characteristic. For example, each brand of soap; Peacock, 777, B-
29, etc is an individual product in the product line - soap.
4.2. Place - reaching the target
Place is concerned with all the decisions in view of getting the “right” product to the target
market’s place. A product isn’t much good to a customer if it isn’t available when and where it’s
wanted.
A product reaches customers through a channel of distribution. A channel of distribution is any

service of firms (or individuals) from products to final user or consumer. Sometimes a channel
system is quite short. It may run directly from a producer to a final user or consumer. This is
especially common in --- business markets and in the marketing of services. Often the system is
more complex involving many different kinds of middlemen and specialists. And if a marketing
manager has several different target markets, several different channels of distribution might be
needed. Most producers do not sell their goods directly to the final users; between them stands a
set of intermediaries which constitute a marketing channel (also called a trade channel or
distribution channel).
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Some intermediaries such as wholesalers and retailers - buy, take title to, and resell the
merchandise; they are called the merchants. A merchant buy different agricultural products from
producers, processed products from processing factory and sell it to consumers. They are
merchants.
Others brokers - manufactory’s representatives, sales agents - search for customers and may
negotiate on the producer’s behalf but do not take title to the goods; they are called agents.
Agents in big towns play an important role in the distribution of agricultural products.
Agricultural products supplied from small towns pass on to wholesalers retailers through these
agents. These agents are important in channeling products from the point of production to the
point of consumption.
Still other - transportation companies, independent warehouses, banks, advertising agencies -

assist in the distribution process but neither take title to goods nor negotiate purchases or sales;
they are called facilitators. They are not directly involved in the selling and buying processes but
mainly facilitate the activity.
Marketing channels are set of interdependent organizations involved in the process of making a
product or service available for use or consumption. Marketing channel decisions are among the
most critical decision facing management. The channels chosen intimately affect all the other
marketing decision.
Intermediaries mostly achieve superior efficiency in making goods wieldy available and
accessible to target markets. Through their contracts, experience, specialization, and scale of
operation, intermediaries usually offer the firm more than it can achieve on its own.
Intermediaries are the major source of cost savings by reducing the number of contact necessary
in channeling products from producer to consumer. Figure ---- compares the number of contacts
necessary when there are intermediaries and when there is no intermediary.
Figure 4.1(a) No Intermediary Figure 4.2(b) Distributor intervener
M
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C M C
1
M C
M C
M – Manufacturer
C – Consumer
Fig (a) shows three producers, each using direct marketing to reach three customers. This system
requires nine different contacts. Thus, if the numbers of producers are M and number of
consumers are C, then the number of contacts will be M times C.
Fig (b) shows the three producers working through one distributor, who contacts the three
consumers. This system requires only six contacts, i.e., it only requires M plus C contacts. In
this way, intermediaries reduce the number of contacts and the work.
Channel functions and flows.
A marketing channel performs the work of moving goods from producers to consumers. It
overcomes the time, place and possession gaps that separate goods and services from those who
need or want. Thus members of the marketing channel perform a number of key functions:
 They gather information about potential and current customers, competitors and other
actors and forces in the marketing environment;
 They develop and disseminate persuasive communications to stimulate purchasing;
 They reach agreement on price and other terms so that transfer of ownership or
possession can be effected;
 They place orders with manufacturers or producers;
 They acquire the funds to finance inventories at different level in the marketing channel;
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 They assume risks connected with carrying out channel work;

 They provide services for the successive storage and movement of physical products;
 They provide for buyers’ payments of their bills throng banks and other financial
intuitions;
 They overset actual transfer of ownership from one organization or person to another.
Some functions (physical, title, promotion) constitute a forward flow of activity from the
producer/manufacturer to the customer; other functions (ordering and payment) constitute a
backward flow from customers to the producer. Still others (information, negotiation, finance
and risk taking) occur in both directions.
4.3. Price
Dear students, Can you attempt to define Price?
In the narrowest sense, price is the amount of money charged for a product or service. More
broadly, price is the sum of all the values that consumers exchange for the benefits of having or
using the product or service.
PRICE - The amount of money charged for a product or service, or the sum of the values that
consumers exchange for the benefits of having or using the product or service. “One can define
price as that which people have to forego in order to acquire a product or service.”
Dear students, price of products are important variable in the product mixes. Traditionally price
has operated as the major determinants of buyer choice. This is still the case in poorer nations
and with commodity-type products. When you see something attractive, you will be interested to
know its price. As you remember from microeconomics course, price is probably the first and
most important determinant of demand from consumers’ viewpoint. From consumers’ side, price
represents consumers’ cost. Conversely, price is important variable for the firm as it is the main
determinant of the firm’s revenue. A consumer buys a product if she expects to derive
satisfaction that is equal to the cost of appropriating the product.
Dear students, note that price is one of the most important decision variables for a firm. Due to
this fact, firms usually design different pricing strategies. These different strategies will be
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discussed in detail in the next unit. Price is also one of the most flexible elements of the
marketing mix. Unlike product features and channel commitments, price can be changed very
quickly. At the same time, pricing and price competition is the number-one problem facing many
marketers.
Although non-price factors have become more important in recent decades, price still remains
one of the most important elements in determining market share and profitability of firms.
Nevertheless, many companies do not handle pricing well. They make these common mistakes:
pricing is too cost-oriented; price is not revised often enough to capitalize on market changes;
price is set independent of the rest of the marketing mix rather than as an intrinsic element of
market – positioning strategy; and price is not varied enough for different product items, market
segments, distribution channels, and purchase occasions.
Guided by the company’s objectives, marketing managers must develop a set of pricing
objectives and policies. They must spell out what price situations the firm will face and how it
will handle them. Based on the main objectives of the firm, a company states its pricing
objectives. These objectives should be explicitly stated because they have a direct effect on
pricing policies as well as the methods used to set prices.
There are various pricing objectives:
 Profit orientated objectives

 Sales or volume oriented objectives
 Competition oriented objectives
 Strategic objectives
 Relationship objectives.
Which, among these objectives, a firm chooses to follow depends on the broader objective of the
firm and the objective reality the firm is working in.
Dear students, these objectives will be explained and discussed in detail in the next unit.
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When price is at the discretion of the firm, the firm’s pricing policy should explain:
- How flexible prices will be,

- At what level they will be set over the product life cycle,
- To whom and when discounts and allowances will be given, and
- How transportation costs will be handled.
Dear students, you discussed different market structures in your microeconomics courses. In
these different market structures, the power of the firm over price varies from market structure to
market structure. All, except perfectly competitive market structure, have more or less some
power over price. The degree of power may range from excessive power, as in the case of pure
monopoly, to some but limited power as in the case monopolistically competitive market. Thus,
price is one of the most important decision variables for a firm.
In such markets as perfectly competitive markets, price may be external to a firm in the sense
that price is usually decided by the market and hence will not be the firm’s decision variable. In
this case, the firm will just take the market price as its own price and decide on other variables
like quantity of output.
4.4. Promotion
Dear students, do you think that having a good product at the right place with a reasonable price
is sufficient? No, there is one more point. Even though a firm’s marketing strategy satisfy all
these three conditions, it cannot be effective in getting its product sold if the firm does not
effectively communicate with consumers. Modern marketing calls for more than developing a
good product, pricing it attractively, and making it accessible. Companies must also
communicate with present and potential stakeholders, and the general public.
Promotion is communicating information between seller and potential buyer or others in the
channel to influence attitudes and behavior. The marketing manager's main promotion job is to
tell target customers that the right product is available at the right place at the right price.
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What the marketing manager communicates is determined by target customer's main needs and
attitudes. How the messages are delivered depends on what blend of the various promotion
methods – the marketing manager chooses.
There several promotion methods. The following promotion methods are the most common.
Personal selling - involves direct spoken communication between sellers and potential
customers. Face-to-face selling provides immediate feedback which helps salespeople to adapt.
Although salespeople are included in most marketing mixes, personal selling can be very
expensive. So it is often desirable to combine personal selling with mass selling and sales
promotion.
Mass selling - is communicating with large numbers of potential customers at the same time. It is
less flexible than personal selling, but when the target market is large and scattered, mass selling
can be less expensive.
Advertising is one of the main forms of mass selling. Advertising is any paid form of non-
personal presentation of ideas, goods, or services by an identified sponsor. It includes the use of
such media as magazines, newspapers, radio and TV, internet, and direct mail. While advertising
must be paid for, another form of mass selling - publicity -is ''free''.
Publicity - is an unpaid form of non-personal presentation of ideas, goods, or services. Of course,

publicity people are paid. But they try to attract attention to the firm and its offerings 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 - and book sales - without the publisher paying for TV
time.
Sales promotion - refers to promotion activities other than advertising, publicity, and personal
selling - that stimulate interest, trial, or purchase by final customers or others in the channel.
Sales promotion may be aimed at consumers, at middlemen, or even at a firm's own employees.
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UNIT FIVE: PRICE SETTING

