BRANCHES OF COMMERCE
1.Commerce includes all the activities which contribute to the transfer of surplus goods from the original producer to the final consumer at the right time, at the right place, in the right quantity and at the right price.
2. To effect this transfer efficiently, both trade and aids to trade are required.
3 Trade means the actual buying and selling of goods with a view to making a profit. It involves satisfying directly or indirectly the wants of consumers by transporting the 'right' goods, both final and intermediate, from the producers to the consumers.
4. There are two main types of trade:
(a) Home trade is carried out among the people of the country itself. It may be wholesale or retail. A wholesaler buys from the producer and sells to the retailer who in turn resells to the final consumer.
(b) Foreign trade is trade between the people of one country and the rest of the world. It may be import trade or export trade, both of which are normally wholesale in nature.
5. Trade cannot be carried on without aids to trade. So aids to trade are the various activities carried on to help carry out trade. The aids to trade include banking, transport, communications, warehousing, advertising and insurance.
6. Everyone, whether in the capacity of a final consumer or a producer such as a farmer, a manufacturer, a trader or even a doctor, requires the services of commerce, i.e. trade and aids to trade.
7. Commerce is needed in the production process, before and after the production of raw materials and finished goods.
RODUCTION
Production is the process by which raw materials are transformed into finished goods to satisfy the requirements of consumers or other organizations. In addition to being in the right form, the goods must be in the right place at the right time before the process of production is complete.
Branches or stages of Production:
Primary Production
This is the first stage of production and is called the extractive stage. In this stage, raw materials are extracted from the surface of the earth or from the sea. Workers are employed in mining, fishing, quarrying, forestry and farming. In this stage the raw materials are unusable and have to be sent to the manufacturing industries to be changed in to goods that can be used.
Secondary Production
In this stage, the raw materials are transformed into semi-finished or finished products. The goods are made ready for sale to the final consumers in this stage. Textile industry, building and construction industry, chemical industry, etc, are examples of the manufacturing work carried out in this stage.
Tertiary Production
The transfer of goods from the factories to the final consumers is the work that is carried out in the tertiary stage. In this stage there are many activities which are broadly divided in to two:
- Commercial Services: This includes workers in communications, finance, insurance, wholesaling and retailing. These workers are involved in getting the goods to the final consumer.
- Direct Services: People in this group work to provide a direct service rather than delivering goods to the consumers. Teachers, doctors, nurses, lawyers, civil servants, policemen, etc, are examples of people providing direct services.
Chain of Production:
Primary, secondary and tertiary industries are the stages in the chain of production, which is the process by which raw materials reach the consumer as finished goods or services. Each stage of production, value is increased. For example, consider a chain of production for a wooden table. In the primary stage trees are cut down and sawn into planks. In this stage planks (raw materials) are very cheap. In the secondary stage the wood is shaped into a table. In the production process of wooden table, manufacturer uses labours, machines, raw materials and other materials needed to finish the product. Overhead costs such as rent, fuel and power, insurance, telephone charges etc. are also incurred in the production process. Therefore at the end of the secondary stage, the value of the table will be much higher compared to the primary stage. When selling the tables to the wholesalers, manufacturer also adds a profit margin. In the tertiary stage , the wholesalers and retailers will add profit margin when selling the tables. Therefore, value increases at each stage of production until it reaches the final consumers.
The chain of production for a wooden table would be as follows:
Primary- a tree is cut down and sawn into planks.
Secondary- the wood is shaped into a table.
Tertiary- the table is transported and sold by a retailer.
Another way of classifying production is as follows:
- Direct Production: This is producing goods and services for the producer’s own use. For example, when a man grows food crops for his own use or a man builds his own house or makes his own furniture, it is called direct production.
- Indirect Production: This involves specialization in a particular type of work. For example, a man specializes in ensuring that the quality of a product is standardized. There is division of labour, which leads to specialization.
DIVISION OF LABOUR
In an industry there are many firms and each firm has many departments. In each department there are many workers. Each worker has his own specialized job. This is the principle of division of labour. For example, in the finance industry there are many banks. Each bank has a number of departments like the accounts department, the clearing department, the payments and receipt department, etc. Within each department there are many workers and each worker has his own job. In the receipts and payments department, some workers deal with cheques, while others deal with the computers and clerical work.
Division of labour at Individual Level
This is breaking down of a productive activity into tasks so that each person performs a particular task that he is most skilled in. For example a person may be solely responsible for only cutting the fish in a fish-canning factory.
Division of Labour at Regional Level
This happens when a particular region in a country is involved in producing a particular product. This may be due to the availability of natural resources in that particular region. For example, Feevah, an island in the
Division of Labour at National Level
Sometimes a country may specialize in producing one line of goods. This is also due to the availability of resources or favourable climatic conditions in that particular country. For example,
Advantages of Specialization
· Individual workers can concentrate on the work that they are most suited for.
- Practice makes perfect. Workers doing the same work hundreds of times a day will become perfect in their work.
- Division of labour allows a great saving of tools and equipment.
- When there is division of labour, there are chances of new techniques and ideas being developed.
- Division of labour leads to an increase in the output per worker.
- Increase in output results in lower costs for the consumers.
- This also results in the need to exchange the surplus in one area with that of another area.
- Specialization leads to less breakages and damages resulting in less wastage.
Disadvantages of Specialization:
· Each department depends on the other departments. If there is a break down in one department, then the whole industry may get affected.
- There are chances of boredom as the workers are doing the same work hundreds of times a day.
- As machinery becomes more elaborate it replaces labour causing unemployment.
- Division of labour normally leads to a decline in craftsmanship.
- As machinery takes over, the choice of goods available to consumers is reduced.
Explain the ways in which industry, commerce and direct services are inter-related and interdependent.
All human beings have unlimited wants. Human wants can be satisfied by production. Production takes place in industries. Industries produce goods and services to satisfy human wants. All goods and services produced should reach the final consumers. Here commerce assists a lot. Commerce includes trade and aids to trade. Commerce does see that all those goods and services being produced should reach the final consumers. In this regard, banking, insurance, communications, warehousing and transport assist the industries so as to reach the goods and services to the final consumers.
Direct services are those services which are performed directly to the people who receive them. This is concerned with the provision of personal services. Direct services are not concerned with the distribution of goods. They enable the private individuals to make use of health facilities (eg, using doctors) and obtaining knowledge and skills (eg, using teachers) as well as relying on the maintenance of law and order and other personal services (eg, hair dressing, journalist). Direct services help the firms’ employees to be better educated and healthier and therefore they will be more productive.
Direct services like education, health services, professional services assist industries in such a way that both skilled and unskilled workers are available for those industries. Clerical staff offer their services for a smooth running of both trade and commercial activities. Thus, commerce, industries and direct services are interdependent to each other.
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Wholesale trade deals with the bulk buying of goods from various manufacturers either locally or from overseas and the breaking down of this bulk into smaller quantities which are then sold to the retailer. Middlemen, be they wholesale merchants, merchantile agents or wholesalers provide this intermediate link in the chain of distribution before the goods are sold to the retailers.
THE ROLE OF THE WHOLESALER IN THE CHAIN OF DISTRIBUTION
CHANNELS OF DISTRIBUTION
1. There are four main channels of distribution and many 'intermediaries' or middlemen involved before goods can finally reach the consumers as shown in the following table:
2. In reality, the channels used are very varied and often complex, and there is much overlapping.
Channel 1: When a manufacturer sells direct to the consumer
1. This occurs when customers post orders for books or magazines direct to the publishers who then send them their orders direct as in mail order or e-commerce. This ensures the publisher of selling to as many people as possible, including those who live far away. In this way, they increase their sales. Consumers, too, benefit since they are assured of getting the latest issue or publication early.
2. It also occurs when something is made specially for a customer such as a suit or made-to-order furniture. Consumers who demand individuality in design for such personal effects normally have to pay more than what they have to pay for the same type of good which is mass-produced.
3. It also occurs in the case of expensive and highly specialized goods which are purchased only occasionally by governments or big private companies. Examples of these kinds of goods are aeroplanes, ships, railway rolling stock, and the like. Buyers prefer to go direct to the manufacturers so that they may be able to discuss their individual requirements as well as the terms of purchase.
4. This channel of distribution, however, is not suitable for all kinds of goods.
Channel 2: When a manufacturer sells to the retailers who in turn sell to the consumers
1. Most of these retailers are large stores that have the financial resources to buy in bulk direct from the manufacturers. The main advantage of bulk buying is the large discounts given that enable these retailers to compete successfully with the small retailers in terms of ability to offer a greater variety of goods at competitive prices.
2. In many cases, manufacturers open their own retail shops, for example, those selling footwear and medicine. These manufacturers have resources large enough to open retail outlets of their own throughout the country.
3. Sometimes, the retailers may be 'tied' to the manufacturer. For example, petrol stations sell only one brand of petrol.
Channel 3: When a manufacturer sells to a wholesaler or a wholesale merchant who in turn sells in smaller quantities to retailers (shops), who in turn sell to the consumers
1. This occurs when producers themselves are unable to market the excess goods themselves because of financial constraints or the lack of access to widely dispersed markets due to a lack of contacts, commercial know-how and the like or owing to the fact that it is just not commercially profitable for the producers to do so themselves. This is true of most rural produce like fish, padi, vegetables, eggs, poultry, etc. which are easily perishable. These are often sold to dealers (wholesalers) who then pack them properly and transport them quickly to the big towns and cities either in the same country or overseas, where they are sold to various retailers, who in turn sell them to the consumers.
2. Locally manufactured goods like ordinary household essentials which are stocked by small retailers are often distributed in this way since the retailers buy in too small a quantity to make it viable for the manufacturer to sell direct to them.
3. This method of distribution is especially important where the demand for the product is seasonal but production takes place throughout the year, e.g. fireworks and Christmas cards. It is the same if the demand for the product is fairly even throughout the year, but output is concentrated during specific periods of the year, e.g. padi.
In such cases, the wholesaler's function of acting like a reservoir in order to balance demand and supply becomes very important.
4. Goods which are sold in this way become more expensive because of the cost of distribution and profit margins required by the wholesaler and retailer. Moreover, consumers have no direct contact with manufacturers or producers. However, consumers are assured of a wide variety of goods produced by many producers.
5. The producer is free to devote all his attention and resources to the actual work of producing the goods since the marketing aspect of his goods is already in the hands of the wholesaler. At the same time, the producer is assured that his goods are marketed over a wide geographical area.
