4 years ago



where and are the

where and are the marginal marketing costs (cost for one unit of additional output sold) for the direct and conventional channel. This shows that the economic desirability of selling through direct marketing channels depends on the price differences and on differences in marketing costs. Often the advantages with respect to price are highlighted, while the differences in marketing costs are neglected. Several aspects might cause marketing costs per unit of sold product to be substantial. First of all, labor requirements can vary considerably across channels. Producers often‐times fail to account for labor costs associated with several types of direct marketing channels. Farmers’ market or staffed farm shops often require significant labor hours. Second, whereas marginal costs normally tend to decrease as the volume increases, several marketing costs have a fixed nature, i.e. they do not change when sales through that particular channel change. Costs such as promotion, sanitary requirement, taxes, market entry fees, shop maintenance are all costs that remain unchanged when the level of sales decrease. Hence, when sales are low, average and marginal marketing costs per unit sold are high, potentially offsetting the higher price received at direct marketing channels. A certain scale of sales is necessary to cover the fixed marketing costs, which is contrary to one of the often mentioned advantages of direct marketing, that direct farming may allow farmers to begin farming at volumes that might otherwise be too small for conventional outlets. Whereas this simple theoretical model clearly shows the importance to consider not only the difference in price received but also the difference in marketing costs, it is deficient for a full detailed analysis for three reasons. First, the model fails to account for the fact that Qd is highly uncertain (not all products supplied to the direct marketing channels are sold), which, combined with the perishable nature of many of the products typically marketed through short circuit channels, may impose high additional costs, as marketing costs are incurred for all products supplied, regardless of whether they’re actually sold. In a case‐study by Hardesty (2007), up to 20 % of the products supplied to a farmers’ market was left unsold, a major marketing cost of this particular channel. Second, the model fails to account for factors such as the producer’s level of risk aversion, lifestyle preferences and other attributes that may alter the optimal choice. However, as we deal with the mere economic aspects, this is beyond the scope of this paper. Third, the model also neglects potential impact of choosing a different marketing channel on C, the cost of production considered independent of the choice of marketing channel. “C” consists of normal production costs such as labor, seeds, pesticides, feed, fertilizer, energy, etc. While the model considered these costs independent of the choice of marketing channel, changes might occur. The necessity to maintain a large diversity of products, for instance, can decrease the 68

efficiency of each individual product through a failure to profit from economies of scale. Further, the very same necessity might cause the farmer to be obliged to maintain diverse production infrastructure, which increases the farms fixed costs. In comparison to conventional sales channels, the type of transaction in direct sales channels differs substantially, as there is a shift from business to business to business to consumer transaction. According to Williamson (1985), transactions differ in the degree to which relation‐specific assets are involved, the amount of uncertainty about the future and about other parties involved, the complexity of trading arrangements and the frequency with which transactions occur. In the case of direct selling, relation‐specific assets are more important, as they need to be developed between the direct selling farmer and each individual customer. The uncertainty also differs considerably, as elaborated in the next paragraph. The complexity of the trading arrangements increases with the number of products supplied. Typically, direct sales channels offer more products compared to their conventional counterparts. For the same amount of products sold, the frequency of transactions also has to increase considerably, as conventional products are sold in bulk to buyers, in contrast to the direct sales channel where only small amounts are purchased. As a consequence, transaction costs, which are costs relating to the search for information, negotiation, monitoring and enforcement of the transaction, increase significantly. Learning effects can cause marketing costs to decrease over time, as producers gain more experience, e.g. they can reduce labor costs related to staffing a farm shop when learning about peak times in sales. DIRECT MARKETING AS A RISK MANAGEMENT STRATEGY Uematsu and Mishra (2011) note that, even if direct marketing has a potential negative impact on income, farmers may still choose to continue their direct marketing strategies because it is a potential risk management instrument that protects farmers from unexpected decreases in output prices and diversifies their income. Indeed, farmers who sell their products through direct marketing channels have much more control over the price of their products. However, it must be noted that, through direct marketing, farmers are shifting from price risk to market risk. Indeed, several circumstances may cause farmers to sell much less than they anticipated, effectively causing incomes to decrease, just as would be the case with price risks. Using conventional marketing channels, prices for most outputs and inputs are highly uncertain and production (yield) is uncertain as well (due to for instance weather conditions and pests). Sales, however, are in most cases certain; conventional marketing channels will, normally, buy all produce. In direct marketing channels, the relative certainty of output price is often considered the only difference. However, an equally important difference is the uncertainty of sales. When prices are certain, but sales are highly uncertain, gross revenue might be equally risky in direct marketing channels (Figure 1). 69

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