5.1. Pricing Decisions
Dear students, you are already aware of the concept of marketing mix. Price is one of the
components of marketing mix. As you know that all profit organizations and many non-profit
organizations must set prices on their products and services. Price remains a critical element of
the marketing mix, despite the increased role of non-price factors in modern marketing. Price is
the one element of marketing mix that produces revenue; the other elements produce costs.
All of the decisions made with respect to the elements of the marketing mix are of critical
importance and pricing is one of the decisions as to what price to ask for the product or service.
The task of pricing is reiterative because it takes place within a dynamic environment: shifting
cost structures affect profitability, new competitors and new products alter the competitive
balance, changing consumer tastes and disposable incomes modify established patterns of
consumption. This being the case, an organization must not only continually reassess its prices,
but also the processes and methods it employs in arriving at these prices.
Perhaps a logical starting point for an organization is to clearly articulate what objectives it seeks
to achieve through its pricing policies and then to evaluate the factors likely to impinge upon the
strategies which it seeks to adopt in pursuit of those objectives. Thus, the broader objective(s) of
a firm make the pricing strategy.
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Enterprises have a hierarchy of objectives. At the apex of this hierarchy are the corporate
objectives and it is from this that the organization’s marketing objectives are derived. Price is an
element of the marketing mix, and so pricing objectives are defined in terms of their role within
the marketing mix strategy.
There are different strategies of setting prices. The different strategies can be categorized under
two basic approaches: Cost-oriented and Demand-oriented price setting. In general
determinations of price require information on various aspects of the firm and external factors.
Figure 5.1 summarizes the key factors that influence price setting.
Pricing objective
Price of other products Price flexibility

in the line
Demand Discounts and

Price allowances
Setting
Cost Legal environment
Competition Geographic
pricing terms
Markup chain in
channels
Figure 5.1 key factors that influent price setting
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5.2. Pricing Objectives
Dear students, to decide the pricing strategy a firm; it is important to answer what objective the
pricing strategy should meet. In addition to those discussed before, there are various objectives.
Dear students, what happens when companies wants to maximize profit? Many companies try to
set a price that will maximize current profits. They estimate the demand and costs associated
with alternative prices and choose the price that produces maximum current profit, cash flow or
rate of return on investment. This strategy assumes that the firm has knowledge of its demand
and cost functions; in reality these are difficult to estimate. Some companies want to maximize
their market share. They believe that a higher sales volume will lead to lower unit costs and
higher long-run profit. They set the lowest price, assuming the market is price sensitive.
Whilst these pricing objectives vary from firm to firm, they can be classified into six major
groups: (1) profitability, (2) volume, (3) competition, (4) prestige, (5) strategic and (6)
relationship objectives. The way in which each of these objectives is expressed can take different
forms as figure 5.1 illustrates.
5.2.1. Profitability objectives
Commercial enterprises, and their management, are judged by their ability to produce acceptable
profits. These profits may be measured in monetary values and/or as a percentage of sales and/or
as a percentage of total capital employed. In addition to maximizing the profit of the firm as a
whole, the objective can further be considered in terms of the profit level from each unit sold of a
product or product line.
In other words, in addition to the overall profitability of the organization, the profitability of
strategic business units (SBUs), product lines and individual products are also often monitored.
The principal approach, to ascertaining the point at which profits will be maximized, is marginal
analysis, which is described later in this chapter.
Target return on investment (ROI) goals are common in commerce and these can be either
short or long run goals, stated as profit as a percentage of either sales or assets. This is a cost-
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oriented approach to pricing decisions. The targets set will depend very much upon the economy
within which the organization operates. Typical pricing objectives might be a 20–25% annual
rate of return on investment (after tax) and a 5–8% returns on sales. Individual targets are likely
to be set for strategic business units, product lines and individual products.
Maximizing revenues: it is an objective of getting the maximum possible revenue. When it is

difficult to calculate cost of each item produced or sold (e.g. when most costs are indirect and/or
are shared by different products) marketing managers often seek to maximize revenues when
setting prices. They do so because they need only to estimate the patterns of demand and they
believe that if current revenues are maximized then, in the long run, profits will be maximized.
In such case, it is not possible to make sure that the prices maximize the profit levels of each
product or product unit. Hence, the objective of the firm is to maximize the profits, by
maximizing sales revenue, of the firm as a whole given its direct and indirect costs. When a
firm’s fixed costs constitute larger proportion of the total production cost, maximizing revenue is
virtually equivalent with maximizing profits.
5.2.2. Volume objectives
On occasion, the pricing decisions of managers have more to do with sales maximization than
profit maximization. In these cases, organizations set a minimum acceptable profit level and then
set out to maximize sales subjected to this profit constraint. The difference between this
objective and the revenue maximization objective mentioned above is that here in the volume
objective, the main objective of the firm is to maximize just its sales revenue given a certain
minimum acceptable profit. The firm is, here, committed to sacrifice some profits in order to
achieve higher sales volume. Firms usually follow such strategic objective for two main reasons.
If a firm achieves higher market share relative to other rival firms, it will have dominant power
in the industry and hence can enjoy monopoly power in the future. Some farsighted firms
intentionally compromise short-term profits for long-term profits. Moreover, there is frequently
a positive relationship between high market share and profitability since the additional volumes
help lower unit production costs.
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In some instances, firms may also attempt to maintain the existing market share if they have
already achieved higher market share.
5.2.3. Competitive objectives
As with any other marketing decision, pricing decisions must take into account the current
behavior of competitors and seek to anticipate the future behavior of those competitors. In
particular, a company will wish to anticipate competitors' likely reactions if the pricing strategies
and tactics it is considering are actually implemented.
Going-rate pricing: Competing firms will sometimes set out to match the industry leader's
prices. The net result is to take the emphasis away from price competition and refocus
competition on to other elements of the marketing mix. Although pricing is an effective tool for
gaining a differential advantage over competitors, a price move is easily imitated and mostly
leads to retaliatory action. In certain cases, if the competing firms in a market allow pricing to be
the chief basis of competition, the profitability of the whole industry can suffer. Competitors may
attempt to promote stable prices by focusing upon product/service strategies, promotion and
distribution, i.e. the non-price elements of the marketing mix. In this case, the objective of firms
is to avoid price competition which may lead to price-war.
Anti-competitive pricing (sometimes termed as limit pricing): On occasion, a firm will price its
products with a view to discouraging competitors from entering the market or to force them out
of the market. This is done by maintaining relatively low prices and profit margins. The extent to
which this sort of pricing can be practiced depends upon the firm's own return-on-investment
requirements and the vigor with which anti-competitive actions are policed within a country.
Such pricing can be effective if the firm has some monopoly power gained through cost
efficiency. If the firm’s long run average cost of production is sufficiently low, it can exercise
limit pricing over a weak firm or new entrants. Such strategy can chiefly be used by decreasing
cost industry or by a firm enjoying substantial economies of scale. As opposed to the above, this
pricing strategy is targeted to gain market power.
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5.2.4. Prestige objectives
Prestige objectives are unrelated to profitability or volume objectives. These involve establishing
relatively high prices to develop and maintain an image of quality and exclusiveness that appeals
to status-conscious consumers. Such objectives reflect recognition of the role of price in creating
the image of an organization and its products or services. Such pricing is mostly exercise in
service firms like hotels. Electronics and automobiles that have well accepted brands usually set
their price high just to maintain an image of superior quality. The quality of the product may not
actually be superior in real sense; but firms, by making some ‘fancied’ differentiation, attempt to
convince consumers that the product is different.
Dear students, some consumers feel inferior if the price of a product is lower. Especially, in such
services as hotels, restaurants, etc, consumers would feel superior when they pay higher prices
for the same service that is being delivered at lower price. Some people in a society want to
identify themselves as a higher social class and they will be willing to pay higher price for the
sake of attaining the status. Firms, knowing such behaviors of some consumers, try to form the
social class through prestige pricing strategy. You may pay higher price in a hotel, for the same
brand beer – say, St. George – than you pay for it in other hotels having comparable service.
5.2.5. Strategic marketing objectives
Price stabilization: The objective of stabilizing prices is met in the same way as that of
removing price as the basis of competition. That is, the company will seek to maintain its own
prices at or around those of competitors. However, the aim is not to negate price as a possible
marketing advantage, but to narrow the range of price differentials and fluctuations.
Supporting other products: Pricing decisions are often focused upon the aim of maximizing
total profits rather than maximizing profits obtained from any single product within the portfolio.
To this end, some products may be designated as loss leaders whereby their price is set at a level
that produces low or even negative returns in order to improve the sales and profitability of
others within the range. Thus, for instance, a manufacturer of crop protection products may sell a
knapsack sprayer at or below cost in an attempt to stimulate sales of the high-margin chemicals
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which it is designed to apply. Especially, when a firm produces two complementary products, it
can stimulate the sales of one product by lowering the price of the complement in a way it
maximizes the overall profits of the firm. Such strategic behavior will be effective if the firm has
some monopoly power in one of the complements and faces high degree of competitions in the
other complement. The firm can lower the price of that product in which it is facing stiff
competition and compensate the loss by charging higher price for that product in which the firm
has monopoly power.
Maintaining cash flow: Many businesses fail not so much because there is an inadequate
demand for their products and services, but due to cash outflows running ahead of cash inflows.
It follows that the maintenance of a sound cash flow position is an important management
objective. Much of a company's trade will be on the basis of credit rather than cash sales. The
pricing mechanism can be used to manage cash flow. Prices can be structured in such a way that
customers are encouraged either to pay cash or to repay credit earlier than they might otherwise
do.
Target markets: The sensitivity of buyers to prices can vary across different market segments.
Some consumers will view products as commodities and therefore purchase mainly, or wholly,
on price. Others will perceive differences between competing brands and will perhaps make their
choice on the basis of characteristics such as quality, freshness and convenience rather than on
price.
Prospective buyers also differ in their perceptions of what the actual price is that they are being
asked to pay. Some farmers, for instance, will focus on the retail price of a piece of agricultural
equipment when considering a purchase. Others will take into account the credit terms available
on the item. Yet others will calculate the trade-in value for used equipment that one dealer is
offering in competition with another dealer.
5.2.6. Relationship marketing
Channel of distribution members: The interests of all participants in the channel of distribution
for the organization’s products have to be taken into consideration when making pricing
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decisions. By developing pricing policies and structures which assist intermediaries to achieve
their own profit objectives, an organization is better able to retain the loyalty of channel
members. Where there is intense competition for distributive outlets it is the organization which
proves most knowledgeable and sensitive about the needs of intermediaries that will fare best.
Suppliers: Just as the organization must take account of the interests of its distributors, so it
must be concerned about the welfare of suppliers. Japanese automobile manufacturers have
revolutionized supplier-manufacturer relations around the world. North American and European
car manufacturers traditionally operated a system of having would-be component suppliers
tender each time a new model was ready for mass manufacture. The fact that a particular supplier
was already satisfactorily producing and supplying components for other models was no
guarantee of involvement in the supply of components for the new car model. In contrast,
Japanese manufacturers tend to develop long-term relationships with component suppliers who
have provided a satisfactory service in the past. Work is rarely put out to open tender. The
Japanese philosophy sees the component supplier as an extension of its own business.
Whereas a component supplier, to a North American or European automobile manufacturer,

could expect to be brought in once the engineering design on the car had been completed. The
Japanese manufacturer does not provide the supplier with a set of specifications for the
component. Instead, the component supplier is briefed on the concept of the proposed new car
and asked to develop a design for the component which will assist in translating the concept into
a tangible product. Suppliers to Japanese automobile manufacturers enjoy a measure of security
which enables them to plan for a longer period ahead and encourages them to invest in new
technology. Car manufacturers from other parts of the world have begun to appreciate the need
to develop closer relationships with their suppliers. General Motors, for example, has now
adopted the Japanese approach to supplier relations.
The general public: The general public has an interest in the activities of commercial
organizations even if they do not buy or use the organizations’' products or services. The public
will, for instance, be concerned about the state of business ethics within an organization and with
issues such as the impact that an organization’s activities have on the environment, the extent to
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which the organization contributes to the local community (e.g. charitable works and
contributions), the manner in which it deals with the complaints and concerns of the community
and the extent of its profits. Companies have to be careful in the way they report prices and
profits since these can easily be perceived as being excessive.
Government: Governments often take a keen interest in the prices charged, particularly if the
product is a staple food. This is true even where organizations have been freed from government
control over prices because the price of basic foods is a politically sensitive issue in most
countries. The government will wish to be seen to be vigilant in preventing profiteering at the
expense of the common people. The situation can be particularly difficult for organizations such
as agricultural marketing firms who after years of suppressed prices find it necessary to raise
prices substantially to become commercially viable.
5.3. Cost - oriented Pricing Method

