Marketing Channels

Marketing channel refers to an inter-organizational system made up of a set of

interdependent institutions and agencies involved in the task of moving products from
their point of production to the point of consumption. A fairly well-established channel
must be available to enable consumers to secure the products they demand. The idea
focuses on delivery. Consumers will not be able to appreciate products unless they are
delivered to an accessible place. Owing to the widening gap between the farm and the
consumer brought about by economic growth, direct sale by producers to final consumers
has now become a rarity. A product often passes through a number of intermediaries
before reaching the consumers. In product movement, therefore, the universal need for
marketing channels become inevitable.

Nature of Marketing Channels

Marketing channels vary according to the type of commodity handled, time and
location. One product in a particular time and place will definitely require a unique set-
up of institutions and agencies, assuming that it is distributed through the channel system.
These agencies and institutions (intermediaries) that form the marketing channel also
change through time. Their number might increase or decrease, depending on the existing
economic conditions. Consider a simple case of a marketing channel with only one
middleman as shown below. As

Producer ----------- Retailers ------------ Consumers

the market grows and develops, wholesaler-retailers or wholesalers might enter the
channel and become additional intermediaries in the movement of the product. This entry
into the system does not incite competition among intermediaries, but rather, induces
cooperative relationship among channel members. Competition only arises between entire
networks of marketing channels.

Channel members also follow explicit rules to ensure the viability of the system.
These rules include the functions of payment, delivery, standardization and the like.
Although not formalized, these rules are followed because a channel member behaves as
one expects him to. To facilitate the proper functioning of the system, the role of each
channel member must be clearly defined. A mutual understanding among members
regarding type of clientele, territory to be served, and functions or activities performed,
are important in the efficient functioning of the system. Once this is not met, the viability
of the system is jeopardized.

Reducing the number of intermediaries does not assure a reduction in the

distribution costs. Producers with access to cheap and efficient marketing channels will
definitely earn higher profits through low distribution costs. Consumers, on the other
hand, will benefit from this situation through low-priced commodities.

However, on account of scrambled merchandising and integrated marketing, no

single marketing channel assures an optimum profit. The choice of a marketing channel
to be used becomes a problem to the producer. In actuality, producers employ several
channels and their choice is influenced by the following factors:
1. Nature of the product

Perishability. For perishable products, such as fruits and vegetables that must be
transported at long distances, a longer distribution channel is required. On the
other hand, locally produced and marketed goods are sold directly to minimize
spoilage.

Unit value. Products that command higher values per unit have a greater
possibility of direct marketing as long as the price is high enough to cover
marketing costs in addition to the cost of production. Products with low unit values
must be sold in lots or must employ the traditional channels of distribution.

Newness of the product. Newly-introduced products in the market often call for the
development of a new marketing channel. However, not all newly-introduced
products require new distribution channels. Existing channels may be adopted as
long as effective distribution at the least cost can be maintained.

2. Nature of the market

Consumer buying habits. Convenience goods generally require the services of

intermediaries, while shopping and specialty goods can be marketed directly.

Size of average sale. Small average sale to the ultimate consumer gives the
producer less chance for direct selling. On the other hand, the bigger average sale
allows the producer a mark-up large enough to enable him to sell directly.

Total sales volume. A producer may opt to eliminate the services of the middlemen
only if the total sales volume is substantial enough. If his sales volume is very
small, he may decide to utilize agent-middlemen rather than the typical wholesale
channels.

Concentration of purchases. If the market for a product is concentrated, direct

marketing is advisable. However, if the market is scattered, it is better to use the
existing channels of distribution.

Seasonality of sales. It is recommended to use existing channels of distribution if

the consumption or production of the product is seasonal. Since the producer of
seasonal goods has fewer contacts in the market, he must depend upon middlemen
to distribute his commodity.

In choosing the most efficient channel, the producer must consider the cost
involved is using each channel, the investments required and the potential net
profit from sales. He may decide to distribute the product through established
middlemen who are specialized in their marketing functions and thereby minimize
costs. Direct selling can also be employed as long as the producer can finance the
investments required. This method, however, involves more out-of-pocket costs.
Marketing Channels of Selected Farm Products

There are seven different types of intermediaries which can be identified

according to their contributions and functions. These are the contract-buyers,
wholesalers, commission agents, wholesaler-retailers, assembler-wholesalers,
butcher-retailers and retailers.

Contract-buyers. This type of intermediaries is most prevalent in the fruits

and vegetable channels. Buying contracts between the buyer and the producer are
made even before the product is harvested. Once an agreed price is set and a
contract is made, the contract buyer from there on takes care of the plants until
harvest. All expenses, therefore, are now borne by the buyers including pre-
harvest and post-harvest expenses and risks.