6.The retailer needs little capital as he needs to maintain only a small stock. He does not need to keep large stocks because it is easy for him to get new and, hence, fresher stocks from his supplier (wholesaler) once his stocks are depleted.
7. General wholesalers normally stock a wide range of goods and need a substantial amount of capital to finance their large warehouses, stocks and advertising and to pay the salaries of their salesmen. These tend to operate on a national or regional basis.
Specialist wholesalers, however, deal mainly in a particular trade in a particular area, for example, a wholesaler of building materials, in fruit, in vegetables, etc.
8. Sometimes, a wholesale merchant may import directly from an overseas supplier. Like the wholesaler, he then sells it to the retailers in smaller quantities.
Channel 4: When an overseas manufacturer appoints a sole agent
1. This is done in the home market to manage the sale and distribution of goods as well as to provide after-sale services. The sole agent is responsible for getting reliable retailers to market the goods throughout the country. Such sole agents are appointed to sell imported cars, cosmetics and electrical goods.
FUNCTIONS OF THE WHOLESALER
1. Bulk buying
1. The wholesaler buys goods in bulk from the producers or manufacturers in the hope that he will be able to resell them at a profit.
2. Sometimes, he may import the goods from foreign countries, but he usually buys from importers or their brokers, or from commission agents acting for overseas exporters.
3. A wholesaler has specialist buyers who are in very close contact with the market and who know the various sources of supply.
2. Risk bearing
1. The wholesaler makes his purchases based on up-to-date and reliable information on the likely tastes and preferences of consumers. He buys in advance of demand.
2. He will make huge profits if he anticipates demand correctly.
3. He bears the risk of loss in cases where anticipated demand for his purchases does not materialize, if products are damaged, spoilt or stolen, or if retailers default. In case tastes change, he may even have to sell off the goods at a loss. Prices may fall or goods may go out of fashion before they can be passed on to the consumers.
3. Warehousing
1.The wholesaler stores the goods which are purchased in advance before they are distributed to the retailers This would even out the flow of goods. In times of glut, they can be kept off the market, and in times of shortage, released. This would prevent severe fluctuations in prices.
2. In some trades, the wholes~er grades, sorts, packs or prepares the goods for sale. He may sell under his own brand name.
4. Breaking bulk
1. The wholesaler breaks bulk or divides the goods bought into smaller quantities.
2. He sells the goods in smaller quantities to various retailers.
5. Transportation
1. The wholesaler provides transport for goods from the suppliers to suitable depots in the various cities, and from there, to the retailers' shops.
2. If retailers were to buy from a cash-and-carry wholesaler, they have to provide their own transport.
6. Finance
1. The wholesaler finances the retailer by allowing him extended credit.
2. He finances the producer indirectly by paying him promptly.
7. Information
1. The wholesaler acts as a liaison between the retailers and producers by informing producers of the retailers' reactions to their goods, and acquainting retailers with new products and other developments in the market.
TYPES OF WHOLESALERS:
General Wholesaler:
· They operate on national and regional basis.
- They stock a large variety of goods in their warehouses and thus need large capital.
- They advertise nationally.
- They employ salesmen to obtain orders from retailers and pay them salaries.
Specialist Wholesaler:
- They restrict their activities to a particular trade and to a particular area.
- They offer credit facilities and delivery service.
- Examples are wholesale fruit and vegetables markets.
Cash-and-Carry Wholesaler:
· They do not allow credit facilities.
- They do not provide delivery services.
- They sometimes sell even to the general public.
- They sell mostly low-priced goods, which sell quickly.
TRENDS IN WHOLESALING
The current retail trade is characterized by an increasing number of large-scale retailers being set up in the traditional market made up largely of small-scale retailers. The wholesale trade, threatened as such by these developments, has had to undergo certain changes in recent years in order to survive. Today the wholesale trade is characterized not only by the independent wholesaler, but by the cash and carry wholesaler as well as the voluntary chain.
Voluntary chains
Groups of independent retailers or shopkeepers who join with wholesalers to gain the benefits of bulk buying. When ordering goods, all the members put their orders together through the wholesaler who is also a member. The wholesaler is then able to obtain goods in bulk direct from the producer at a discount.
It helps small-scale retailers to combat the competition from Large - scale retailers e.g. supermarkets. They are able to offer goods at competitive prices, give special offers and attract more customers.
Voluntary chains are found mostly in the grocery trade e.g. SPAR, Square Deal, Wavy Line
They are normally organised via the wholesaler. The group will undertake national advertising on behalf of the group. It may provide finance and shopfitting for retail members who have to keep their shops to a certain standard. Goods are delivered direct to the retailer. Advice on pricing, display and stock may be given.
Cash-and-Carry Wholesaler:
§ They do not allow credit facilities.
- They do not provide delivery services.
- They sometimes sell even to the general public.
§ They sell mostly low-priced goods, which sell quickly.
INSTANCES WHERE THE WHOLESALER IS STILL NEEDED:
· In foreign trade, the wholesaler has the experience and contact that an overseas firm cannot do without.
- The wholesaler is still important where the producers are still small-scale producers.
- The wholesaler is important where production is seasonal and irregular in quantity.
- The small retailers who dominate the market do not have large finance to buy directly from the manufacturers. Hence wholesalers are still needed.
DECLINE OR ELIMINATION OF THE WHOLESALER:
- Manufacturers, nowadays, produce branded goods, which are pre-packed into convenient sizes.
- Through advertisements, manufacturers are able to create and maintain a market for their own products.
- The establishment of large retailers like multiple stores and departmental stores has the finance to buy goods directly from the manufacturers.
- The improvement in transport and communication has made it faster and easier for the manufacturer to deliver goods and contact the widely scattered retailers.
- Some manufacturers open their own retail shops and sell goods directly to the consumers.
- Manufacturers have decided to sell goods directly to the retailers as the retailers would sell the goods faster than the wholesaler would.
HOW THE WHOLESALER SERVES THE
MANUFACTURER, THE RETAILER AND THE CONSUMER
By carrying out the above functions, the wholesaler not only helps the manufacturer or primary producer, but also the retailer and the consumer as well.
Services to the manufacturer
Low storage expenses
1. The wholesaler absorbs the goods produced by the manufacturer as they are being made. The manufacturer is, therefore, relieved from paying the expenses of storage -that is, rent, insurance, wages, utilities as well as the loss of interest due to money capital tied up in stocks.
2. The manufacturer of goods in seasonal demand such as winter clothing, greeting cards for various festivals, etc. is able to continue production throughout the year as the wholesalers are willing to absorb the products when they are being produced. No manufacturer can survive if his factory is forced to close down for a few months in a year for there are costs to be met even if there is no production. These costs include depreciation on plant and equipment, interest on loans and wages of administrative staff.
3. All goods are produced before there are orders for them from the retailers. The manufacturer is relieved of the risk of loss should the anticipated demand for these goods from consumers fail to materialize. It is the wholesaler who has bought the goods in bulk who will have to bear the risk of loss.
Reduced cash flow problems
1. By paying the manufacturer promptly, the wholesaler reduces the amount of working capital required by the manufacturer and allows the latter to continue production smoothly. The manufacturer will, therefore, have a regular inflow of cash after selling off each batch of production. This reduces the amount he has to borrow.
Low marketing cost
1. Should the manufacturer undertake to market the goods himsel{ he will incur a lot of expenses for transport, advertising as well as administration since it is conceivable that some of the smaller retailers would prefer credit.
2. However, if he were to sell through the wholesalers, he would deal with only a few major customers who buy in bulk and who can pay him cash fairly promptly. This would reduce his marketing costs.
Services to the retailer
Purchase of small quantities
1. A wholesaler's willingness to sell in small quantities is a boon to a small retailer who only places small orders and is unable to get his stock directly from the manufacturer as the latter only sells in bulk. Transporting orders of small quantities all over the country would be costly for the manufacturer.
Reduced cash flow problems
1. Awholesaler provides credit to a retailer and reduces the latter's capital requirements. A producer is often not willing to grant credit to a retailer since it would increase his working capital.
2. As a result, the retailers have time to sell the goods before they have to pay for them.
Low goods preparation cost
1. A wholesaler simplifies a retailer's work since the goods are already graded and prepacked into convenient quantities and sizes.
Low storage expenses
1. A retailer is always assured of delivery of fresh stocks from the wholesaler's warehouse if he runs short. This reduces the amount of stock he needs to hold at a time, hence saving on costs of storage, insurance and risk, in case demand is below expectations.
Wide choice of related products
1. A wholesaler offers a variety of goods made by various manufacturers, both local and abroad. This saves the retailer time which would otherwise have to be spent in dealing with each manufacturer individually. The retailer is also kept up-to-date on the latest products available. The information supplied by the wh~esaler is much less likely to be biased than that supplied by the manufacturer.
Low wholesale prices
1. A cash-and-carry wholesaler who is a wholesale 'supermarket' offers a retailer goods at cutprices although the latter may have to arrange for his own transport. Lower prices are possible due to savings in cost which are a result of:
(a) no credit facility - sales are on 'cash' basis
(b) no delivery service
(c) self-service - no need to employ huge staff
(d) goods stocked are those that sell quickly.
Services to the final consumer
Regular supply at steady prices
1. Consumers are assured of a regular SUpply of goods throughout the year at steady prices since the wholesaler releases the goods when required.
2. This is particularly important for goods which are produced seasonally such as rice but whose demand is regular.
3. This is because a wholesaler buys goods when they are plentiful, and hence prices are comparatively low, and releases them in times of shortage without raising prices unduly.
Convenient shopping and wider choices
1. The wholesaler enables the small retailers to compete with the large retailers, especially in suburban areas where rentals are lower than in the city centre. Thus, consumers are assured of getting the goods they want from the retailer nearest to their homes. Usually, the large retailer is situated in the city centre.
2. The consumer is assured of a wider choice of goods even at the smaller shops, since the retailers get their supplies from a number of wholesalers, who would in turn obtain their supplies from many producers.
3. Since wholesalers encourage the setting up of a number of smaller retailers, consumers have a wider choice of shops.
Consumer demand
1. Since the wholesaler is in closer contact with the public through feedback from retailers, he can ensure that a consumer's opinion of a particular good generally reaches the manufacturer, with whom he too has close contact. In this way, products can be improved in line with consumer demand.