5.3.1. Markup Pricing
Some firms - including most retailers and wholesalers - set prices by using a markup - a dollar
amount added to the cost of products to get the selling price. For example suppose that a retail
shop buys a kilo of sugar for 4.5 Birr from Metahara Sugar Factory. To make a profit, the retail
shop obviously must sell the sugar for more than 4.50 Birr. If it adds 50 cents to cover operating
expenses and provide a profit, we say that the retail shop is marking up the item 50 cents.
Markups, however, usually are stated as a percentages rather than dollar or Birr amounts.
Markup means percentage of selling price that is added to the cost to get the selling price. Thus,
the markup for the above item can be calculated as:
Markup
For the above example;
Selling price (revenue) = 5.00 Birr
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Buying price (cost) = 4.50 Birr
( 5. 00 − 4 .50 )
x 100 %
5.0
Markup =
0. 50
x 100%
5.0
=
= 10 %
Deciding the level of the markup
Many middlemen select a standard markup percent and then apply it to all their products. This
makes pricing easier. Sometimes if the firm is selling a number of products, spending time to
find the best price for each item in stock might not pay. The easiest way is to develop a standard
markup which is sufficient to cover the firm’s operating expenses and provide a reasonable
profit. But what is the basis for setting this standard markup?
A standard markup is related to gross margin - it is usually set close to the firm’s gross margin. It
is also be important to study the markups at different levels in the marketing channel. Different
firms in a channel often use different markups.
A markup chain - the sequence of markups firms use at different levels in a channel - determines
the price structure in the whole channel.
For example, the farmer’s selling price of wheat grain becomes the cost for a flourmill firm. The
flourmill’s selling price of wheat flour becomes a baker’s cost. The Baker’s selling price of bread
to a retail shops becomes the retailer’s cost. And this cost plus a retail markup becomes the retail
selling price of bread to final consumer. Each markup should cover the costs of running the
business and leave a profit.
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Selling price to Selling price of one Selling price of bread Selling price
flourmill quintal of wheat flour
that uses quintal of
250 Birr = 100%
120 Birr = 100% 150 Birr = 100% flour 200 Birr = 100%
Markup - 15 Birr = Markups - 30Birr = Markup - 50 Birr = Markup - 50 Birr

12.5 % 20% 25% = 20%
Cost of producing one Cost of one quintal of Retailer cost of

