Econometric Analysis of Marketing Costs: A Case Study

This study analyzes the marketing costs of a pineapple producing and export firm (Bomart Farms) in Ghana. Con­ sistent with the existing literature, we categorize marketing costs into assembling, processing, and distribution costs. The assembling cost comprises of cost of crating and loading fresh fruit into trucks 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 stuff­ ing, transportation to harbor/airport, port handling charges, and logistics/documentation . We specified a seemingly unrelated regression model of the marketing costs of this firm and collected data on these cost items for 36 months (January 2005-December 2007). We specified 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 correla­ tions of the errors across equations .The empirical results reveal that transportation cost from the farm to pack house contributes the most to assembling costs (a one-percent increase in transportation cost increases the assembling cost by 0.58 percent) , while the cost of cartons contributes the most to processing costs (a one-percent increase in cost of cartons increases the Processing costs by 0.68 percent); freight contributes the most to the distribution cost (a one­ percent increase in freight increases the distribution cost by 0.88 percent). 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. There is only one producer/seller of cartons (Polycraft Ghana), so the price of cartons is quite exorbitant. In this respect, there is the need for the government to provide tax concessions and other benefits (e.g., tax holidays) for individual firms who intend to go into carton production, as competition among firms will ultimately lead to price reductions. It is not surprising that freight not only contributes the most to Distribution cost but also is the greatest contributor overall to 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.