What does Marketing Efficiency mean? Marketing efficiency is total revenue expressed as a percentage of total marketing costs including promotion, product development and sales expressed as a percentage of revenue. Learn and understand the four Key Indicators of Marketing Efficiency; A simple textbook definition says "Marketing efficiency is the maximization of input-output ratio." We know that measuring the efficiency of marketing is as critical to the success of the modern marketer as is measuring the ROI of their marketing efforts. As well as, important thing; Marketing Research.
Learn the Concept and Indicators of Marketing Efficiency.
The strong form of marketing efficiency or market efficiency essentially proclaims that it is impossible to consistently outperform the market, particularly in the short term, because it is impossible to predict stock prices. If you’re not measuring your marketing efficiency, your marketing is going to suffer, but marketing efficiency is only the beginning what matters most is identifying the pieces of data that can make a difference in driving your marketing strategy.
This may be controversial, but by far the most controversial aspect of market efficiency is the claim that analysts and professional advisors add little or no value to portfolios, especially mutual fund managers (with the notable exception of those managing funds that take on greater risks), and that professionally managed portfolios do not consistently outperform randomly selected portfolios with equivalent risk characteristics.
Definition of Marketing Efficiency:
Fred Waugh remarked that,
"An unsophisticated student might make two false assumptions, first, that is it easy to define and to measure the efficiency of agricultural marketing and, second, that almost everyone is in favor of efficiency."
Wells, confessing that he did not know precisely how to measure marketing efficiency, added: "And I doubt whether our so-called efficiency experts know how."
As well as, Definition of Market Efficiency:
The elements of market efficiency can be stated as follows:
- Competition and the number of market participants: Greater the number of buyers and sellers participating in the transactions or greater the competition, the market efficiency increases.
- Transfer of ownership and the balance of market power: The party which has greater knowledge has the greater power over deciding the terms of sale i.e. the terms of transfer of ownership. In an efficient market, both parties are well equipped with information so that the balance of power is easily maintained.
- The efficiency of price formation: Efficient pricing of products occurs when a large number of buyers and sellers take part in the transaction and possess the same information about the market.
The formula of Marketing Efficiency:
Marketing Efficiency = (Revenue / Marketing cost) x 100
For example, a firm with revenue of $2 billion dollars with total marketing costs of $250 million has the marketing efficiency of marketing efficiency = (2000/250) x 100 = 800%
Marketing efficiency should not be confused with a profit rate as this doesn't include any non-marketing costs such as the unit costs of your products. However, it serves as a useful benchmark and metric for measuring improvement to your marketing results. Also, don't forget about understand; What is Marketing Planning?
#Indicators of Marketing Efficiency:
Due to the non-availability of standard efficiency criteria, the following indicators are sometimes identified with marketing efficiency.
- Marketing margins.
- Consumer price.
- Availability of physical marketing facilities, and.
- Market competition.
A. Market Margins:
In most cases, high marketing margins are regarded as prima facie evidence of gross inefficiency in marketing, and the middlemen who are blamed for being either inefficient, too numerous, or too monopolistic, are most often regarded as the major cause of high marketing margins. Whether high marketing margins, necessarily imply inefficiency in marketing must be analyzed in light of the following considerations.
- Firstly, marketing margins will appear high in relation to Production costs of a commodity in any country or region in which those production costs are themselves quite low. The use of modern technology, which prodigiously lower costs of production, exhibits a magnifying effect on any given distributive margin.
- Secondly, the extreme geographic specialization of production (especially in the developed countries) has resulted in a considerable increase in the cost of providing the ‘lace utility of farm goods. This, in turn, has served to increase transport costs and, therefore, marketing margins. But this may imply that opportunity costs of production are so low in areas far from the market that the low costs of production more than offset the high costs of marketing.
- Thirdly, the increased amount of time utility embodied in food products (both perishable and non-perishable) has required extra storage and processing costs for their orderly marketing.
- Fourthly, in all developed countries (and in a good number of developing countries, too) considerable changes have occurred with respect to farm utility of farm products. Consumers today are increasingly demanding that their food and agricultural non-food requirements be met in more and more finished form. This has tended to multiply marketing margins, especially in developed countries.
- Finally, the high labor costs, especially in the retail trades, which are a special feature of the developed countries also contribute to high marketing. Self-Service shopping, which has gained considerable momentum in recent years, endeavors to minimize the impact of high labor costs, but it is not a magical device to reduce the overall costs to a significant extent. It merely eliminates the small fraction of the costs due to those retail services that come to be performed mainly by the consumer.
The major marketing costs are those which result due to enhanced improved utilities of form time and place. They represent the costs of the services which the consumer demands and for which he is willing to pay. In view of the above consideration, it could be safely concluded that distributive margins which form a longer and larger share of food expenditure have not been inconsistent with efficient marketing in the developed countries. In fact, these marketing margins have been a sine qua non for an effective marketing system in developed countries.
What follows from the above illustration is that the size and composition of marketing margins can be used as a useful measure of efficiency, but to use it effectively requires an extremely sensitive weighing balance. The size of margin cannot be related to anything else until it is accurately related to the quantum and type of services yielded by it. Let us analyze this aspect briefly.