Cost of one quintal of
quintal of wheat wheat 120 Birr = bread 200 Birr
flour 150 Birr = 75%
105 Birr = 87.5% 80% = 80%
Farmer flourmill Baker Retailer
Markups and Profits
Some people including many traditional retailers think high markups means big profits. Often
this is not true. A high markup may result in a price that is too high - a price at which few
customers will buy. And you cannot earn much if you do not sell much - no matter how high
your markup. But many retailers and wholesalers seem more concerned with the size of their
markup on a single item than with their total profit. And their high markups may lead to low
profit - or even losses.
Some retailers and wholesalers, however, try to speed turnover to increase profit even if this
means reducing their markups. They realize that a business runs up costs over time. If they can
sell a much greater amount in the same time period, they may be able to take a lower markup and
still earn higher profits at the end of the period.
An important idea here is the stock turn rate - the number of times the average inventory is sold
in a year. The 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.
For example a firm (Firm A) that sells a 100,000 Birr value of items with stock-turn rate of say 2
- two times a year – requires 50,000 Birr worth of inventory. Another equivalent firm (Firm B)
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with this 50,000 Birr may attain a stock-turn rate of say 5, if that firm reduces its markups. This
means the later firm can sell a 250000Birr value per annum. Assume further firm A has a markup
(gross profit) of 20 cents from each one Birr sales revenue while firm B has 15 cents. The total
gross profit of firm A will then be 20,000 Birr (0.2x100,000) per annum but it will be 37500 Birr
per annum for that of firm B. Thus, by reducing markups and hence prices of products, it is
possible to maximize sales revenue and be able to increase total profits.
Reducing markups to increase profit works especially if reducing price increases percentage
sales by more than the reduced percentage price. In other words, total revenue increases when
price declines if the price elasticity of demand of the item under consideration is elastic. That is
the percentage increase in quantity sold is greater than the percentage decline in price. In the
above example, firm B by reducing price by 25% (from 20 cents to 15 cents) is able to increase
its sales revenue by 150% (from 100,000 Birr to 250,000 Birr revenue). The relationship
between price elasticity and total revenue will be dealt in the later chapters.
5.3.2. Average cost Pricing
Average cost pricing means adding a reasonable markup to the average cost of a product. A
manager usually finds the average cost per unit by studying past records. Dividing the total cost
for the last year by all the units produced and sold in that period gives an estimate of the average
cost (the cost per unit output) for the next year.
Total fixed cost - is the sum those costs that are fixed in total no matter how much is produced.
Among these fixed costs are rent, depreciation, managers’ salaries, property taxes and insurance.
Such costs stay the same even if production stops temporarily. Fixed costs do not vary with the
amounts of output.
Total variable cost - on the other hand is the sum of those changing expenses that are closely
related to output - expenses for raw materials, packaging materials, labor costs, sales
communications, etc. At zero output level, total variable cost is zero. As output increases, so do
variable costs.
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Total cost - is the sum of total fixed and total variable costs. Changes in total cost depend on
variations in total variable cost since total fixed cost stays the same. The pricing manager usually
is more interested in cost per unit than total cost because prices are usually quoted per unit.
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
Average cost (per unit cost) - is obtained by dividing total cost by the related quantity (that is the
quantity that causes the total cost).
AC =
AC - average cost
TC - total cost (fixed cost plus variable cost)
Average fixed cost (per unit fixed cost) - is obtained by dividing total fixed cost by the related
quantity.
Average variable cost (per unit variable cost) - is obtained by dividing total variable cost by the
related quantity.
If the company produced 40,000 items in that time period the average cost is 62,000 divided by
40,000 units or 1.55 Birr per unit.
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Q - total quantity sold = 40000
AC = or
To get the price, the firm decides how much profit per unit to add to the average cost per unit. If
the firm considers 45 cents a reasonable profit for each unit, it sets its price at 2.00 Birr.
Accordingly if the firm sells, say, 40000 units in the next period too the total profit will be 18000
Birr.
Average cost pricing is simple. But it can also be dangerous. It is easy to lose money with
average cost pricing. For instance in the above example if the firm sells only 20000 Birr, the
average cost can be calculated as follows:
Total Fixed cost --------------------------------- 30000
Total Variable Cost ------------------------------ 16000
Total cost -------------------------------- 46000
Average cost will then be
AC =
It the firm continues to sell its product with 2.00 birr assuming that the average cost is just 1.55
Birr per unit, the firm will lose 30 cents from each unit sold and will incur a total lose of 6,000
Birr.
The basic problem with the average cost pricing approach is that it does not consider cost
variations at different level of output. But, average costs may decline or increase as the level as
output increases. Therefore, it is important to develop a better understanding of the different
types of cost a marketing manager should consider when setting a price. If a firm’s marketing
department develops the cost function of the firm, it can efficiently use Average Cost Pricing.
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5.3.3. Break-even Pricing
Another method considered in setting price is break-even pricing. This pricing system is
sometimes called target profit pricing. Break-even analysis evaluates whether the firm will be
able to break-even - that is cover all its costs - with a particular price. This is important because a
firm must cover all costs in the long run or there is not much point being in business. Break-even
point is the level of quantity at which the firm’s total cost will just be equal to its total revenue.
In other words, it is that quantity that makes profits zero.
Break-even Pricing – is setting price to break even on the costs of making and
marketing a product; or setting price to make a target profit.
As shown in Figure 5.2, the TFC is constant at 20,000 Birr irrespective of the level of output i.e.,
whether the firm produces nothing or produces 100 tones; the total fixed cost remains the same.
It is horizontal line and will remain so as long as the firm does not increase or reduce its scale or
size.
T T
o T
t
a
Profit
l 4
c
3 Break – even
o
s
2 T
t
1 Loss
a
8
Quantity of
Figure 5.2 Break – even point
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Total cost, however, varies with the level of output. When the output is zero, variable cost is zero
and total cost is equal to total fixed cost. But at any other output levels, the total cost grows with
the level of output. In the above example, the total cost is assumed to be straight line. That is the
total cost increases by a constant amount for each additional unit of output which can be
measured by the slope of the total cost curve.
The total revenue (TR) curve is also assumed to be straight line and it will be so in reality as long
as the firm sells its product at constant price. Thus, the total revenue curve is upward stopping
and is straight line. The total revenue curve will be more flat if the selling price is lower and will
be steeper when the selling price rises. The difference between the total revenue and total cost at
a given quantity is the profit or loss. If total cost lies above total revenue curve, the firm incurs a
loss. The firm will make a profit if the total revenue lies above the total cost curve. However, the
firm would be at break – even point, if it could sell 80 tones. At this point TR just equals TC. It
is a point where TR curve intersects TC curve. The point gives us the breakeven TC, TR and
quantity of output. The breakeven price can be calculated by dividing TR by that breakeven
quantity.
The graphical presentation of break-even point is helpful to understand the idea. How can we
compute break-even point? The break-even point, in units can be found by dividing total fixed
costs (TFC) by the fixed cost contribution per unit the assumed selling price minus the average
variable cost (AVC).
The derivation break-even point is as follows:
Breakeven point is the point where Total Revenue (TR) is just equal to total cost (TC).
TR = TC or ; (1)
It is a point where the difference between TC and TR is zero.
TR – TC = 0
Total revenue is equal to quantity of output sold (Q) times price of output (PQ)
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TR = (2)
Total cost is the summation of Total Fixed Cost and Total Variable Cost
TC = TFC + TVC (3)
As mentioned previously Average Variable Cost (AVC) is total variable divided by total output.
Thus, TVC can be expressed as
TVC = (4)
Substituting equation (4) in equation (3), the total cost will be expressed as
TC = TFC + AVC x Q (5)
Substituting equation (5) in to equation (1) gives the condition at break-even
TR = TFC + AVC x Q
Substituting in place of TR
Pq ×Q=TFC + AVC × Q
Solving for Q to obtain break-even quantity
PQ x Q – AVC x Q = TFC
Q (PQ – AVC) = TFC
TFC
Qb=
PQ − AVC
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Qb is break-even quantity which is the ratio of total fixed cost to the contribution of fixed cost
per unit.
(PQ – AVC) is the per unit contribution of the fixed cost
It is the unit contribution of fixed cost because if the item is sold at price (P Q) and incurred a unit
variable cost (AVC), the difference is what is left after the unit variable cost is paid which is the
unit contribution of the fixed cost. When we divide this per unit contribution of the fixed cost
into the total fixed costs that must be covered, we have the break-even quantity.
To illustrate the formula, let us assume that the average variable cost per unit is 80 cents and the
price per unit is 1.2 Birr. If the total fixed cost is 30,000 Birr, the break-even output will then be:
30000
Qb = = 75000 unit
0.4
From this you can see that if the firm sells 75000 units, it will exactly cover all its fixed and
variable costs. If it sells even one more unit, it will begin to show a profit - in this case, 40 cents
per units - because all the fixed costs are already covered and the part of revenue formerly going
to cover fixed costs is now all profit.
If we multiply the break even quantity - 75000 units - by the unit selling price (1.20 Birr), we get
90000 Birr - the break-even revenue or cost. The importance of computing the break-even
quantity is that we can accept the proposed price if it is possible to sell sufficiently large quantity
that exceeds the break-even quantity. This is because, as mentioned above, any more sells
beyond the break-even quantity increases profit (assuming both the TR and the TC curves are
linear). If the break-even quantity, however is above the existing demand the manager must
reject the proposed price because any less realized sells below the break-even quantity incurs a
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loss. It is often useful therefore, to compute break-even quantity for each of several possible
prices and compare the quantity for each price to the likely demand at the price.
So far in our discussion of break-even point, we have focused on the quantity at which total
revenue equals total cost - where profit is zero. We can also vary this approach to see what
quantity is required to earn a certain level of profit. The analysis is the same as described above
for the break-even quantity, but the amount of target profit is added to the total fixed cost. Then,
when we divide the total fixed cost plus profit figure by the contribution from each unit, we get
the quantity that will earn the target profit.
Let us assume the firm sets a target profit of П. Then
π=TR−TC
In the previous sections, we have
If in the previous example, the firm sets a target profit of say 10,000 Birr, the quantity that will
have to be sold to meet the target profit will then be:
TFC = 30000 Birr
PQ = 1.20 Birr
AVC = 0.80 Birr
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The firm can then assess the market situation to make sure that it is possible to sell 100,000 units
at the targeted price of 1.20 Birr to achieve the targeted profit.
5.3.4. Marginal Analysis
The above limitations of break-even analysis for pricing show that a marketing manager and
anyone else involved in setting a price must really understand how costs vary at different sales
opportunities. And they also show that it is not enough just to understand costs. The price setter
should also consider demand. The challenge is to consider both demand and costs at the same
time because the price decision usually affects both costs and revenues - and they determine
profit.
The best pricing tool marketers have for looking at costs and revenues (demand) at the same time
is marginal analysis. Marginal analysis focuses on the change in total revenue and total cost
from selling one more unit to find the most profitable price and quantity. Marginal analysis
doesn’t just seek a price that will result in some profits. It seeks the price that maximizes profit.
This objective makes sense. If you know how to make the biggest profit you can always adjust to
pursue other objectives - while knowing how much profit you are giving up.
This analysis maximizes profits by equating marginal revenue with marginal costs.
Marginal Revenue: is the change in total revenue that results from the sale of one more unit of a
product. When the demand curve is downward sloping, this extra unit can be sold only by
reducing the price of all items.
Marginal cost is the change in total cost that results from producing one more unit.
If the additional revenue obtained from one additional unit sold exceeds the additional cost
incurred to produce that unit, the firm has to continue reducing price to sell more units. Because
the firm’s profits will increase as the firm increases its sales. If, on the hand, the additional
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revenue obtained from additional unit sold is less than the additional cost incurred to produce
that unit, the firm has to increase price even though its sales declines. If the firm increases its
sales father, its profits will decline.
Profits will be maximized when the firm’s additional revenue from unit additional sales is just
equal to the additional cost incurred to produce that additional unit.
That is, profit will be maximized when MR = MC.
Figure 5.4 shows the relationships of average costs, marginal cost, demand and marginal revenue
curves. And it locates the profit maximizing level of price and the corresponding quantity. (For
more on price determination using marginal analysis refer to any micro economics books).
P, AC,
MC AC
MC, MR
AC
D
MR
Q0 Q Q1 Quantity of output
e
Figure 5.4 Determination of the most profitable price and quantity
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The above figure shows that at output level of Q e the marginal cost is just equal to marginal
revenue at point e - profit will be maximized at this level of output.
Any quantity below Qe results lower profit. If the firm produces at Q 0, the revenue from the last
additional output is greater than the cost incurred to produce that additional output. The firm
must increase its output. On the other hand if the firm produces output level of Q 1, at this level
the revenue from the last additional output is less than the additional cost incurred to produce
that additional output. This indicates that the firm is incurring more cost than it would earn from
it, which implies that the firm must decrease its output. Eventually, the optimum output would be
at output of Qe - where marginal cost is just equal to marginal revenue. At this level of output
(Qe), the firm can sell it at a price of P e-as indicated by the demand curve- which is the reflection
of the willingness and ability of consumers to pay Pe for quantity of Qe.
The above figure show the profit maximization of a firm facing downward sloping demand
curve. This principle is also equally applicable when the firm faces horizontal (perfectly elastic)
demand curve. The only difference in this case is that the firm taking the price as given (given by
the horizontal demand curve), the firm can decide how much to sell.
In addition, the marginal analysis also useful to find the price that will be least unprofitable when
market conditions are so poor that the firm must operate at a loss. If sales are slow, the firm may
even have to consider closing. But a marketing manager might have something to say about that.
A key point here is that most fixed costs will continue even if the firm stops its operations. Some
fixed costs may even involve items that are so "sunk" in the business that they cannot be sold for
anything near the cost shown on the company's records.
If the firm can recover the marginal cost of the last unit, it may want to continue operating. The
extra income would help pay the fixed costs and reduce the firm's losses. If it cannot meet
marginal costs, it should stop operations temporarily or go out of business.
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Is marginal analysis practically applicable? Is it possible to exactly estimate the demand and cost
curves? Do all marketing managers use this tool in setting prices and deciding the output that
should be sold?
Marginal analysis is a flexible and useful tool for marketing managers. As discussed above it
helps managers to maximize the profit of the firm if its fundamental objective is so. Some
managers, however, don't take advantage of the technique because they think it is just not
practical to try to determine the exact shape of the demand and cost curves. But this view misses
the point of marginal analysis.
Marginal analysis encourages managers to think very carefully about what they do know about
costs and demand. Only rarely is either type of information exact. Most often, both demand and
cost curves, for many reasons, are not exactly known and more-over it is hard to get smooth
curves as shown in Figure 5.4.
These limitations are, of course, real problems in applying marginal analysis for decision
purpose in the way presented above. The focus of marginal analysis in practical application is not
on finding the precise price that will maximize profit. Rather, the focus is on getting an estimate
of how profit might vary across a range of relevant prices.
Further, a number of practical demand-oriented approaches can help a marketing manager do a