INTERMEDIARIES
Merchants
1. These middlemen are principals who trade on their own account and therefore own the goods and earn profits from their trading activities. Exporters and importers are the merchants in foreign trade while the wholesalers are merchants engage4 in home trade.
Forwarding agents
Forwarding agents are middlemen in international trade who specialise in moving goods from country to country. They arrange transport, documentation, customs clearance, insurance, storage so that the owner of the goods does not have to do this e.g. DHL, FED EX.
Mercantile agents
1. These middlemen act on behalf of their principals in finding would-be sellers and would-be buyers of the goods and services of their principals. They do not own the goods and services. They earn commissions for their services. Some merchantile agents act as 'brokers' and some as 'factors.
Broker
A broker is a middleman who:
- Finds buyers for the seller.
- Does not take possession of the goods.
- Cannot sell in his own name.
- Cannot sell at his own price.
- Receives commission for his services.
Factor
A factor is a middleman who:
- Finds buyers for the seller.
- Takes possession of the goods.
- Can sell in his own name.
- Can sell at his own price.
- Makes a profit out of sale.
Del Credere Agent
A del credere agent is a middleman who:
- Finds buyers for the sellers.
- Takes possession of the goods.
- Guarantees to sell all the goods.
- Receives higher commission for his services.
RETAILER
A retailer is a middleman who buys goods from the manufacturer or from the wholesaler and sells to the many consumers. A retailer’s functions are numerous:
FUNCTIONS OF A RETAILER:
a Provides goods in convenient quantities.
a Provides goods in convenient locations.
a Provides goods in convenient times.
a Provides a variety of goods.
a May provide pre-sales and after-sales services.
a May provide credit facilities.
a May provide delivery service for some goods.
a Deals with customers’ complaints.
a Provides advice and information to customers.
a May provide self-service.
a Acts as a channel of distribution between customers and the manufacturers of goods
TYPES OF RETAILERS
LARGE SCALE REATILERS
General features
1. A large-scale retailing business is normally run as a public limited company.
2. The capital needed is very large.
3. The large assets owned make it easier for the company to raise money from the bank or the public in the form of debentures.
4. The retailers normally buy in bulk direct from the manufacturers.
5. Some retailers may even have their own factories.
6. As such, the retailers can do away with the services of the wholesalers.
MULTIPLE SHOP or CHAIN STORES:
Examples: Halfords, Richard Shops, W.H. Smith, Tesco, Boots The Chemists, Marks and Spencer, H. Samuel,
Features:
- It consists of many similar branch shops in different areas or under one roof.
- Each shop is under the direct control of a branch manager.
- The head office controls all the branch shops.
- Every shop is decorated in the same manner, has the same name and sells the same goods at the standard prices fixed by the head office.
- The chain stores mostly deal in one line of goods (clothes, food, shoes & medicine).
- The stores mostly operate as public limited companies.
- The head office sends out inspectors to make regular checks on all the branches.
- There is centralized buying and administration and decentralized selling through the branches.
- The terms of sale are normally for cash.
Advantages:
- The stores buy goods from the manufacturers in bulk and hence get discounts. So they are able to sell goods to consumers at competitive prices.
- They have large capital and are able to employ specialists in such matters as buying, publicity, window display, etc,.
- Losses sustained in one branch can be absorbed in the profits made by other branches.
- There is economy in advertising as all the branches are included in one advertisement.
- Slow-selling lines and surplus stock in one area can be transferred to more promising areas, instead of clearing it off at a loss.
Disadvantages:
- There is too much centralized control from head office. So branch managers do not have any freedom.
- Credit facilities are not offered. So the stores may lose their customers.
- There is lack of personal touch between the branch shops and the customers.
DEPARTMENTAL STORES:
Examples: Harrods, Selfridges, Debenhams.
Features:
- It consists of many departments all in one building.
- Department stores are located in the centre of large cities.
- Each department is under the control of a manager and the head office controls all the departments.
- Each department specializes in one line of goods, for example, furniture, hardware, clothes, foodstuff, etc.
- Many conveniences to the shoppers including toilets, restrooms, saloons, telephone booths, car parking facilities, etc, are provided.
- Goods are pre-packed and the prices are clearly marked.
- Many department stores are owned by very large firms.
Advantages:
- The department stores buy goods from the manufacturers in bulk and are able to get discounts. Hence they can sell goods to consumers at competitive prices.
- They have large capital and are able to employ specialists in such matters as buying, publicity, window display, etc,.
- There is economy in advertising as all the departments are included in one advertisement.
- Losses sustained in one department can be absorbed in the profits made by other departments.
- More customers are attracted as conveniences such as lounges, restaurants, car parking facilities, etc, are provided.
- Shopping can be done under one roof. This makes it very convenient for customers.
Disadvantages:
- There are high overheads because of the many facilities provided. This increases the price of goods.
- As departmental stores are located in the centre of towns and cities, high rental charges increase the unit price of goods.
- There is very little freedom for individual departments as there is strict control from the head office.
3. SUPERMARKETS:
Features:
- These are self-service shops with floor space of more than 186 square metres.
- They sell mostly foodstuff and household goods.
- Goods are pre-packed, well displayed and self-service is encouraged.
- Amenities such as car parking, toilets, restaurants, etc are provided.
- Supermarkets sometimes brand their own goods.
- Prices are very competitive because of the high rate of sales.
Advantages:
- The supermarkets buy goods from the manufacturers in bulk and are able to get discounts. Hence they can sell goods to consumers at competitive prices.
- Self-service reduces the wage costs of the supermarket.
- Customers benefit from quick service as the goods are pre-packed and well displayed.
- Supermarkets buy from the manufacturers who brand the goods using the supermarkets’ own labels.
- Customers are attracted because of the amenities and the large variety of goods that are provided by the supermarket.
Disadvantages:
- Self-service encourages pilfering and shop lifting.
- Customers do not enjoy any personal service.
HYPERMARKETS:
Examples: Asda, Tesco, Sainsbury.
Features:
- Hypermarkets usually have more than 5000 square meters of selling space.
- Hypermarkets offer a great variety of foodstuff and a wide range of other goods.
- They buy directly from manufacturers and sell at competitive prices.
- Hypermarkets are usually found outside towns and cities.
- They provide large car parking space.
- Goods are pre-packed, well displayed and self-service is encouraged.
- To encourage non-car owners, they provide free bus service to and from the hypermarkets.
- Amenities such as lounges, swimming pools, toilets, restaurants, child care centers, etc, are provided to make shopping comfortable for customers.
Advantages:
- The hypermarkets buy goods from the manufacturers in bulk and are able to get discounts. Hence they can sell goods to consumers at competitive prices.
- Self-service reduces the wage costs of the hypermarket.
- Customers benefit from quick service as the goods are pre-packed and well displayed.
- Amenities such as lounges, swimming pools, toilets, restaurants, child care centers, etc, are provided to make shopping comfortable for customers.
- Customers are attracted because of the amenities and the large variety of goods that are provided by the hypermarket.
- They provide free bus service to and from the hypermarkets.
- They provide large car parking space for customers.
- Shopping can be done under one roof.
Disadvantages:
- Hypermarkets lead to a decline of business in the town centers.
- Self-service encourages pilfering and shoplifting.
- Customers do not enjoy any personal service.
FRANCHISING:
Examples: The Wimpy, Kentucky Fried Chicken, Body Shop, and MacDonald’s.
Features:
- This is a process whereby the owners of a business allow others to run branches in return for certain payments.
- The owner of the business is called a franchiser and the people who operate the retail outlets are called franchisees.
- The franchisee has to rent or buy his business premises.
- The franchisee has to pay the franchiser a certain sum of money for the permission to run the retail outlet.
- The franchisee also has to pay royalty to the franchiser for the purpose of using his name.
- All the shops selling the particular franchised products are decorated in the same style and use the same name.
Advantages to the Franchiser:
- The franchiser has the advantage of attracting more capital from the franchisees.
- The franchiser also receives a share of the franchisee’s profit (royalty).
- As the number of retail outlets increase, the franchiser’s name spreads more.
Advantages to the Franchisee:
· The franchisee has the advantage of selling a product that is well established in the market.
· Franchisees benefit by having an easily recognizable shop, which is well advertised.
Advantages to the Customer:
· The customer knows he is buying a known product whose quality is guaranteed when he buys from a franchised outlet.
· It is very easy for a customer to identify a franchised outlet.
Disadvantages to Franchiser:
· The franchiser loses his customers who go away to the franchised outlets for their convenience.
Disadvantages to Franchisee:
· It is very expensive to buy a franchise.
· The franchisee has to pay the franchiser royalty.
· The franchisee has no freedom regarding decorating his shop, etc.
VOLUNTARY CHAINS:
Example: Wavy Line, Spar.
Features:
· These groups are organized by wholesalers and they allow small retailers to join and enjoy the benefits of large-scale retailing.
· The retailers buy goods from the wholesalers within the group at agreed prices.
· The retailer has to keep his premises and services up to a standard specified by the organization.
· All the retailers have the same name given by the group.
· Advertising is done nationally by the whole group.
· These chains are found mostly in grocery trade.
Advantages:
· The retailers place orders with wholesalers within the group and can get discounts.
· Advertising expenses are reduced as the whole group is nationally advertised.
· The retailer can get loans from the group for renovation and decoration.
· The group lays down standards for retailers to follow, thus making them more efficient.
Disadvantages:
· The retailer does not have much freedom as the group makes most of the policy decisions.
· The representatives of the group decide upon even the advertising, window display, selection of goods, etc.
RETAIL CO-OPERATIVE SOCIETIES:
Definition: A cooperative is a non-profit making voluntary organization where members associate on the basis of equal rights to obtain economic and social benefits for themselves.
Features:
· Membership is opened to anyone prepared to buy a share in the society.
· Control is vested among the members. The members elect a management committee by the principle of “One man-One vote”.
· The societies must be registered with the Registrar of Societies under the Cooperative Ordinance.
· The members enjoy limited liability.
· They have separate legal entity of their own, separate from the owners.
· Retail co-operatives buy a variety of goods from the wholesale co-operatives.
· Activities include retailing and giving a range of benefits to members like educational aid, youth camps and assistance for funeral expenses.
· The profits are distributed among members as dividend stamps, exchangeable for cash.
Advantages to the Co-operative:
· It can raise a large capital at low interest rates.
· It is exempted from paying taxes on profit.
· Members buy goods from the cooperative as they enjoy patronage dividend based on their purchases. Thus the cooperative is ensured of a regular clientele.
