Econometric analysis of marketing costs: A case study

Abstract

In this study we analyze the marketing costs of a pineapple producing and export firm (i.e., Bomart Farms). Consistent with the strand of literature we categorize marketing costs into Assembling, Processing and Distribution costs. The Assembling cost comprises of cost of crating and loading fresh fruit into truck on the farm; and transportation from farm to pack house. The Processing cost consists of labor for preparation of fruit, cartons, pallets, strapping nails, storage (pre-cooler), water, chemicals, and strapping tape. The Distribution cost consists of freight, container stuffing, transportation to harbor/airport, port handling charges, and logistics/documentation. We specify econometric models (Seemingly Unrelated Regression and Vector Autoregression) of the marketing costs of this firm and collected data on these cost items for 36 months (January 2005-December 2007). We specify the system of equations for the various marketing cost components and estimated this system using Seemingly Unrelated Regression in order to take account of the contemporaneous correlations of the errors across equations. The empirical results reveal that transportation cost from the farm to pack house contributes the highest to Assembling costs (i.e., 1 GH¢ increase in transportation cost increases the Assembling cost by GH¢ 0.58); while the cost of cartons contributes the highest to Processing costs (i.e., 1 GH¢ increase in cost of cartons increases the Processing costs by GH¢ 0.68); freight contributes the highest to the Distribution cost (i.e., 1 GH¢ increase in freight increases the Distribution cost by GH¢ 0.88). The results are intuitive in the sense that increases in fuel prices lead to increases in the transportation cost. There is the need for the Government to reduce sales taxes on fuel products. Next, regarding the cost of cartons, there is only one producer/seller of cartons (i.e., Polycraft Ghana) and hence the prices of cartons are quite exorbitant. In this respect, there is the need for the Government to provide tax concessions and other benefits (e.g., tax holiday) for individual firms who intend to go into carton production as competition among firms will ultimately lead to price reduction. It is not surprising that freight not only contributes the most to Distribution cost but also the most cost component contribution to the overall marketing costs. This can be explained to a large extent by the fact that there are only few freight forwarders (which are mainly foreign companies) at the port, thereby making the freight charges exorbitant for Bomart Farms. Hence, there is the need to provide tax concessions, tax holidays and other incentives for individual firms who intend to go into the pineapple export business. Furthermore, the freight charges are in foreign currencies; hence it is imperative that the unstable foreign exchange be stabilized as fluctuations in the foreign exchange leads to increases in the freight charges. This information is of importance to the management of Bomart Farms, and to any food producing and export firm.