better job of understanding the likely shape of the demand curve for a target market.
5.4. Demand – oriented Pricing methods
Demand oriented approaches for setting prices are based on the value in use - how much the
customer saves? Many marketers use value in use pricing - which means setting prices that will
capture some of what customers will save by substituting the firm's product for the one currently
being used. The value in use can be measured by the additional productivity or cost saved if the
item is a resource.
For instance, the value in use of herbicide can be measured by the cost saved in terms of the
labor cost that would be incurred it a farmer used hand-weeding. The labor cost for weeding
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varies from farmer to farmer in that the opportunity cost of different farmers is different. The
herbicide producer has to estimate how much on average each farmer will save by using
herbicide and then set a price that makes less expensive for the farmer to buy herbicide than to
use hand weeding.
This is a demand oriented approach because when a farmer decides to buy herbicide, he
compares the cost of purchasing the herbicide with the opportunity cost of his labor if spend his
time weeding his farm. Suppose a farmer lose, say Birr 50 income (or any comparable benefit),
when he uses his family labor for weeding. Then he will be willing to buy herbicide for any price
less than Birr 50. This means, the value in use of the herbicide can be estimated by the labor cost
saved. The same is true for consumption goods.
5.4.1. Leader Pricing
The other strategy in pricing is leader pricing. Leader pricing means setting some very low prices
- real bargains - to get customers in to real stores. The idea is not to sell large quantities of the
leader items but to get customers into the store to buy other products. Certain products are picked
for their promotion value and priced low-but above cost. In food stores the leader prices are the
"specials" that are advertised regularly to give an image of low prices. Leader items are usually
well-known, widely used items that customers don't stock heavily - milk, butter, eggs, or coffee -
but on which they will recognize a real price cut. In other words, leader pricing is normally used
with products for which consumers do have a specific reference price.
A reference price is a price a price for which customers will evaluate whether the prices of goods
of a firm are too expensive or too cheap. If customers found that the price of that item is low as
compared to other competitive firms, they conclude that most items are cheap in that store or
retail shop. Which means that leader price changes the perception of customers and leads them to
buy many other products on the assumption that all other goods are cheap in that shop.
But sometimes such pricing can erode the profit of the firm if customers buy only the low price
leaders. Therefore, managers need to be sure that the selected leader items really lead customers
to buy other items.
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5.4.2. Bait pricing
Bait pricing is setting some very low prices to attract customers-but trying to sell more expensive
models or brands once the customer is in the store.
For example, a furniture store may advertise a color TV of 21" for Birr 1600 or less. But once
bargain hunters come to the store, salesclerks point out the disadvantages of the low-price TV
and try to convince them to trade-up to a better (and more expensive) set. Bait pricing is
something like leader pricing. But here the seller doesn't plan to sell many at the low price.
If bait pricing is successful, the demand for higher - quality products expands. This approach
may be a sensible part of a strategy to trade-up customers. And customers may be well-served if
- once in the store - they find a higher - priced product offers features better suited to their needs.
Bait-pricing when it is aggressive could be unethical and it could damage the firm's public image
substantially. It is an act of putting a food - piece of bread - on a mousetrap to catch a mouse.
5.4.3. Discriminatory pricing
Discriminatory pricing involves the company selling a product/service at two or more prices,
where the differences in prices are not based on differences in costs. Discriminatory pricing takes
one or several forms:
a. Segmentation pricing: That is, prices are set to achieve an organization’s objectives within
each segment. Customers in different segments will pay different prices, for the same
product. Thus, refined sugar may be sold at a higher price in affluent urban areas and at a
lower price in poorer rural areas.
b. Product-form pricing: Here different versions of the product are priced differentially, but
often not in proportion to differences in their costs. For instance, a tea factory may prepare
tea in two forms: the one that can be immersed and that can not be immersed types of tea
for different segments of the market. The production cost may not be that much different
but the price difference may be significant.
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c. Time pricing: This involves varying prices seasonally. Typically this is done to encourage
demand by reducing prices at times when sales are seasonally low and by raising prices to
contain demand when it is strong and likely to outstrip supply.
Dear students, you studied about price discrimination in microeconomics course. It is important
to see further price discrimination. Who can use price discrimination, how can the firm
effectively use price discrimination, why firms use price discrimination, etc.? The following
paragraphs, try to answer these questions.
Why and How Firms Price Discriminate
Dear students, read the following tale.
A prince was once lost in the forest for many hours. Finally, he came upon a bar, where he was
recognized immediately. He ordered a light meal of fried eggs.
When he finished, the prince asked the barkeeper, "How much do I owe you for the eggs?"
The barkeeper replied, "Twenty-five rubles."
"Why such an exorbitant price?" asked the prince. "Is there a shortage of eggs in this area?"
"No, there is no shortage of eggs," the innkeeper replied. "We have plenty of eggs. But, here is a
shortage of princes.'’
Dear students, there are many firms that charge different prices for the same commodity or
service. Why firms do so? The answer is price discrimination pays.
WHY PRICE DISCRIMINATION PAYS
For almost any good or service, some consumers are willing to pay more than others. A firm that
sets a single price faces a trade-off between charging consumers who really want the good as
much as they are willing to pay and charging a low enough price that the firm doesn't lose sales
to less enthusiastic customers. As a result, the firm usually sets an intermediate price. A price-
discriminating firm that varies its prices across customers avoids this trade-off.
A firm earns a higher profit from price discrimination than from uniform pricing for two reasons.
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First, a price-discriminating firm charges a higher price to customers who are willing to pay
more than the uniform price, capturing some or all of their consumer surplus—the difference
between what a good is worth to a consumer and what the consumer paid—under uniform
pricing. Second, a price-discriminating firm sells to some people who were not willing to pay as
much as the uniform price.
We use a pair of extreme examples to illustrate the two benefits of price discrimination to firms
—capturing more of the consumer surplus and selling to more customers. These examples are
extreme in the sense that the firm sets a uniform price at the price the most enthusiastic
consumers are willing to pay or at the price the least enthusiastic consumers are willing to pay,
rather than at an intermediate level.
Suppose that the only movie theater in town has two types of patrons: college students and senior
citizens. The college student will see the Saturday night movie if the price is $10 or less, and the
senior citizens will attend if the price is $5 or less. For simplicity, we assume that there is no cost
in showing the movie, so profit is the same as revenue. The theater is large enough to hold all
potential customers, so the marginal cost of admitting one more customer is zero. Table 12.1
shows how pricing affects the theater's profit.
In panel a, there are 10 college students and 20 senior citizens. If the theater charges everyone
$5, its profit is $150 = $5 x (10 college students + 20 senior citizens). If it charges $10, the senior
citizens do not go to the movie, so the theater makes only $100. Thus if the theater is going to
charge everyone the same price, it maximizes its profit by setting the price at $5. Charging less
than $5 makes no sense because the same number of people goes to the movie as go when $5 is
charged. Charging between $5 and $10 is less profitable than charging $10 because no extra
seniors go and the college students are willing to pay $10. Charging more than $10 results in no
customers.
Table 5.1 A Theater's Profit Based on the Pricing Method Used
(a) No Extra Customers from Price Discrimination
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Pricing Profit from 10 Profit from 20 Total

College Students Senior Citizens Profit
Uniform, $5 $50 $100 $150
Uniform, $10 $100 $0 $100
Price discrimination* $100 $100 $200
(b) Extra Customers from Price Discrimination

Pricing Profit from 10 Profit from 5 Total
College Students Senior Citizens Profit
Uniform, $5 $50 $25 $75
Uniform, $10 $100 $0 $100
Price discrimination" $100 $25 $125
"The theater price discriminates by charging college students $10 and senior citizens $5.
Notes: College students go to the theater if they are charged no more than $10. Senior
citizens are willing to pay up to $5. The theater's marginal cost for an extra customer is
zero.
At a price of $5, the seniors have no consumer surplus: They pay exactly what seeing the movie
is worth to them. Seeing the movie is worth $10 to the college students, but they have to pay
only $5, so each has a consumer surplus of $5, and their total consumer surplus is $50.
If the theater can price discriminate by charging senior citizens $5 and college students $10, its
profit increases to $200. Its profit rises because the theater makes as much from the seniors as
before but gets an extra $50 from the college students. By price discriminating, the theater sells
the same number of seats but makes more money from the college students, capturing all the
consumer surplus they had under uniform pricing. Neither group of customers has any consumer
surplus if the theater price discriminates.
In panel b, there are 10 college students and 5 senior citizens. If the theater must charge a single
price, it charges $10. Only college students see the movie, so the theater's profit is $100. (If it
charges $5, both students and seniors go to the theater, but its profit is only $75.) If the theater
can price discriminate and charge seniors $5 and college students $10, its profit increases to
$125. Here the gain from price discrimination comes from selling extra tickets to seniors (not
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from making more money on the same number of tickets, as in panel a). The theater earns as
much from the students as before and makes more from the seniors, and neither group enjoys
consumer surplus. These examples illustrate that firms can make a higher profit by price
discriminating, either by charging some existing customers more or by selling extra units. Leslie
(1997) finds that Broadway theaters increase their profits 5 by price discriminating rather than
using uniform prices.
Who Can Price Discriminate
Not all firms can price discriminate. For a firm to price discriminate successfully, three
conditions must be met.
First, a firm must have market power; otherwise, it cannot charge any consumer more than the
competitive price. A monopoly, an oligopoly firm, a monopolistically competitive firm, or a
cartel may be able to price discriminate. A competitive firm cannot price discriminate.
Second, consumers must differ in their sensitivity to price (demand elasticities), and a firm must
be able to identify how consumers differ in this sensitivity. The movie theater knows that college
students and senior citizens differ in their willingness to pay for a ticket, and Disneyland knows
that tourists and natives differ in their willingness to pay for admission. In both cases, the firms
can identify members of these two groups by using driver's licenses or other forms of
identification.
Similarly, if a firm knows that each individual's demand curve slopes downward, it may charge
each customer a higher price for the first unit of a good than for subsequent units.
Third, a firm must be able to prevent or limit resales to higher-price-paying customers by