Advantages to the Members:
· Members receive interest on capital, which they have invested in the cooperative.
· Each member receives rebates, patronage dividends or trading stamps in proportion to their purchases.
· Members receive other benefits like educational aid, group insurance, etc.
Disadvantages:
· With the separation of management from ownership, members lose interest, as they do not participate in the running of the business.
· There is inefficiency in the business as the elected management committee consists of ordinary people.
· There are a limited variety of goods offered by the cooperatives.
· Sometimes in order to pay patronage dividend, the prices of goods are increased.
· Many of the retail cooperatives are too small to take advantages of large-scale retailing.
SMALL SCALE RETAILERS
General features
1. A small-scale retailing business is normally run as a sole proprietorship or as a partnership.
2. The small amount of capital needed is raised from personal savings, or borrowed from friends and relatives. If the retailer has some collateral security (e.g. house, land, lucrative business), he might be able to obtain some money from a bank in the form of a loan or an overdraft.
3. Small retailers obtain a great variety of goods in small quantities from wholesalers. They are not able to go direct to the manufacturers since purchases are not made in bulk.
4. The sole proprietor normally serves his customers with the help of some assistants. Therefore, he has the opportunity to get to know his regular customers well.
5. Small-scale retailers usually operate only one outlet, normally at a convenient location. Some very successful ones may open branches in other parts of the city.
6. Most small-scale retailers work very long hours and lack retailing know-hows.
1. STREET MARKETS:
Features:
· These markets are operated by owners of shops who wish to increase their sales and by producers of agricultural goods.
· These owners and producers rent stalls at a number of different markets on different days.
· Mostly agricultural goods are sold in a fresh condition.
· They are opened mostly on holidays.
· The overheads are very low.
Advantages:
· These shops are opened mostly on holidays to enable customers to do their shopping conveniently.
· Customers can get goods very cheap as goods are sold mostly by producers of agricultural goods.
· Customers can get goods in a fresh condition.
· As overheads are low, the goods are sold very cheap.
Disadvantages:
· Damaged, stolen or second-hand goods may be sold.
· No credit facilities are allowed.
· There are no after-sales services provided.
· These markets are not opened everyday.
2. Hawkers
Hawkers are the small-scale traders who carry the goods by using some form of transport like handcart. They are also selling the goods like vegetables, fruits, etc.
3. Peddlers
Peddlers are the small-scale retailers who carry the goods on their heads or bags. They are selling the goods, which have low unit valve like pen, pencil, etc.
4. Vending Machines: -
Features:
· These machines are placed at the entrance of public places like cinemas, parks and supermarkets.
- The customer has to insert the correct amount of money into the machine, press a button or turn a lever and the goods come out.
- Such machines are either bought or hired by the operator.
- Goods like cold bottled drinks, hot drinks, cigarettes, sweets, etc, are sold in this way.
Advantages to the Operator:
· The machines provide great savings in labour cost.
- They can be located in convenient spots and do not need a shop.
Advantages to the Customer:
· Customers can get these goods at any time.
- They do not have to depend on going to a shop and are relieved of pressure from shop assistants.
Disadvantages:
· The cost of installing the machine is considerable.
· The machine can be easily broken into and the money pilfered.
· It causes an inconvenience to the customers if the machines break down.
· Prices are high.
· Machines are sometimes jammed and it is often difficult to find anyone that can help or to get a refund.
5. Market Traders
A local market is usually held on the same days each week and consists of number of stalls, which cover a wide range of products.
Advantages to the Customers: -
- Prices are very low, because market trader has few expenses.
- Bargaining can take place.
- Goods are sometimes “Sold off” at cheaper prices at the end of a day.
Disadvantages to the Customers: -
- It may be difficult to exchange goods.
- In bad weather, shopping can be uncomfortable in open markets.
SELLING TECHNIQUES, TREND IN RETAILING AND IMPLICATIONS OF E-COMMERCE
1. BRANDING AND PACKAGING:
Features:
· Branding means the selling of goods under a trademark or brand name of the manufacturer, wholesaler or retailer. The trademark is clearly displayed on the package or the container.
- The aim is to differentiate the goods of one manufacturer from those of others.
- Branded goods are of uniform size, weight, and quality and sometimes price.
- Packaging of goods serves as a protection for the products gives them an attractive appearance and helps to identify branded products.
Advantages to Manufacturer:
· The manufacturer is able to create brand loyalty amongst consumers for his brand of products.
- It increases turnover and results in economies of scale.
Advantages to the Retailer:
· The retailer does not have to weigh or pack the goods.
- As instructions are printed on the labels of goods, there is no need for the retailer to have specialized knowledge.
- The retailer need not advertise branded goods.
- The retailer can offer self-service as the goods are already branded and packed.
Advantages to the customer:
· The customers need not waste time inspecting the goods as they are already branded and packed.
- Customers may be able to enjoy a wider choice of goods.
- Customers are well informed about the product as the instructions are printed on the labels of the products.
Disadvantages:
· Manufacturers have to spend large amounts of money on competitive advertising.
- A retailer has to stock different brands of the same product to meet consumers’ demand.
- Branding and packaging increases the price of goods for consumers.
- Branding leads to imitation of goods, which affects customers.
2. SELF SERVICE:
Features:
· The customer is allowed to choose the products by himself with a trolley or a basket.
- This system is widely used by large retailers.
- Self-service is impossible without branding and packaging.
- This service has been developed to make shopping convenient for the modern busy housewives.
Advantages to the Retailer:
· It is very economical as it cuts down the cost of employing shop assistants.
- Self-service increases turnover as it encourages impulsive buying.
Advantages to the Customers:
· The customer can select the goods he needs quickly as they are already pre-packed.
- The customer can take his own time to select the goods without pressure from shop assistants.
Disadvantages:
· Much capital is needed, as shops must be large and spacious.
- More variety of goods is needed. This result in capital tied up in stock.
- Self-service leads to pilfering and shoplifting.
- Customers are deprived of personal service.
- Customers may be tempted to buy goods they do not require.
- Safety measures like cameras, mirrors, etc, have to be installed to avoid pilfering.
3. AFTER-SALES SERVICE
1. After-sales service is an undertaking made by the retailer, or sometimes the manufacturer or its agent, to repair any faults which occur to the article sold within a certain time. Sometimes, the undertaking could also be to provide some maintenance service at regular intervals for a definite period of time from the time of sale of the article to ensure the efficiency of the article.
2. Sometimes, this undertaking is known as a warranty and the period that such an undertaking holds is the warranty period.
3. After-sales services are normally provided for permanent or durable goods such as machinery, motor cars, television sets, and other domestic electrical appliances.
4. Since durable goods and machinery are highly technical and complex, retailers who are normally trained agents of the manufacturer, or the manufacturer's sole agent undertake the all-important task of providing after-sales service, for a fixed charge.
Positive effects of after-sales service
On the manufacturer and the retailer
1. Good and efficient after-sales service gives the product a good image and increases its competitiveness with its rivals (i.e. the same type of product, but of a different brand). Thus, its sales may increase. For example, consumers would certainly hesitate to buy a particular make of car if it is reputed to come with poor after-sales service.
On the consumer
1. He is assured of an efficiently working product at least within the warranty period.
2. Should mechanical faults become apparent after the article is in use, the consumer is assured of getting it repaired free of charge if it is still within the warranty period. If the fault is still not rectified, he may get a replacement.
3. He is assured of expert technical advice with regard to maintenance and use of the article since the manufacturer would ensure that the technical staff providing the after-sales service are properly trained.
Negative effects of after-sales service
On the manufacturer and the retailer
1. High overheads are needed to maintain a technically-trained staff. Sometimes, there is the need to maintain workshops fitted with proper equipment at strategic points throughout the country.
2. Sometimes, there is the need to replace a defective article if the fault cannot be detected or is beyond repair. The replacements have to be written off as losses.
On the consumer
1. More often than not, the cost of after-sales services is included in the selling price of the article. To that extent, the consumer is paying a higher price for the good, especially if he does not avail himself of such services.
2. After-sales service is only available during the warranty period. If the fault is only detected after this period, the consumer has to pay the repair bill himself.
4. BAR CODING
Instead of using price tags for each item of good, bar codes are used nowadays. A bar code consists of parallel black stripes of different widths with different spacing between the stripes, printed on the wrapper itself. The arrangement of the stripes can be read by using special scanners. The information is then sent to a computer to be processed. Information as to type of goods, its price and weight can be readily accessed. For example, the UPC (Universal Product Code) bar code system is widely used in the supermarket industry for standard recognition for goods sold and manufactured.
Positive effects of bar coding:
On the retailer
1. It saves time and hence labour cost, since vital information such as price, type of good can be read accurately, easily and quickly by special scanners that are linked to computers at the checkout points. This avoids the possibility of human error if the counter personnel has to key in vital information. Such information will then be passed on to a central computer. The retailer can make use of the data thus collected to manage his business efficiently.
2. It helps management greatly in controlling and supervising the movement of inventory in the premises. The retailer will be able to know at the end of the day how much of each type of good was sold. New inventory can then be ordered whenever the need arises. The retailer saves because he need not hold excess stock.
On the customer
The time taken by the cashier to arrive at the total amount payable by the customer is shorter. Thus, the customer can check out faster.
Negative effects of bar coding
On the retailer
1. A high initial capital outlay in terms of buying equipment and training of staff is needed. The whole retail outlet has to be fully computerized.
On the customer
1. He does not remember the cost of each item he intends to buy since the bar code can only be read by the special scanner. He is then not able to do a quick calculation of the prices before he pays at the cash counter.
5. SHOPPING COMPLEXES OR PRECINCTS:
Features:
· A shopping complex is a large multi storied building located in the town centre, consisting of many shop units, each owned by different individuals.
- Each shop may sell different types of goods.
- A wide range of goods and services are available in a shopping complex.
- Shoppers can enjoy ‘one stop’ shopping, as they buy all goods they require under one roof.
- Amenities such as car parking, lifts, air-conditioning, restaurants, etc, are provided.
6. LOYALTY CARDS
Loyalty Cards are plastic cards issued by large—scale retailers to their customers to try to keep the customers rather than let them go to the competitors. This is often used by supermarkets. In this technique, customers are given cash back on purchases when the customer has gained sufficient points. Sometimes, the customers with loyalty cards are given special offers. This technique is often used by airlines who give ‘air miles’ and reward loyal customers with free flights.