Marketing margin consists of two elements:
- Explicit costs paid for the performance of various marketing functions, and.
- The profit of the market intermediaries.
1. The Cost Component:
The costs in marketing are incurred in the performance of various marketing functions of assembling, transportation, storage, processing, etc. or in other words, in the creation of various utilities. In order to minimize costs, the marketing facilities should operate at the maximum possible capacities with the least possible losses of produce.
We can decide whether the costs prevailing in the marketing system have any economic justification only after we have analyzed the following factors:
- The intensity of competition, especially in light of various state policies.
- The extent of utilization of the capacity of marketing facilities.
- The quantum and nature of services rendered in creating time, place and form utilities.
- The quantum of production losses in distribution.
2. The Profit Component:
The subject of marketing profit has been rather extensively covered in the marketing literature of the developing countries. There are more abuses than appreciations attached to this subject. It is usually stated that the profit element predominates in the aggregate margin on agricultural commodities as a result of certain superfluous or inefficient intermediaries in the existing marketing channels.
Most of the studies relating to this topic do not, however, endeavor to quantify the cost of various direct and indirect services rendered by the intermediaries. Much of what is called profit, in fact, reflects middlemen costs.
For instance, studies of middlemen profit in the developing countries usually tend to ignore the following cost, items:
- The cost on the money loaned out by the intermediary to farmers, consumers, or other intermediaries;
- The cost of risks and uncertainties borne by the middleman in agricultural trade;
- The cost of social help extended to the farmers;
- The cost of entertainment at his business premises;
- The cost due to spoilage of produce; and
- The cost for bribes or gifts and for some kinds of levies, taxes and service charge not in fact related to the actual services provided.
In order to arrive at the real profit figures, the cost of these and other indirect services has to be quantified. In determining the economic justification of various intermediaries the following factors would be carefully analyzed:
- The intensity of competition at all trade levels.
- The number of risks and uncertainties involved.
- The size of the business.
- Alternative employment opportunities in society.
- Restrictive state policies.
B. Consumer Prices:
Rising consumer prices are usually regarded as a measure of market inefficiency.
But the price of any commodity is a function of:
- Consumer income.
- Available supplies in relation to effective demand.
- Money supply.
- Prices of substitutes and complements.
- Seasonal factors.
- Marketing margins and distributional patterns.
- State price policies, and.
- General Price level.
Increase in consumer prices is commonly attributed to manipulation by middlemen artificially restricting the distribution of commodities to their own advantage or creating artificial scarcities in the distribution of commodities. Actually, most marketing costs are relatively sticky and tend to change very slightly as compared to price changes caused by other factors.
Even when deficiencies in the distributional patterns affect the price structure, they are usually caused by state price and procurement policies. High consumer prices are, therefore., largely due to factors other than marketing inefficiencies, although marketing often becomes the scapegoat for ills it has not directly caused.
C. Physical Marketing Facilities:
The inadequacy of physical marketing facilities like transport, storage, processing, etc. is also a subject of criticism in discussions of the efficiency of the marketing system. This has been common especially since the recent agricultural breakthrough in many of the developing countries. Although the availability of physical facilities has a direct bearing on marketing efficiency, to treat it as an important efficiency is questionable.
The paucity of physical facilities may exist because of subsistence farming, the seasonal nature of agricultural production, the structure and wide dispersion of farm producing units, low quantum of marketable surplus, the stage of economic development, and the huge overhead expenditure involved in the provision of such facilities in the developing countries. Where physical facilities do exist, they are seldom based on a reassessment of the economic potential and requirements of the area.
In the developing countries, the spatial distribution of physical marketing facilities is so unorganized that at certain places they are underutilized and at other over utilized. There is a need to determine the exact demands and patterns of distribution and the reallocation of existing facilities needed for their efficient use.
D. Market Competition:
The intensity of competition has been widely suggested as a major indicator of market inefficiency. Though competition is desirable in itself, the methods of its measurement lack uniformity, precision, and objectivity. It is conventional for researchers to blame the policymaker in a developing country for any lack of competition.
On the other hand, where competition is intense the researcher who considers it the key to efficiency is hard to put to indicate areas of possible improvement or to define relative degrees of efficiency. Excessive focus on quality competition is likely to be found in a market that lacks progressiveness and growth orientation; excessive attention to private competition leads towards greater concentration among sellers and the development of monopolistic organization with all of its attendant evils.
Reliance on competition as a key indicator of efficiency is thus a static approach which disregards dynamic considerations, lacks a standard of comparison, and pays no attention to economic and social norms based on the value system of an economy. Use of competition as a measure of marketing efficiency would have to be selective and judicious to have any constructive influence on market performance.
Since market performance refers to the end results of market adjustment by buyers and sellers in the market, the intensity of market competition may be considered both as a performance norm and as the net outcome of a reorganization of the market structure and market conduct.
Thus the effective use of market competition as a measure of marketing efficiency would require an appropriate application of the criteria of workability for market structure, conduct and performance with all their interaction effects, so as to increase the intensity of competition to the extent socially desirable, while also moving towards such pre-designated social and economic goal.