customers whom the firm charges relatively low prices. Price discrimination doesn't work if
resales are easy because the firm would be able to make only low-price sales. A movie theater
can charge different prices because senior citizens, who enter the theater as soon as they buy the
ticket, do not have time to resell it.
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Except for competitive firms, the first two conditions—market power and ability to identify
groups with different price sensitivities—frequently hold. Usually, the biggest obstacle to price
discrimination is a firm's inability to prevent resales. In some markets, however, resales are
inherently difficult or impossible, firms can take actions that prevent resales, or government
actions or laws prevent resales.
Preventing Resales
Resales are difficult or impossible for most services and when transaction costs are high. If a
plumber charges you less than your neighbor for clearing a pipe, you cannot make a deal with
your neighbor to resell this service. The higher the transaction costs a consumer must incur to
resell a good, the less likely those resales will occur. Suppose that you are able to buy a jar of
pickles for $1 less than the usual price. Could you practically find and sell this jar to someone
else, or would the transaction costs be prohibitive? The more valuable a product or the more
widely consumed it is, the more likely it is that transaction costs are low enough that resales
occur.
Some firms act to raise transaction costs or otherwise make resales difficult. If your college
requires that someone with a student ticket must show a student identification card with a picture
on it before being admitted to a sporting event, you'll find it difficult to resell your low-price
tickets to nonstudents, who must pay higher prices. When students at some universities buy
computers at lower-than-usual prices, they must sign a contract that forbids them to resell the
computer.
Similarly, a firm can prevent resales by vertically integrating: participating in more than one
successive stage of the production and distribution chain for a good or service. Alcoa, the former
aluminum monopoly, wanted to sell aluminum ingots to producers of aluminum wire at a lower
price than was set for producers of aluminum aircraft parts.
Governments frequently aid price discrimination by preventing resales. State and federal
governments require that milk producers, under penalty of law, price discriminate by selling milk
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at a higher price for fresh use than for processing (cheese, ice cream) and forbid resales.
Government tariffs (taxes on imports) limit resales by making it expensive to buy goods in a
low-price country and resell them in a high-price country. In some cases, laws prevent such
reselling explicitly.
Not all Price Differences are Price Discrimination
Not every seller who charges consumers different prices is price discriminating Hotels charge
newlyweds more for bridal suites. Is that price discrimination?
Some hotel managers say no. They contend that honeymooners, unlike other customers, always
steal mementos, so the price differential reflects an actual cost differential.
The price for all issues of TV Guide magazine for a year is $103.48 if you buy it at the
newsstand, $56.68 for a standard subscription, and $39.52 for a college student subscription. The
difference between the newsstand cost and the standard subscription cost reflects, at least in part,
the higher cost of selling at a newsstand rather than mailing the magazine directly to customers,
so this price difference does ot reflect pure price discrimination. The price difference between
the standard subscription rate and the college student rate reflects pure price discrimination
because the two subscriptions are identical in every respect except price.
Types of Price Discrimination
There are three main types of price discrimination. With perfect price discrimination—also
called first-degree price discrimination—the firm sells each unit at the maximum amount any
customer is willing to pay for it, so prices differ across customers, and a given customer may pay
more for some units than for others.
With quantity discrimination (second-degree price discrimination), the firm charges a different
price for large quantities than for small quantities, but all customers who buy a given quantity
pay the same price. With multimarket price discrimination (third-degree price discrimination),
the firm charges different groups of customers different prices, but it charges a given customer
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the same price for every unit of output sold. Typically, not all customers pay different prices—
the firm sets different prices only for a few groups of customers. Because this last type of
discrimination is the most common, the phrase price discrimination is often used to mean
multimarket price discrimination.
5.4.4. Psychological pricing
Psychological pricing means setting prices that have special appeal to target customers. Some
people think there are whole ranges of prices that potential customers see as the same. So price
cut in these ranges do not increase the quantity sold. But below this range, customers may buy
more. Then, at even lower prices, the quantity demanded stays the same again - and so on.
Pricing research shows that there are such demand curves as shown in Figure 5.6 below.
Figure 5.6 Demand curve when psychological pricing isQappropriate
5.4.5. Prestige pricing
Prestige pricing is setting a rather high price to suggest high quality or high status. Some target
customers want the best, so they will buy at a high price. But if the price seems cheap, they
worry about quality and don't buy. Prestige pricing is more common for luxury products - such
as furs, jewelry and perfume.
P1
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Qe Q
Figure 5.7 Demand curve showing a prestige situation
It is also common in service industries - where the customer cannot see the product in advance
and relies on price to judge its quality. Such response by customers to price changes may give
the demand curve an unusual shape as depicted below in Figure 5.7. Instead of a normal down-
ward sloping curve, the curve goes down for a while and then bends back to the left again. Below
a certain level of price such as below P 1 customers feel the item is of poor quality and they look
for another item with higher price. As a result, very low price reduce sales.
5.4.6. Price lining
Price lining is setting a fewer price levels for a product line and then marking all items at these
prices. This approach assumes that they expect to pay for a product. For example most pair of
shoes is priced between 100 and 160 Birr. In price lining, there are only a few prices within this
range. Pair of shoes will not be sold for Birr 100, 101, 102, 103, 104 and so on up to 150. They
might be priced at levels - Birr 100, 110, 120, 130, 140 and 150. Price lining has advantage in
that it is in line with customers’ expectations. Moreover, it simplifies recording, inventory
management, and sales management.
5.4.7. Complementary product pricing
Complementary product pricing is setting prices on several products as a group. This many lead
to one product being priced very low so that the profits from another product will increase and
increases the product group’s total profits. A new Gillette shaver, for example, may be priced
low to sell the blades, which must be replaced regularly.
5.4.8. Product-bundle pricing
A firm that offers its target market several different products may use product-bundle pricing -
setting one price for a set of products. A fruit farm can prepare fruit-bundle which contains a
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mixture of different fruit types mixed as a bundle of 2 or 3 kilos of - orange, lemon, and other
similar types of fruits. This may be suitable even for customers in that they may want some but
few amount from each type of fruits.
CHAPTER SIX
INTRODUCTION ABOUT VALUE CHAIN
6.1. Basic concepts of Value Chain
A value chain is the full range of activities required to bring a product from conception, through
the different phases of production and transformation. Flow of seed to farmers and grain or
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tubers to the market occurs along the chains. These can be referred to as value chains because as
the product moves from chain actor to chain actor e.g. from producer to intermediary to
consumer it gains value. So, the starting point of the value chains is market intelligence and they
are demand driven. Such issues come to view by asking questions like what are the needs in the
market (consumer, export market, major clients like retailer or food industry).
Value chain players organize/align the work among themselves based on market signals and
capabilities. They are always on the look-out to build new and complimentary capabilities (e.g.,
aggregators and traders focus to build primary processing, packaging and other value add
capabilities). This implies that value chains can be competitive only when they innovate and not
by maintaining the status-quo. With innovation a larger pie is created which provides greater
incentives to share which in turn fosters further innovation (as a result a new and higher value
product would come out of the chain). This will result in innovatively processed products such as
fresh fruits juices, smoothies… coming out of the fresh produce value chain.
In the value chain approach innovation drives the chain facilitates. There is a need to deliver
quality (as desired by the market), for continuous improvement and setting and upgrading the
standards. The operational elements like forecasting, inventory, production planning and
everything else are still very important. However, they are designed based on market-demand
and not on capacities. Under specific circumstances, depending on the type of product and
available seasons, an optimal push-pull combination is used (e.g., raw material productions could
be push-based because of seasonality, but value addition better be pull based). A competitive
value chain identifies and works towards achieving the right trade-offs in push/pull based
production plans. The value chains survive and prosper on work alignment and incentive
alignment. In essence, the value chains are by definition innovative, value & market-driven and
follow an optimal push-pull mechanism.
6.2. Value Chain Actors
Value chain approaches have been used to analyze the dynamics of markets and to investigate
the interactions and relationships between the chain actors. A value chain is made up of a series
of actors (or stakeholders) from input (e.g. seed) suppliers, producers and processors, to
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exporters and buyers engaged in the activities required to bring product from its conception to its
end use. Value chain stage defines the various chain actors and their roles for the functioning of
the entire chain.
Actor is a corporate person, a natural person or other entity, that is able to influence its direct
surroundings. Actors are usually defined trough their input-output transformations and inter-
actor transactions. The concept can be nested, i.e. a chain or network can also be considered as
an actor within a larger network. The various actors in the value chain can be grouped under
three levels or stages based on the roles they play. They are:
1. Value chain main actors: The chain of actors who directly deal with the products. Activities
of value chain main actors regarding a specific product or group of products involves producing,
processing, trade and owning the produces. Actors in a value chain may include input suppliers,
producers, itinerant collectors (small and mobile traders who visit villages and rural markets),
assembly traders (also called primary wholesalers who normally buy from farmers and other
itinerant collectors and sell to wholesalers), wholesalers (who deal with larger volumes than
collectors and assemblers and often perform important storage functions), retailers (who
distribute products to consumers), and processors (firms and individuals involved in the
transformation of a product).
2. Value chain supporters: The services provided by various actors who never directly deal with
the product, but whose services add value to the product. Closely related to the concept of value
chains is the concept of business development services or value chain supporters. These are
services that play supporting role to enhance the operation of the different stages of the value
chain and the chain as a whole. In order for farmers to engage effectively in markets, they need
to develop marketing skills and receive support from service providers who have better
understanding of the markets, whether domestic or international. Local business support services
are, therefore, essential for the development and efficient performance of value chains. The
business development services can be grouped into infrastructural services; production and
storage services; marketing and business services; and financial services.
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Basic infrastructural services include market place development, roads and transportation,
communications, energy supply, and water supply.
Production and storage services in value chain include input supply, genetic and production
material from research, farm machinery services and supply, extension services, weather forecast
and storage infrastructure.
Marketing and business support services include market information services, market
intelligence which tells a company about its environment in the market (Supply and demand for
its products, Drivers that influence demand, Who the buyers and suppliers are, Overall economic
outlook for the product), technical and business training services, facilitation of linkages of
producers with buyers, organization and support for collective marketing.
Financial services include credit and saving services, banking services, risk insurance services,
and futures markets.
Nevertheless, roles of the business development services have mostly been neglected. The
neglect was a result of the mistaken assumption that profitable business development services
will emerge as value chains develop or that the public will provide business development
services where they are needed and when markets are insufficient to provide profitable niches for
competitive services to develop.
3. Value chain influencers: These are the third group of chain actors. These include the
regulatory framework, policies, etc. Specific policy and regulatory service elements influencing
value chain performance include land tenure security, market and trade regulations, investment
incentives, legal services, and taxation.
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CHAPTER SEVEN
VALUE CHAIN ANALYSIS (VCA)
7.1. The overview of Value Chain Analysis
Value chain analysis is an attempt to assess or estimate how competitive a selected commodity
or product is likely to be in a target market, even before it gets there. Value chain analysis
describes the activities within and around an organization, and relates them to the analysis of the
competitive strength of the organization. Therefore, it evaluates the value each particular activity
adds to the organizations products or services. The value chain analyses is the base for value
chain improvement, development or the setup of complete new value chains. This idea was built
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upon the insight that an organization is more than a random compilation of machinery,
equipment, people and money. Only if these things are arranged into systems and systematic
activities it will become possible to produce something for which customers are willing to pay a
price. Porter argues that the ability to perform particular activities and to manage the linkages
between these activities is a source of competitive advantage.
Value chain analysis plays a key role in understanding the need and scope for systemic
competitiveness. The analysis and identification of core competences will lead the firm to
outsource those functions where it has no distinctive competences.
Value chain analysis is useful for identifying constraints and opportunities for the provision of
financial services. The process of value chain analysis helps to identify demand for services
within value chains; recognizes that optimal levels of investment requirement of a range of
services from a range of providers, including enabling institutions and value chain actors; and
prioritizes needs for donor intervention in financial services and limits of Value Chain Finance
are tied to the quality of cooperation between actors.
There are four major basic concepts in agricultural value chain analysis: Understanding the value
chain and context; Development of interventions and innovations; Testing and implementation;
and Evaluation and recommendations for improvement. Since value chains are composed of
hierarchy of chain stages, the concept of stages of production is basic in value chain analysis.
Closely related to the stages of production is the concept of vertical coordination.
Value chain analysis describes the activities within and around an organization, and relates them
to the analysis of the competitive strength of the organization. Therefore, it evaluates which
value each particular activity adds to the organization’s products or services. This idea was built
upon the insight that an organization is more than a random compilation of machinery,
equipment, people and money. Only if these things are arranged into systems and systematic
activities it will become possible to produce something for which customers are willing to pay a
price. Porter argues that the ability to perform particular activities and to manage the linkages
between these activities is a source of competitive advantage.
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Value chain analysis facilitates an improved understanding of competitive challenges, helps in