7. ELECTRONIC POINT OF SALE (EPOS)
EPOS system is a device at the point of sale which has the capability to identify each item the retailer sells. It will also provide the price for the item and record the sale of the item. In addition it should be able to provide the retailer with information on sales and profitability of each item.
EPOS enables a retailer to find out the shopping habits of its customers - type of goods bought, quantity purchased so that the retailer can then make decisions about what to stock.
Advantages of EPOS
1. The prices charged are accurate - no under-ringing.
2. The retailers can give quick services to the customers.
3. The retailers do not have to price mark every item.
4. The retailer can identify any item which is under priced. The system can work out and apply margins for the retailer without a calculator.
5. The retailer can charge different prices for different types of customers without calculators, books, tables, or trained staff.
6. The retailers do not have to count stock to re-order.
7. EPOS system will increase the retailer’s margins, optimize the retailer’s stockholding and save the retailer’s time.
E-COMMERCE (ELECTRONIC COMMERCE)
E-commerce (electronic commerce or EC) is the buying and selling of goods and services on the Internet, especially the World Wide Web. In practice, this term and a new term, "e-business," are often used interchangeably. For online retail selling, the term e-tailing is sometimes used.
HOME SHOPPING
1. MAIL ORDER FIRMS:
Features:
- Mail order business is run by manufacturers or specialist mail order warehouses.
- They sell goods to customers by sending expensive catalogues or by local part-time agents (housewives).
- Goods are ordered with the help of post or with the help of the part-time agents.
- Goods ordered are sent to the buyers by parcel post.
- The method of payment is cash on delivery (C.O.D.) or cash with order (C.W.O.).
- Payments can be made in installments if the part time agents are collecting the money.
Advantages:
· The mail order firms buy goods in bulk directly from the manufacturers and sell at competitive prices.
- There is no need for expensive large buildings.
- There is no need to employ qualified sales staff.
- The catalogues and part-time agents act as a permanent advertisement.
- Customers can buy goods on credit and pay in installments.
- Customers can return unwanted goods, but they must do so within a time limit.
- There is no need for the customers to visit the shop as the goods are sent to the customers’ doorstep.
Disadvantages:
· The high cost of catalogues and advertising increases the cost of sales per unit.
- There are high operational expenses in the form of commission to agents, cost of packaging and postal charges.
- There is a risk of bad debts as customers may default in their payments.
- There is a lack of personal contact between the mail order firm and the customer.
- The mail order firm has difficulty in selling goods that are returned by customers.
- Customers cannot inspect the goods if payment is by C.O.D or C.W.O.
- No after sales service is provided.
- Sometimes there may be a delay in the delivery of goods.
- The mail order firms take a long time to refund money for goods returned by customers.
2. SHOPPING BY PHONE
Telephone marketing is a convenient way to learn about and buy products and services without leaving the comfort of your home.
Some of the benefits of telephone shopping include:
- Shopping 24 hours per day, seven days a week;
- Buying goods and services with credit;
- Comparison shopping with a variety of merchants;
- Locating hard-to-find items — this can be especially convenient for those with unusual hobbies or interests;
- Getting help and information before and after a sale;
3. SHOPPING BY TELEVISION
TV has become nowadays an effective media not only for advertisement but also for effective sales through live product demonstration. Consumer durables, consumer goods, home appliances are demonstrated on TV. The consumers who watch the advertisements and the product demonstration can place orders by phone SMS, E-mail or by fax. The goods will be delivered by Post.
4. TELESALES
It is the recent development in large scale retailing trade. The large scale retailers send SMS to the customers’ mobile phones and advertise the product thereby sell the goods. It is the current trend that the expertised sales staff talk over the phone to the customers, detail about the product, convince them, and make them to buy the product or service. Telesales deliver the goods to the door step of the customers. Telesales have become more popular with selling of electronic goods, electrical goods, home appliances, offering car loan, housing loan, credit cards etc.,
Advantages of telesales to the large scale retailers/manufacturers
· Cost of advertising is very less.
· Sales promotion over phone is very easy.
· Expenditures to be incurred on salesmen are cut-off.
· Expanding of market to regional or national will be so easy.
Advantages of telesales to the customers
- Shopping becomes so easy
- Customers get their goods/services at their door step.
Disadvantages of telesales to the large scale retailers/manufacturers
· Persuading the customers will be so difficult since there can be no product demo or exhibit.
· It is difficult to cover huge customers over a region or across the country.
Disadvantages of telesales to the customers
· Telesale products or services are not subject to trustworthy since the retailer has no permanent selling place.
· Customer satisfaction over product/service offered through telesales may not be 100% since the products may not be according to the specifications.
· Telesales firms take a very long time to refund the amount to the customers when faulty/damaged/dissatisfied goods are returned.
5. ELECTRONIC SHOPPING
1. As the population of a country becomes more and more computer-literate, this form of shopping has the potential to become very popular in the future. In 1996, more than US$1 billion was transacted over the Internet, making it a good potential platform for electronic shopping. In 1998, this had tripled to more than US$3.5 billion.
2. In electronic shopping over the Internet, or a local on-line network via the Internet, the customers can order goods direct to the on-line retailer in any part of the world via the Internet E-mail. On-line retailers or warehouses can develop their own websites to advertise their products to potential customers. Payment can be made by cash or by the use of credit cards. The goods will then be sent by post or courier direct to the customer's doorstep after confirmation of payment. Warranty claims, if any, may be made on the on-line retailer or the supplier of the product itself within a specified period.
Positive effects of electronic shopping
On the retailer
1. The 'shop' can be open 24 hours a day to customers all over the world.
2. It is not very expensive to set up. Only a personal computer, a web browser, a modem, an Internet account and a telephone line are needed to start.
3. It is convenient, time and cost saving because the e-mail system sent to any part of the world, including the home country, costs the same.
4. Since all information is processed electronically, there will be less room for error.
5. It allows for quick exchange of information and feedback from customers.
6. Small businesses can now compete as effectively as the larger ones in the larger marketplace.
7. The Internet allows for the testing of new services and products in the media. Electronic shopping is very suitable to market information technology (IT) related products like banking, purchase of airline tickets, making hotel or travel arrangements, purchase of books, stocks, bonds, flowers and greeting cards.
8. High overheads of maintaining a normal retail shop such as high rental in a good location, shop decoration and display need not be incurred. The location can be anywhere convenient and economical to the retailer. His customers normally do not visit him personally.
On the customer
1. It is convenient, time and cost saving. The consumer does not need to face traffic jams and parking problems to go to the particular shop to buy the goods that he wants. He shops from the convenience of a computer that is connected to the Internet.
2. Goods can be bought from any part of the world.
3. He is able to 'shop' anytime at his own convenience.
Negative effects of electronic shopping
On the retailer
1. There is only a small clientele since not every household in the country has a personal computer. According to Fortune Magazine (March 18 1996), about 12 per cent of American households own a computer. Moreover, the general public is still quite wary of electronic shopping which is something quite new.
2. At the time of writing, the Internet is still not really ready for the 'Home Shopping Network' for the average household. Electronic shopping is mainly engaged between businesses for the distribution of high-value information and IT-related products and software.
3. On-line retailers need to employ specialized personnel who are experts not only in marketing but also in computer technology in order to participate in this type of retailing.
4. It takes time for a potential on-line retailer to implement an Internet strategy properly. This sort of marketing over the Internet requires close coordination. Sales and customer service has to be involved 24 hours a day. Sales staff may feel overwhelmed at having to answer queries by e-mail and the fact that customers have direct access to information.
On the customer
1. The customer has no way to verify the authenticity and integrity of the on-line retailer. He actually does not get to see the retail outlet. Moreover, he has to give the retailer his credit card number and pay for the good before he even receives it.
2. There is a lack of privacy and lack of security since there is the possibility of someone 'intercepting' his credit card number.
3. There is likely to be no after-sales service.
ADVANTAGES OF LARGE SCALE RETAILING TO THE RETAILER
· Retailers can get better trade and cash discounts when they buy from manufacturers in bulk quantities.
· Large retailers can afford to employ specialists for each department. Hence goods and services are of better quality and standard.
· Some large retailers are able to brand their goods using their own labels and thus are able to create brand loyalty among consumers.
· Large retailers buy in bulk and so have their own fleet of transport vehicles.
· Large retailers provide self-service and so are able to cut down expenses of hiring shop assistants.
· As large retailers buy in bulk they are able to sell at competitive prices. This increases sales and the profit of the retailer.
· Large retailers can afford to carry out sales promotions in order to increase their sales.
· Large retailers are able to afford to use the latest sophisticated cash tills and computer terminals to making shopping convenient for the retailer and the customers.
ADVANTAGES OF LARGE SCALE RETAILING TO THE CUSTOMERS
· Customers are able to get goods at competitive prices as the large retailers buy in bulk directly from the manufacturers.
· Customers find it convenient to do their shopping under one roof as large retailers provide a great variety of goods.
· Self service and the various amenities provided by large retailers makes it even more convenient for the customers to do their shopping.
DISADVANTAGES OF LARGE SCALE RETAILING TO THE RETAILER
· Large capital is needed as large retailers need to buy a large variety of goods direct from the manufacturers in bulk quantities.
· As the shop expands and the branches and departments increase, control becomes more difficult and expensive.
· There are high operating expenses and these can be covered only by a high turnover in sales.
· There is a greater risk of loss through pilfering and shoplifting as self-service is provided.
DISADVANTAGES OF LARGE SCALE RETAILING TO THE CUSTOMERS
· Customers do not enjoy personal services from these large retailers.
· Large retailers normally do not provide credit facilities.
· As large retailers provide many amenities, consumers may get the goods at higher prices.
HOW WHOLESALERS ARE AFFECTED BY THE GROWTH OF LARGE SCALE RETAILERS?
The establishment and popularity of large retail outlets like the multiple and the variety chain stores which have the financial and technical resources to buy in bulk direct from the manufacturer have contributed to the decline of the wholesaler. Nowadays most of the manufacturers prefer to sell goods direct to the large scale retailers. By selling direct to the large scale retailers, the manufacturers are able to sell goods on bulk consignment where the payment is made for the consignment by the large scale retailers immediately. The manufacturers get the benefits of more profit percentage as the wholesalers are eliminated in this way. Manufacturers also get in touch with the final consumers through large scale retailers as they perform the function of customers personal service through pre-sale and after-sale service. Most importantly a large scale retailer can deal with many manufacturers’ goods at wide range. As these functions cannot at all be performed by wholesalers, the wholesale trade has become of less importance.