When there are several contract buyers, bidding is commonly employed

and the contract is awarded to the highest bidder.

Wholesalers. These are merchant middlemen who sell to retailers and

other merchants in significant amounts but not to ultimate consumers. Products
are usually sold in large quantities or on wholesale basis. Wholesalers are usually
located in urbanized areas.

Commission agents. These are middlemen who buy products in localized

areas. They buy products for other middlemen such as the viajero or assembler-
wholesaler and in return are given commissions as payment for their services.
They usually buy from the producers and other middlemen in the area, assemble
the products and sell them to the viajeros.

Wholesaler-retailers. These are business operators who get the produce in

large quantities either from wholesalers or contract buyers. They sell mainly to
retailers on wholesale basis but they also retail the rest. They usually maintain
permanent stalls in the market.

Assembler-wholesalers. They buy from producers and contract buyers,

assemble the products in large volume and transport them to market centers. They
are locally known as the viajeros. They also sell products on wholesale basis.
Butcher-retailers. These are middlemen who buy live poultry and livestock
from the wholesaler or direct from the producer and sell them in dressed or
carcass form. Selling is commonly on retail basis, per kilo dressed or carcass
weight. They have permanent stalls in the market and sell directly to consumers.

Retailers. These are product handlers who serve as the last link in the
marketing channel. They have greater utility both in rural and urban centers by
selling directly to consumers. They occupy permanent stalls in the market or on
roadsides. Selling is on retail basis and conducted almost everyday.
Marketing Margins and Costs

Marketing margin refers to the difference between prices at different levels

of the marketing system. It can also be defined as the difference between what the
consumer pays and what the producer receives for his agricultural produce.
Known as “price spread,” the marketing margin between farm and retail may be
expressed in notation as PR - PF.

Components of the Marketing Margin

A general misconception about marketing margin concerns its size. It is

alleged that a wide margin means high prices to consumers and low prices and
incomes to producers. In other words, a wide margin implies an inefficient
marketing system, and vice versa. Yet we cannot jump outright to this conclusion
unless we have examined closely the components of the marketing margin, as these
components can provide us information on what causes the size of the margin.

The value of the marketing margin may be subdivided into different

components. One way of subdividing this margin is in terms of its returns to the
factors of production used in providing the processing and marketing services
rendered between the farmers and consumers. These include wages as a return to
labor; interest as a return to borrowed capital; rent as a return to land and
buildings; anl profit as a return to entrepreneurship and risk capital. All these
things are referred to as marketing costs.

Another way of subdividing marketing margin is to categorize returns

according to the various agencies and institutions involved in the marketing of
products such as: the return to retailers for their services, to wholesalers for their
activities, to processors for their manufacturing activities and to assemblers for the
work they perform. This subdivision is referred to as marketing charges.

Types of Margins

Marketing margins may be of absolute or percentage type or a combination

of these two types.

Absolute constant margin. Absolute margins are expressed in terms of pesos

and are constant over all quantity ranges. In other words, regardless of the volume
marketed, the absolute peso difference between prices at various levels remains
constant.

Percentage margin. On the other hand, percentage margin is the absolute

difference in price, i.e., the absolute margin divided by the selling price. Thus, if a
retailer purchased a kilo of tomatoes for P2.70/kilo and sold it for P3.50/kilo, the
absolute margin would be P0.80 and the percentage margin would be 23 percent.
 % Margin = Absolute margin/ Selling price x 100

Where: Absolute margin = Selling price - Buying price

Combination of fixed/constant and percentage margin. In this case,

middlemen set a fixed margin of, say, P0.50/kilo of potatoes in addition to the
percentage margin he could obtain.

Marketing margin and mark-up are sometimes used interchangeably. They

are, however, entirely different from each other. The percentage mark-up differs
from the percentage margin in that it is the absolute margin divided by the buying
price or price paid. Thus, in the previous example, the absolute margin is P , or
the percentage margin is percent and the mark-up is percent.

Breakdown of the Consumer’s Peso

The breakdown of the consumer’s peso is a phrase popularly applied to a

series of figures representing the absolute margins of different types of middlemen
or assignable to different marketing functions, divided by the retail price.
Mathematically, this can be expresses as:

Absolute margin at any two levels = AM

Final retail price or Consumer’s price PR

where:
Final retail price = Farm price + Marketing margin of
all middlemen
or n
Consumer’s price = Pf +  Mi
i=1

1. Farmer’s share = Farm price = Pf

Final retail price PR

2. Middleman’s share = Middleman’s margin

Final retail price

a) Contract buyer = Contract buyer’s margin

Final retail price

b) Wholesaler = Wholesaler’s margin

Final retail price

c) Retailer = Retailer’s margin

Final retail price