the identification of relationships and coordination mechanisms, and assists in understanding
how chain actors deal with powers and who governs or influences the chain. Developing value
chains is often about improving access to markets and ensuring a more efficient product flow
while ensuring that all actors in that chain benefit out of it. Changing agricultural contexts, rural
to urban migration, and resulting changes for rural employment, the need for pro-poor
development, as well as a changing international scene (not least the increase in oil prices) all
indicate the importance of value-chain analysis.
Value chain analysis plays a key role in understanding the need and scope for systemic
competitiveness. The analysis and identification of core competences will lead the firm to
outsource those functions where it has no distinctive competences.
In summary, the concept of value chain provides a useful framework to understand the
production, transformation and distribution of a commodity or group of commodities. With its
emphasis on the coordination of the various stages of a value chain, value chain analysis attempts
to unravel the organization and performance of a commodity system.
The issues of coordination are especially important in agricultural value chains, where
coordination is affected by several factors that may influence product characteristics, especially
quality. The value chain framework also enables us to think about development from a systems
perspective.
Key issues that can be addressed through the value chain analysis: -
 Share of benefits and costs from value chains and market development.
 Distribution of added value along the chain.
 Market share of the different actors and corresponding size of sub-sector.
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 Institutional and legal framework, such as regional production and processing zones,
trade protocols, regulations on movement of people, agriculture marketing policies and
financial institutions.
 Growth potentials (nodes with market potential).
 Infrastructure development.
 Potential for poverty reduction and rural income generation.
 Potential for sustained food supply at affordable competitive prices for consumers.
 Potential for maximization of returns on capital investment at different levels of the

value chain strategy.
 Potential for strengthening sector and regional complementarities and interdependence

through implementation of horizontal and vertical integration approaches in the
commodity production value chains strategy.
7.2. Purposes of value chain analysis
Value chain analysis is conducted for a variety of purposes. The primary purpose of value chain
analysis, however, is to understand the reasons for inefficiencies in the chain, and identify
potential leverage points for improving the performance of the chain, using both qualitative and
quantitative approaches. Value chain analysis is a useful analytical tool that helps understand
overall trends of industrial reorganization and identify change agents and leverage points for
policy and technical interventions. It is increasingly used by donors and development assistance
agencies to better target their support and investments in various areas such as trade capacity,
enterprise competitiveness, income distribution and equity among value chain participants.
Value chain analysis involves breaking a chain into its constituent parts in order to better
understand its structure and functioning. Thus, the analysis consists of identifying chain actors at
each stage and discerning their functions and relationships; determining the chain governance, or
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leadership, to facilitate chain formation and strengthening; and identifying value adding activities
in the chain and assigning costs and added value to each of those activities. The flows of goods,
information and finance through the various stages of the chain are evaluated in order to detect
problems or identify opportunities to improve the contribution of specific actors and the overall
performance of the chain.
By going beyond the traditional narrow focus on production, value chain analysis scrutinizes
interactions and synergies among actors and between them and the business and policy
environment. Thus, it overcomes several important limitations of traditional sector assessments
which tend to ignore the dynamic linkages with and among productive activities that occur
outside the particular sector under assessment or involve informal operations.
Value chain analysis also reveals the dynamic flow of economic, organizational and coercive
activities involving actors within different sectors. It shows that power relations are crucial to
understanding how entry barriers are created, and how gain and risks are distributed. It analyses
competitiveness in a global perspective. By revealing strengths and weaknesses, value chain
analysis helps participating actors to develop a shared vision of how the chain should perform
and to identify collaborative relationships which will allow them to keep improving chain
performance. The latter outcome is especially relevant in the case of new manufacturers –
including poor producers and poor countries –that are seeking to enter global markets in ways
that can ensure sustainable income growth.
Value chain analyses are conducted through a combination of qualitative and quantitative
methods, featuring a further combination of primary survey, focus group work, participatory
rapid appraisals (PRAs), informal interviews, and secondary data sourcing. The information is
useful by itself to understand the linkages and structure of the value chain and serves as the basis
for identifying many of the key constraints and policy issues that require further exposition.
7.3. Steps in Value Chain Analysis
As noted above value chain analysis is a useful tool for working out how you can create the
greatest possible value for your customers. In business, we are paid to take raw inputs, and to add
value to them by turning in to something of worth to other people.
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Value chain analysis is a process that requires four interconnected actions: data collection and
research, value chain mapping, analysis of opportunities and constraints, and vetting of findings
with stakeholders and recommendations for future actions. These four actions are not necessarily
sequential and can be carried out simultaneously.
The value chain team collects data and information through secondary and primary sources by
way of research and interviews. Mapping helps to organize the data, and highlights the market
segments, participants/actors, their functions and linkages. The collected data is analyzed using
the value chain framework to reveal constraints within the chain that prevent or limit the
exploitation of end market opportunities. The resulting analysis of opportunities and constraints
should be vetted with stakeholders through events such as workshops, focus groups or
“reporting-out” days. The steps are explained below.
Step One: Data Collection
Good value chain analysis begins with good data collection, from the initial desk research to the
targeted interviews. The value chain framework—that is, the structural and dynamic factors
affecting the chain—provides an effective way to organize the data, prioritize opportunities and
plan interventions.
The desk research consists of a rapid examination of readily available material. The aim is to
familiarize the team with the industry, its market and the business environment in which it
operates, as well as to identify sources for additional information. Information such as statistics
on exports/imports, consumption reports, global trade figures, etc., can be obtained through the
Internet, phone calls and documents from trade, commerce and industry ministries, specialized
industry journals, and professional and trade association newsletters. Once the desk research is
conducted, an initial value chain map can be drafted for refinement during the primary research
phase.
Interviews are conducted with 1) firms and individuals from all functional levels of the chain,
and 2) individuals outside the value chain such as writers, journalists or economists. In addition
to providing information about the movement of product and the distribution of benefits, the
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interviews should inform on value chain actors’ current capacity to learn; how information is
exchanged among participants; from where they learn about new production techniques, new
markets and market trends; and the extent of trust that exists among actors. Interviews can help
to identify where chain participants see opportunities for and constraints to upgrading. Missing
or inadequate provision of services necessary to move the value chain to the next level of
competitiveness can be identified locally, regionally or nationally.
In addition to individual interviews, focus group discussions are a useful way to explore
concepts, generate ideas, determine differences in opinion between stakeholder groups and
triangulate with other data collection methods. The group may consist of 7-10 people who
perform the same or a similar function in the value chain. Guided discussion better captures the
social interaction and spontaneous processes that inform decision making, which is often lost in
structured interviews.
The qualitative data gathered by these methods will reveal dynamic factors of the value chain
such as trends, incentives and relationships. To complement this, quantitative analysis of the
chain is necessary to provide a picture of the current situation in terms of the distribution of
value-added, profitability, productivity, production capacity and benchmarking against
competitors. Analyzing these factors highlights inefficiencies and areas for reducing cost.
Step Two: Value Chain Mapping
Value chain mapping is the process of developing a visual depiction of the basic structure of the
value chain. A value chain map illustrates the way the product flows from raw material to end
markets and presents how the industry functions. It is a compressed visual diagram of the data
collected at different stages of the value chain analysis and supports the narrative description of
the chain.
Porter distinguished two important elements of modern value chain analysis: The various
activities which were performed in particular links in the chain. Here he drew the distinction
between different stages of the process of supply (inbound logistics, operations, outbound
logistics, marketing and sales, and after sales service), the transformation of these inputs into
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outputs (production, logistics, quality and continuous improvement processes), and the support
services the firm marshal to accomplish this task (strategic planning, human resource
management, technology development and procurement).
The importance of separating out these various functions is that it draws attention away from an
exclusive focus on physical transformation.
Porter distinguishes between primary activities and support activities. Primary activities are
directly concerned with the creation or delivery of a product or service. They can be grouped into
five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and
service. Each of these primary activities is linked to support activities which help to improve
their effectiveness or efficiency. There are four main areas of support activities: procurement,
technology development (including R&D), human resource management, and infrastructure
(systems for planning, finance, quality, information management etc.).
Some thought about the linkages between activities: These linkages are crucial for corporate
success. The linkages manifested through flows of information, goods and services, as well as
systems and processes for adjusting activities. A certain commodity value chain can be mapped
as:
Figure 7.1 : A comprehensive value chain map
The purpose of a visual tool in the analysis process is to develop a shared understanding among
value chain stakeholders of the current situation of the industry. The mapping exercise provides
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an opportunity for multi-stakeholder discussions to reveal opportunities and bottlenecks to be

addressed in subsequent stages of the chain development. Maps are also used to identify
information gaps that require further research.
Step Three: Analysis of Opportunities and Constraints using the Value Chain Framework
Step three uses the value chain framework as a lens through which the gathered data is analyzed.
The framework is a useful tool to identify systemic chain-level issues rather than focus on firm-
level problems. While interviews give the value chain team the chance to gather information
from individual firms, the value chain framework helps to organize this information in such a
way that the analysis moves from a firm-level to a chain-level perspective. If the chain cannot be
competitive, the success of individual firms is compromised. Therefore, taking a systemic
approach is key to sustaining the competitiveness of the chain and the micro and small
enterprises (MSEs) operating within it.
The factors affecting performance of the chain are further analyzed to characterize opportunities
and constraints to competitiveness. These factors are classified under structure and dynamic
components. The structure of the value chain influences the dynamics of firm behavior and these
dynamics influence how well the value chain performs in terms of two critical outcomes: value
chain competitiveness and MSE benefits.
Structure
The structure of a value chain includes all the firms in the chain and can be characterized in
terms of five elements:
1. End market opportunities at the local, national, regional and global levels—the
framework prioritizes this element because demand in end markets defines the
characteristics of a successful product or service.
2. Business and enabling environment at the local, national and international levels—this
includes laws, regulations, policies, international trade agreements and public
infrastructure (roads, electricity, etc.) that enable the product or service to move through
the value chain.
107