SURVIVAL OF THE SMALL RETAILER
In spite of the intense competition from the large retailers and the proliferation of large shopping centres or shopping malls, a number of small independent retailers have still managed to survive even though their numbers have fallen greatly in recent years. This is due to certain advantages that the small retailer still enjoys over the larger and less personal retailers. However, the small retailer still predominates in certain trades such as jewellery and bespoke tailoring in which a large outlet is not exactly suitable.
The reasons for the survival of the small retailer are as follows:
(a) Since the small retailer knows his customers well, he is able to give better personal advice and service. This is extremely important in some branches of retailing, e.g. jewellery and made-to-measure clothing. As a result, consumers prefer going to one shopkeeper to others because of the 'personal touch' which puts them at ease.
(b) Since most small retailers cater for regular customers, they are in a position to assess the credit-worthiness of each customer and may be willing to give credit.
(c) They might undertake delivery of goods - e.g. daily newspaper, fresh bread, daily provisions.
(d) The small retailer's shop is normally close to the homes of his customers, making it very convenient for them to call whenever they run out of supplies.
(e) The small amount of capital needed makes it easy for people to enter the retail trade. Not much skill and expenses are needed to start a business.
(f) The small shop does not have as many overheads as a large retailer, and hence can sell most items at a slightly lower price.
(g) The small shop is easier to manage. The small retailer is helped by members of his family. The owner and other members of his family have every incentive to work very hard since they reap all the profits.
(h) By becoming a member of a voluntary chain (see Glossary) the small retailer may be able to get his supplies on more favourable terms from the wholesalers in his chain as well as enjoy other benefits like advertising, credit and insurance.
Advantages of the small retailer
(Note that the above points from (a) - (h) may be used in the discussion on the advantages of the small retailer.)
Disadvantages of the small retailer
1. Jack of all trades and master of none
The small retailer does not employ any specialist buyer. He himself undertakes the tasks of buying as well as selling, store-keeping and display, not to mention book-keeping and administration. Since he cannot be an expert in every field, it is very likely that he is less efficient and hence, his costs in relation to turnover are higher than those of the larger retailers.
2. Lower trade discount
Since the small retailer gets his goods from the wholesaler, it is natural that he will have to pay a higher price for his goods since he gets a lower trade discount.
REASONS WHY A SMALL RETAILER BUYS FROM THE WHOLESALER
1. Small capital
The small retailer has only a small capital and cannot afford to buy in bulk from the manufacturer. He can only make small orders at a particular time.
2. Limited market
The small retailer has mainly a regular clientele. The market for his goods is only limited to the people living in the vicinity of his shop. This does not warrant bulk buying, even though he can get better prices if he were to buy in bulk from the manufacturer.
3. Small turnover
The total volume of his sales per month is small. Bulk buying would mean that he will have his limited capital tied up in stocks for too long a time. This not only involves a loss of interest but also the payment for rental on storage space. Goods lying around for too long would go bad in the case of foodstuff or may go out of fashion in the case of goods like clothing and furniture. He only needs to pay in small amounts for a great variety of goods produced by many manufacturers. And this is exactly what the wholesale does for him.
4. Need for credit
Trade credit is one of the greatest sources of funds for a small retailer. Manufacturers are often unwilling to give credit. However, the wholesaler is often willing to give credit to the small retailer in order to secure business.
5. Variety of goods
A manufacturer only sells one or a few major related items of goods, e.g. soap, shampoo, washing detergent and other cleansing agents. The number of brands manufactured by a particular manufacturer is also limited. However, a wholesaler stocks a great variety of brands of a particular good, e.g. Lux, Palmolive and Imperial Leather soaps. He also stocks a wide range of related goods, e.g. all kinds of foodstuff and household items.
6. Regular visits from the wholesalers
The small retailer gets to know the latest products in the market through salesmen from wholesaling companies who visit him periodically. The small retailer may also get advice as well as prospective prices of certain product lines from these people who can help him choose the types of goods to stock.
HOW A SMALL RETAILER CAN MAKE HIS BUSINESS MORE SUCCESSFUL
- Location: The small retailer can change the location of his shop if his business is not good in terms of competition and demand.
- Service: The small retailer can improve his services in order to earn more goodwill and secure a regular market.
- Prices: The small retailer may be buying goods at very high prices. So he can change the wholesaler from whom he is buying goods.
- Quality: The quality of his goods may not be very good and hence he may be loosing his customers. So the retailer must buy better quality goods.
- Variety: The retailer must try and provide better variety of goods in order to increase his number of customers.
- Shop Layout: The retailer must keep his shop clean and display his goods very neatly. This will attract more customers.
- Publicity: The retailer must advertise more in order to attract more customers.
A business document is a form that provides details of a transaction and the evidence that the transaction has taken place.
IMPORTANCE OF DOCUMENTS IN COMMERCE
Documents are important in commerce because they:
(a) provide written record of transactions that have occurred
(b) form the basis for recording entries in the accounting records
Features of documents
1. Although every business document has its own special functions, all documents must have the following features:
(a) date of issue (b) nature of transaction
(c) parties to transaction (d) amount
(e) terms and conditions of transaction
2. In addition, most business documents may have reference numbers.
Documents of home trade
Letter of enquiry
1. It is sent by the buyer to the seller to find out about goods required - their availability, their prices and the terms of payment.
2. It informs the seller of the goods required, the quantity, the time and the terms of delivery.
3. The buyer may write letters of enquiry to several suppliers to request for quotations so as to compare prices and terms of payment.
Quotation
It is sent by the seller to the buyer to inform the buyer of goods requested, giving all the relevant information: types of goods, their brands, their respective prices, the terms of delivery and the terms of payment.
Catalogue and price list
Sometimes, instead of sending a quotation, the seller may send a catalogue containing detailed and classified information of the various types of goods offered for sale. The goods, which are either described or illustrated in the catalogue, have a catalogue number each for reference (when placing orders). Prices are not quoted in the catalogue as they may fluctuate often. Instead, a separate price list is sent together with the catalogue.
Order
1. It is sent by the buyer to the seller to place an order for goods. It states the type, brand, quantity and price of the goods (as given in the quotation) as well as the terms of delivery, the terms of payment and the expected delivery date.
2. Sometimes, the seller may supply the buyers with order forms for filling in the details of the goods required.
Invoice
1. It is sent by the seller to the buyer to notify the buyer of the amount due on the goods supplied, stating also the type, quantity, price and terms of payment.
2. It is a bill used for goods sold on credit. (Goods sold for cash need not have invoices. They are billed with cash receipts instead.)
3. It is used to write up the Sales Journal (in the case of a sales invoice) or the Purchases Journal (in the case of a purchase invoice).
Advice note
1. It is sent by the seller to the buyer to inform the buyer that the goods have been despatched.
2. It informs the buyer of the quantity and type of goods (minus its prices), date and means of despatch.
3. It helps the receiving firm to make arrangements for the receipt and the stocking of the goods that are due to arrive.
Delivery note
1. It is sent by the seller to the buyer to inform the buyer of the goods delivered, stating the quantity and type of goods delivered and quoting the order number, if any.
2. It usually arrives together with the goods so that the buyer can check the goods delivered.
3. A copy is usually handed back to the one who has delivered the goods as proof of delivery.
Credit note
1. It is not an invoice and to distinguish it from an invoice, it is printed in red.
2. It is made out by the seller to the buyer when:
(a) the goods sold have been overcharged in the invoice
(b) the buyer returns the goods (damaged, of the wrong type or specifications, etc.)
(c) the buyer returns empty containers for which he has been charged in the invoice
3. It informs the buyer that his account is credited, decreasing the amount that he owes.
Statement of account
1. It is sent by the seller to the buyer at the end of every month.
2. It summarizes the monthly transactions between the buyer and the seller.
3. It shows the amount of goods bought, the returns made, the payments, and cash discounts, if any, all of which can be checked by the buyer with the invoices, credit and debit notes and the receipts received to date.
4. The balance outstanding is the amount that the buyer owes.
5. It serves as a reminder to the buyer to pay up his debt.
6. It enables the buyer to check his books of account and notify the seller if there is any error.
Receipt
1. It is a proof of money received, issued by the seller to the buyer when the buyer makes his payment.
2. When payment is made by cheque, it is not necessary to issue a receipt since the cheque serves as proof of payment.
DIFFERENCE BETWEEN CASH DISCOUNT AND TRADE DISCOUNT:
CASH DISCOUNT | TRADE DISCOUNT |
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Mark- up
Mark – up is the gross profit as a percentage of cost of goods sold.
Mark-up = Gross profit X 100
Cost of goods sold
Advertising
PURPOSES OF ADVERTISING
To in form
1. Advertising serves to inform the public of the availability of a new product or service which is being sold in the market, e.g. advertising a new brand of toilet soap or announcing the opening of a new hairdressing salon.
2. This is aimed at creating a demand for the new product. The new product has to be made known to the public before the goods are actually available for sale. The advertisement also serves to induce the wholesalers and the retailers to stock up the new goods.
3. This type of advertising is called informative advertising. It is not only restricted to new products but is also used to inform people of new uses of a product, of how a product works, of new price changes, of names and addresses of retailers selling a certain product, or even of a new bus timetable.
4. What is important is that it makes no attempt to persuade but merely informs the public of the availability of the product, its uses and advantages, price, quality, terms of sale, etc.
5. Under informative advertising the following goods and services are advertised:
- Advertising in Trade and Technical Journals: These advertisements contain technical information about goods.
- Advertising of Particular Events: Trade fairs, exhibitions, concerts and sporting activities are examples of such advertising. In this type people are informed about such events and are persuaded to attend such events.
- Advertising of Employment Opportunities: In this type people come to know about the various employment opportunities available.
To persuade
1. Advertising also serves to persuade the public to buy some goods or services, e.g. a company seeks to induce the public to buy its particular brand of detergent in preference to others or a travel agency advertises the better quality of service it can provide to its customers.
2. This type of advertising is called persuasive advertising. It not only informs but also persuades the public into purchasing the advertised product by using subtle techniques. It aims at extending the demand for the good or service advertised. In other words, an advertiser aims to increase the sale of its product. By selling more, a firm increases its revenue and might pay a lower unit cost as goods are produced on a larger scale. The net profit of the firm would then increase if these benefits are greater than the costs of advertising.