3. Vertical linkages between firms at different levels of the value chain—these are critical
for moving a product or service to the end market and for transferring benefits, learning
and embedded services between firms up and down the chain.
4. Horizontal linkages between firms at the same level of the value chain—these can
reduce transaction costs, enable economies of scale, increase bargaining power, and
facilitate the creation of industry standards and marketing campaigns. E.g. cooperatives.
5. Supporting markets—these include financial services, cross-cutting services (e.g.,
business consulting, legal advice and telecommunications) and sector-specific services
(e.g., irrigation equipment, design services for handicrafts).
Dynamics
The participants in a value chain create the dynamic elements through the choices they make in
response to the value chain structure. These dynamic elements include:
1. Upgrading—increasing competitiveness at the firm level through product development and

improvements in production and marketing techniques or processes
2. Inter-firm cooperation—the extent to which firms work together to achieve increased
industry competitiveness
3. Transfer of information and learning between firms—this is key to competitiveness since
upgrading is dependent on knowledge of what the market requires and the potential returns
on investments in upgrading.
4. Power exercised by firms in their relationships with each other—this shapes the incentives
that drive behavior and determines which firms benefit from participation in an industry and
by how much
Each plays a role in influencing value chain competitiveness. Using a table format, these
factors of the value chain framework can be evaluated in terms of offering opportunities for
upgrading and the constraints to taking advantage of these opportunities.
Value chain Framework
Who are the members? Who performs which

108 process?

Chai Chain
Chain Chain business
n perform
Figure 7.2: Value chain framework
Step Four: Vetting Findings of Chain Analysis through Stakeholder Workshops
Value chain analysis helps develop a private-sector vision to reflect stakeholders’ interest in
improving the efficiency and competitiveness of the chain. The fourth step, vetting findings, uses
value chain analysis through a structured event (or series of events) like a workshop or reporting-
out day to facilitate discussion with and among selected participants.
The objective of these events is to bring participants together who are responsible for critical
market functions, service provision, and the legal, regulatory and policy environment. The goal
is to have these participants—who have an incentive to drive investments in upgrading—to
develop and assist in implementing a private sector-led competitiveness strategy. To develop this
strategy, the stakeholders will need to prioritize the opportunities and constraints identified
during the value chain analysis. With an open format, such structured events foster buy-in to the
analysis process.
Participants are selected based on the role they play in the value chain, or their responsibility for
critical market functions. There should also be MSE, medium and larger firm and association
representatives who, during the interview phase, exhibited an understanding of the issues related
to the value chain (especially the opportunities), a strong interest in the types of questions posed
during the interview, and leadership skills among peers or the community.
Vetting events can take on several forms from simple one-day reporting-out sessions to more
structured workshops that stretch to two or three days. The events are planned to reinforce the
109

importance of knowing and understanding the end market. In presenting the findings of the value
chain analysis, workshop leaders should stress that to remain competitive, stakeholders and other
participants must continuously learn what end markets demand in terms of product
specifications, quality, and other requirements.
It can be powerful to have a series of buyers present at the workshop. Where not possible, a
phone call or pre-recorded video interview can be an effective means for stakeholders to see and
hear directly from the buyer.
The event should include facilitated discussions, review and adjustments of value chain map and
a review of the analysis table. For this exercise, it is recommended that the completed table be
projected on a screen, and additions and modifications made during discussions inserted with the
computer projecting the table. This assures a participatory process and on-the-spot adjustment
witnessed by attending participants. If changes are made, the updated table can be immediately
printed and distributed to participants before they leave.
In environments characterized by a number of donor partners working with the same group of
firms, burn-out and skepticism particularly among the most important change drivers is likely. In
some instances, the firms most important to driving change may not attend a full-day workshop
even though they may be highly committed to the upgrading process and strategy for making the
industry more competitive. If time allows, the analysis team can meet with these firms in
advance of the workshop to convince them of the value of the competitive planning process. If
this is not possible, the analysis team should meet with these firms soon after the workshop to vet
findings and secure buy-in or commitment to the industry competitiveness planning process.
In most industries, it is rather unusual that a single company performs all activities from product
design, production of components, and final assembly to delivery to the final user by itself. Most
often, organizations are elements of a value system or supply chain. Hence, value chain analysis
should cover the whole value system in which the organization operates. Within the whole value
system, there is only a certain value of profit margin available. This is the difference of the final
price the customer pays and the sum of all costs incurred with the production and delivery of the
product/service (e.g. raw material, energy etc.). It depends on the structure of the value system,
110

how this margin spreads across the suppliers, producers, distributors, customers, and other
elements of the value system. Each member of the system will use its market position and
negotiating power to get a higher proportion of this margin. Nevertheless, members of a value
system can cooperate to improve their efficiency and to reduce their costs in order to achieve a
higher total margin to the benefit of all of them (e.g. by reducing stocks in a Just-In-Time
system). For instance, hierarchy firms are vertically integrated, so that they can directly control
all or most of the activities of the chain
Some value chains can best be described as balanced networks. Firms form networks and in a
balanced network the power relations among them are fairly equal, no one firm or group of firms
dominates the network. In balanced networks supplier and buyer jointly define the product and
combine complementary competencies. An example might be collaboration between producers
of ‘eco-friendly’ knitted fabric and garment manufacturers who make this fabric into fashion
garments. Since both are involved in high value-added production, they can work together more
or less as equals.
Other value chains are governed by lead firms. We call these directed networks. The lead firms
do not merely buy goods in the market. Rather they specify what is to be produced by whom, and
they monitor the performance of the producing firms. In some cases, the networks are directed,
or “driven”, by large producers such as transnational corporations or other large integrated
industrial enterprises. The automobile industry is a good example of a producer driven value
chain. The large automobile companies dominate the chain by setting the specifications that must
be followed by firms joining their networks of component suppliers.
Other chains are driven by the buyers of the products. In clothing and footwear, many leading
brand-name companies do no production themselves. Instead, they concentrate on design and
marketing. Their strength as buyers enables them to dominate certain value chains. They
determine what fabrics will be used, what styles will be produced, and in what colors.
Finally, some chains are characterized by vertically integrated firms. In these cases, firms, acting
through their own decision-making hierarchy, can directly control chain activities.
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The End
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Agricultural Marketing and Value Chain Management

COLLEGE OF AGRICULTURE AND ENVIRONMENTAL SCIENCES

SCHOOL OF AGRICULTURAL ECONOMICS AND AGRIBUSINESS

Agricultural Marketing and Value Chain Mgt. (FSPT4201)

Haramaya University, Ethiopia

UNIT ONE: INTRODUCTION

Haramaya University, Department of Food Science and Post-Harvest

“Marketing is more than selling or advertising”

‘A knapsack sprayer market’

Haramaya University, Department of Food Science and Post-Harvest

1.2. Definitions of Marketing and Agricultural Marketing

Before defining it is important to note that there is no universally accepted definition of

Haramaya University, Department of Food Science and Post-Harvest

Marketing is a total system of business activities designed to plan, price,

This definition mainly focuses on the effectiveness of the market.

Haramaya University, Department of Food Science and Post-Harvest

Marketing is the performance of activities that seek to accomplish an organization’s objectives

Others focus on the function of marketing.

This definition has two problems:

Haramaya University, Department of Food Science and Post-Harvest

 Once again, remember that there is no universally accepted definition of marketing.

Haramaya University, Department of Food Science and Post-Harvest

1.3. Core Concepts of Marketing

Needs, Products Value, cost Exchanges

Figure 1.1 the core concepts of marketing

1.3.1. Needs, wants and demand

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Products (goods, services and ideas)

Haramaya University, Department of Food Science and Post-Harvest

Marketing, Production and Utilities

Haramaya University, Department of Food Science and Post-Harvest

Haramaya University, Department of Food Science and Post-Harvest

Haramaya University, Department of Food Science and Post-Harvest

Figure 1.2 Types of utility and how they are provided

1.1.1. Value, cost and satisfaction

1.1.2. Exchange and transaction

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Industry (a Goods/services Markets (a collection

Haramaya University, Department of Food Science and Post-Harvest

Goods and services Goods and services

Haramaya University, Department of Food Science and Post-Harvest

1.3. Marketing Links Producers and Consumers

Haramaya University, Department of Food Science and Post-Harvest

Specialization and division of labor result in heterogeneous supply capabilities

and sell in large quantities. economical to produce, while consumers are

Producers value goods and services in terms of

Figure 1. 5 Marketing links producers and consumer

1.4. Importance of Marketing

Haramaya University, Department of Food Science and Post-Harvest

1.1. Marketing and Economic System

1.7.1. Planned economy

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1.7.2. Market economy

1.7.3. Mixed economy

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UNIT TWO: AGRICULTURAL PRODUCTION AND MARKETING

Objective of agricultural marketing

Haramaya University, Department of Food Science and Post-Harvest

Consumers Food and other agricultural products

Middlemen Higher profit

Producers/ Higher return

Public/society Efficient movement of agricultural

Figure 1.6 Interests of the different participants of agricultural marketing