To remind
1. Advertising also serves to remind consumers of existing products; that the product may be needed in the near future and where the product can be bought.
2. It is necessary for the advertiser to draw the attention of consumers to his product constantly and to keep away from other competitive brands which may be heavily advertised.
3. It aims to keep the name of the product before the public. For example, a newspaper advertisement may carry a picture of a bottle drink or a bus may carry the name of a firm. They say nothing but serve a useful purpose in reminding the public of the name of the product or service. Many products are branded to distinguish them from similar products. Brand names are registered so other competitors cannot copy them. Some brand names are so well known that advertisements often show only the brand name and the product itself is not mentioned.
4. This type of advertising is called reminder advertising. A related form of advertising is reinforcement advertising which seeks to assure current purchasers that they made the right choice.
5. Reminder advertising aims at sustaining the demand for the good or service advertised.
BENEFITS OF ADVERTISING
1. Advertising increases profits and therefore the producer can lower the price of his goods.
2. Advertising helps in providing information to the customer of a particular product.
3. Advertising helps in launching new products.
4. Advertising helps to introduce new products, thus improving the standard of living.
5. It is believed that advertised goods are of better quality than other goods.
6. Advertising maintains the price of newspapers at a reasonable level.
7. It helps to increase sales.
8. It provides employment opportunities.
9. It helps to create goodwill for the firm.
10. It gives wide choice to customer.
11. It helps the salesman in their efforts of promoting sale.
12. New product can find market only through advertising
13. Advertising provides employment opportunities
SOCIAL ASPECT OF ADVERTISING
Positive:
1. It generates employment.
2. It yields revenue for the public media which is indirectly an income for the government.
3. It educates the society.
Negative:
1. Ads can mislead the customers to try out the lice goods.
2. Ads can turn the society towards flair for sex, and violence.
3. Ads can lead to waste of resources.
DANGERS OF ADVERTISING:
To consumer:
1. Consumers are misled by advertisements.
2. Customers may have difficulty in choosing a brand.
3. Customers may make unnecessary purchase.
4. Customers may be irrational in buying.
To producer:
1. Production costs increase.
2. The expenditure may not be justifiable.
3. The manufacturer may incur financial loss, if he engages in competitive advertising.
Reasons why consumers need protection against some forms of advertising:
· Advertisements may be misleading.
· Advertisements may contain false information.
· Goods may be incorrectly labeled.
· Some advertisements may be dirty and unsuitable.
· Some adult advertisements may be shown at inappropriate timings.
TYPES OF ADVERTISEMENTS
Persuasive Advertising
In this type the advertiser tries to persuade the public to buy his product, by explaining the various good qualities that the product possesses over other products.
Competitive Advertising
This is carried out by different producers of different brands of the same product. Each producer tries to compete with other producers in trying to capture the market. The advertiser uses techniques that are persuasive and aggressive to achieve his target. Example, the advertiser claims that his product is best in terms of quality/performance/durability.
Example: Biggs Butter is best.
Informative Advertising
In this type information is passed on to the consumers about availability of products, changes in fashion and how to use the products. Under informative advertising the following goods and services are advertised:
- Advertising in Trade and Technical Journals: These advertisements contain technical information about goods.
- Advertising of Particular Events: Trade fairs, exhibitions, concerts and sporting activities are examples of such advertising. In this type people are informed about such events and are persuaded to attend such events.
- Advertising of Employment Opportunities: In this type people come to know about the various employment opportunities available.
Generic Advertising (Collective)
When all the producers in one industry combine to advertise their product, it is called generic advertising. These advertisements are usually sponsored by trade associations. The producers group together to share the costs and to promote the product hoping to increase the overall sales of the product.
Example: Drink more tea.
ADVERTISING MEDIA:
| Type of medium | Advantage | Disadvantage |
| (a) Newspaper | 1. There is a wide target audience. It is read by many people. 2. Circulation cost per exposure is low. It is one of the cheapest media of reaching a large number of prospective buyers. 3. It is suitable for products or services in general demand, e.g. films, electrical appliances. 4. It enables the advertiser to present the products in some details, e.g. technical details about a car. 5. The advertiser can have the choice of national or regional coverage. 6. Unlike advertisement in the magazine which must be submitted weeks ahead, advertisements in the newspaper can be inserted or cancelled at shorter notice. 7. The advertiser can obtain response from the readers by providing telephone numbers or by means of coupons or contest. 8. Newspapers have the capacity to accept a large number of advertisements compared with the limited time on television. | 1. It has a short life span 2. The advertisements have to compete with other advertisements for the readers attentions. 3. The written advertisement message can reach only the literates. 4. Advertisements are many and varied such that it takes effort to find advertisement one is looking for. 5. The paper quality is low compared with those used for magazine. 6. As an advertising medium the newspaper doesn’t have the same impact as the television. |
| (b) Magazine | 1. The paper quality is better compared with that used for the newspaper. 2. An advertisement in the magazine enjoys a longer life span than that in the newspaper. 3. The targeted audience of the advertisement can be reached mare easily. E.g. a firm selling computer software could advertise in a computer magazine or a firm selling cash register can advertise in a trade journal. 4. As the advertising message is directed at the intended audience there will be less wasteful circulation. 5. It is suitable for advertising messages which are long and have to be read in a leisurely manner. | 1. It is inflexible, as advertisements must be placed weeks before the date of the publication. 2. There is limited readership as the readers are specific. 3. It is infrequent as the magazine is published only periodically. 4. As an advertising medium, it doesn’t have same impact as television. |
| (c) Radio | 1. The advertising message can be reached large number of people even in remote areas. 2. It is much cheaper to produce advertisements of this medium than a television commercial. 3. The use of sound such as music and oral makes radio a more lively advertising medium than static medium such as newspaper and magazine. 4. The advertising message can reach the target market effectively through special interest programme such as children’s or women’s programmes. 5. With radio sets that are portable or fitted in motor vehicles, radio message can be received widely. | 1. There is lack of visual elements and as such, they are less effective when visual impact is needed. 2. It’s life span is very short compared with the newspaper and the magazine. 3. Audience attention is low when broadcasting is being used to provide a background for other activities. |
| (d) Television | 1. The advertiser can demonstrate the product with realistic sound s, colors and movements because of effects. The television is one of those media that have high persuasive impact i.e. the ability to stimulate consumers. 2. The television commercials can reach a large number of viewers as they have wide exposure. 3. Advertisements can be repeated to the point where a large number of viewers have seen the advertisements to create an effective and lasting impact. 4. The advertisement can be directed at national or regional audience. 5. The time chosen for airing an advertisement can suite the target audience, e.g. Toys can be advertised during children’s programme. 6. There is high audience attention and personal impact. 7. The use of the product can be demonstrated and explained. 8. The viewers can be invited to respond immediately by dialing a telephone number. | 1. It is not suitable when detail information is required. The newspaper and the magazine are better advertising media if more information is required by the prospective buyers. 2. It is not suitable if the target audience is small due to high cost. 3. There is high absolute cost – the cost in producing an airing television commercial is very high and requires big budget. 4. The life span of a given advertising message is short unless it is recorded. 5. There is less audience selectively as television commercials tend to reach mass audience, whereas the magazine can be more selective. |
| (e) Cinema | 1. High audience attention is received as there are fewer distractions compared with house viewing of television. 2. Its wide screen gives extra scope for more dramatic and realistic impact compared to television. 3. Advertisements on films make full use of the audiovisual effects with movements and colors. | 1. There is limited coverage as it is limited to film goers. 2. It is less popular with the event of videotapes, which are used to demonstrate and advertise the use of household products at shopping centers. 3. It is a non-interactive medium, as the audience cannot respond immediately. |
| (f) Direct mail | 1. Audience selectively is practiced as the advertising message will be mailed only to selected target groups. 2. Flexibility can be exercised. 3. There is no competition with the same medium. 4. Wasteful circulation is kept to a minimum as it reaches only the market it is intended for. | 1. It is limited only to the literate. 2. It is limited to the mailing list the firm can secure. 3. Cost of direct mail per prospective client is relatively high. It suffers from the stigma of being classified as ‘junk mail’. |
| (g) Outdoor hoarding and sign e.g. signboard, neon lights, poster | 1. There is an impact of large size and colors. 2. Flexibility can be exercised. 3. There is high repeat exposure. 4. It is a low cost medium. 5. Low competition is expected. 6. The advertising message can reach a large number of people. | 1. There is no audience selectivity. 2. There are creative limitations as messages are limited to simple, short and clear statements. 3. No audio- kinetic impact can be made. 4. It is open to vandalism, especially the posters. |
| (h) Pamphlet and sample | 1. There is intensity of market coverage within a certain area. 2. There is an advantage of personal impact. 3. Advise and explanation can be given when necessary. | 1. It may fall into the hands of those not interested in the product. 2. There is limited circulation as they have to be handed to person to person. |
| (i) Traveling salesman | 1. It is effective because it brings products to the homes of consumers. 2. Salesmen can demonstrate the uses of the product to the consumers. | 1. The coverage is limited to certain areas. 2. Salesman may not be welcome in by home owners. 3. High cost of employing sales personal can be incurred. |
| (j) Window display and exhibition | 1. It is attractive to shoppers and exhibition visitors. 2. Uses and advantages of product can be explained and demonstrated. 3. Products can be shown to targeted audience 4. can give further information 5. Products can actually be seen and examined | 1. It can reach only shoppers and exhibition visitors. 2. The frequency of holding an exhibition is not high. |
| (k) The internet | 1. It is an interactive medium where the user can key in input and obtain response immediately. 2. The medium uses multimedia to create realism in advertisements. 3. The advertiser can place the advertisements in a popular website or he can create his own home page. 4. The advertising message has longer life span than a television commercial or a radio message as the user can always go back to the website previously visited. 5. The advertising message can reach selected target groups. 6. The cost of advertising in this medium is relatively low compared with the television. | 1. The coverage is limited only to those who surf the internet and visit the website. 2. The advertising message placed has to compete with many other messages for attentions. |
| Catalogues | 1. can give full details 2. can be shown in colors 3. can show all the products in one catalogue 4. can be referred to repeatedly | 1. maybe expensive to produce/circulate 2. may reach only a selected group 3. limited to the literate |
FACTORS AFFECTING THE CHOICE OF MEDIA
The choice of advertising media depends on the following factors:
Nature of the product or service
1. The medium chosen must fit the product or the service to be advertised. Goods, especially new ones that require explanations and demonstrations are best advertised at trade fairs and exhibitions. Alternatively, salesmen can visit homes to demonstrate the use of household appliances, etc. Women's clothes are best shown in fashion shows or women's magazines. Services such as self-service petrol kiosks and Automated Teller machine (ATM) services are best demonstrated over the television network as television commercials combine sight, sound and movement which can create a more dramatic impact than the other media. Besides, television commercials can reach a large number of viewers.
Target market
1. Target market refers to the group of people that the advertisement is aimed at. Groups of people may differ in terms of income, age or sex. The medium chosen must fit the target group, i.e. the group of people who will likely buy the product or service. For example, if you are trying to reach the female market, then women's magazines may be appropriate. If you are trying to reach to children, then you may select television as the medium especially during children's programmes.
Extent of market: Local, national, international
1. If wide coverage is needed for a certain advertisement, the national newspaper will be a more appropriate medium than the local newspaper. However, the local newspaper will be useful for tapping the local market, e.g. selling used car or renting a room or a house. Television is probably the most popular medium for disseminating any advertising message to the mass market which includes both the literate and the illiterate. For example, advertisers can reach the world market through live telecast of football or boxing which has international appeal.
Cost
1. The cost of using the medium should be considered in relation to the budget or the amount of funds available and the circulation of the medium. For example, a small firm intends to advertise the sale of used cars but it has allocated a small budget for this purpose. As such, we can rule out television as a choice as the cost of advertising on television is very high. Instead, the firm may put a small advertisement in the newspaper.
2. The advertiser should also weigh the relative benefits of the media with their relative costs when making a choice. Although the cost of advertising on television may be high, the size of the audience it will reach is great, resulting in lower cost per exposure.
3. The standard criterion for comparing media is cost per thousand, i.e. the cost of reaching 1000 members of the target audience. Cost per thousand enables the advertiser to compare the cost of different media, such as television versus radio or magazine versus newspaper.
Flexibility
1. Flexibility refers to the ease with which the advertiser can change the advertisement so as to adapt to different conditions and circumstances. As a medium, the magazine generally has less flexibility than the newspaper. As the former requires the finalized layout weeks before publication, the advertisement in the magazine cannot be changed easily, whereas the advertisement in a newspaper can be changed days before its publication. Radio provides greater flexibility as the advertiser can change the advertisement more easily, even on the day the advertisement is aired.
Noise
1. The 'noise level' refers to the level of distraction for the targeted audience. The noise level for an advertisement in the newspaper is great, meaning that other advertisements in the newspaper as well as news reports distract the reader's attention from the advertising message. On the other hand, television commercials encounter a lower level of distraction because the commercials are aired one at a time and can capture the viewers' attention. Compared with the newspaper and the television, the cinema encounters the lowest level of distraction as a medium - an advertising message can capture the full attention of the audience in a cinema.
Lifespan
The lifespan of an advertisement refers to the length of time an advertisement will be on display. Different media have different life spans. For example, a radio or a television commercial has short lifespan - it will last only for a few seconds. Listeners cannot replay the commercial unless they record the programme. On the other hand, an advertisement in the newspaper or the magazine has a longer lifespan as the advertisement can be read and re-read several times. It can also be filed and passed on to other people.
ANALYSIS OF GIVEN SITUATIONS IN THE CHOICE OF ADVERTISING MEDIA
1. Natro is an established company. It intends to market a new brand of instant noodle, Ramee, to people of all walks of life and at national level. The company has found out that a significant proportion of the target group consists of the illiterate and that watching television is more popular than listening to radio among the target audience. The company has allocated a big budget for this purpose. State, with reasons, which advertising medium you would recommend.
Natro could use the television as the advertising medium.
Reasons for choice
(a) Since the target audience consists of people of all walks of life, the medium chosen should be able to reach mass target group. With this point in mind, we can rule out the magazine, the direct mail and the other media that can reach only a small number of people.
(b) However, it has been pointed out that a significant proportion of the target group consists of the illiterate. As such, an advertising message in the newspaper may not reach this group of audience.
(c) It has been found that watching television is a more popular pastime than listening to radio. We can assume that television commercials will be able to reach a bigger target audience than radio commercials.
(d) Natro is an established company and it has allocated a big budget for the purpose of marketing this new brand of instant noodle. Assuming that the company can bear the cost of advertising Ramee on television, the following are the advantages of advertising on television over the other media:
(i) Instant noodle is a product of general demand as it is likely to be consumed by most people. Television represents the best choice as it can reach a large number of audience including children, the illiterate and those who do not read the newspaper.
(ii) Television commercials combine sight, sound and movements which can create a more dramatic impact than the other media.
(iii) Advertisements of Ramee on television can be repeated to the point where a sufficient number of viewers have seen the advertisements to create an effective and lasting impact.
(iv) The advertisements can be aired at the national level.
(v) There is high audience attention.
(vi)The time chosen for airing the advertisement for Ramee can suit the target audience, e.g. during snack or meal times.
2. An established company intends to market an expensive camera. The prospective buyers are likely to be photograph enthusiasts. The general public is probably not interested in this product due to its high price and the use of this camera requires high level of competency. The camera has several new features which need to be explained to the prospective buyers. State, with reasons, which advertising medium you would recommend. The company could use an up-market magazine, a popular photography magazine or a journal/magazine subscribed by photography enthusiasts as the advertising medium.
Reasons for choice
(a) Since the target group is exclusively limited to those who are rich and are very interested in photography, radio, television and other media that can reach mass audience can be ruled out, or it will be a waste.
(b) As the new features need to be explained to the prospective buyers, radio and television can be ruled out. On the other hand, print media such as the newspaper or the magazine may be more suitable as the media allow the features to be explained in great detail. Advertisement in a magazine can be directed more specifically to the target audience, i.e. photography enthusiasts who can afford to buy the expensive camera whereas advertisement in a newspaper is directed to mass audience. As the advertising message is directed at the intended audience, there will be less waste.
(c) The up-market magazine will be able to address to those people who have sophisticated and expensive tastes.
(d) The high quality of production in the magazine will enable the advertisement to bring out the outstanding features of the camera.
(e) An advertisement in the magazine enjoys a longer life span than the newspaper.
(f) The advertising message in the magazine can be read in a leisurely manner. It can be read and re-read. It can also be filed for future reference.
3. Miss Wong Meilin intends to advertise for the sale of her used car a three-year old Honda Civic. She thinks the prospective buyers will probably be those in the same town that she is staying now. She does not intend to spend a lot of money on the advertisement Can you advise her on the medium she should choose to place the advertisement? State the reasons for your choice of the medium.
Miss Wong Meilin could use the 'Classified Ad' column in a local newspaper as the advertising medium.
Reasons for choice
(a) The cost of advertising in a local 'Classified Ad' column is very low compared with other media.
(b) The target market is focused as those who are interested to buy used cars will look up the 'Classified Ad' column.
(c) The advertisement in a newspaper can reach a large number of target audiences.
(d) Advertising in a local newspaper is generally cheaper than in a national newspaper.
(e) The target audience is likely to be those living in the same town as Miss Wong.
4. Mr Ramasamy intends to sell Indian shawls at a special price by post. A shawl is a large piece of woollen cloth which is worn by women over their shoulders or head, or which is wrapped around a baby to keep it warm. Mr Ramasamy thinks that the prospective buyers are largely Indian women and he has obtained a list of names and addresses of those Indian women who will likely buy this product. If you were Mr Ramasamy, which medium will you choose to market your special offer Indian shawls? State your reasons for the choice.
Mr Ramasamy could use the direct mail as the advertising medium.
Reasons for choice
(a) As the product is demanded only by a specific group of people, the media chosen must address only an exclusive group. So, media such as radio and television which address mass audience will be a waste. On the other hand, as direct mail reaches selectively, i.e. the prospective buyers and not the general public, this medium will have minimum waste.
(b) As Mr Ramasamy has already obtained the list of names and addresses of those who will likely buy the product, this list will facilitate in the use of the direct mail, i.e. information about the product can be sent to those on the list and order can be obtained by post, phone or facsimile transmission.
(c) There is no competition for the same medium.
(d) As the product is a special offer item, Mr Ramasamy is not prepared to spend a lot of money on advertising through other more expensive media.
METHODS OF APPEAL
Devices and methods of appeal e.g. music, colours, famous people and emotions.
“SEARCHE”
Social acceptance:
A consumer could make more friends if a particular brand of deodorant is used.
Economy:
Bike manufacturers advertise their products highlighting the less fuel consumption and more milage.
Ambition and success:
The customer can be persuaded that if he buys a particular brand of cloths he could get a better job.
Romance:
If a woman buys a particular cream she could become more beautiful and attractive.
Comedy:
If an advertisement is amusing the product shown will be remembered by the consumers and therefore they might buy it.
Hero worship:
A well-known personality can be used to advertise the product. It is hoped that consumer will buy the product because of the appeal of the personality.
Easy life:
Buying a new brand of washing machine will give the consumer more leisure.
SALES PROMORTION
Sales Promrtion, element of the marketing process that can close the sale of good or services to a potential customer by providing the incentive to buy. Sales promotion, advertising, and salesmanship are the major techniques used in merchandising products to the public. Salesmanship often takes the form of a face-to-face encounter between the buyer and seller; the presentation is set up to convince customers that the product on sales is essential to their satisfaction. The lack of personal feedback between buyer and seller is sometimes considered a drawback of the advertising approach. Selling by telephone, although it is significantly less effective than selling, is still considered an important method of merchandising. Since the 1980s, a growing promotional technique has been use in-home shopping programs on cable television channels and computer networks.
DISTINCTION BETWEEN ADVERTISING AND SALES PROMOTION
Advertising aims at persuading customers whereas sales promotion aims at promoting sales. Advertising is done through indoor and outdoor advertising media whereas sales promotion is done through gifts, price reductions, special offers, point of sale, offers, sponsorship and trade fairs and exhibitions. Sales promotion might be carried out for a specific period whereas advertising needs to be carried out through out the life of the product.
METHODS OF SALES PROMOTION
Free samples
This is the best way of introducing a product. It is very expensive as samples are given to every household.
Price reduction
Customers often expect household articles to be offered at reduced prices. Some producers distribute coupons to customers. The customer can use these coupons for part payments.
Competition
Sometimes competitions are held. Customers have to purchase several packets of the producer’s goods to enter the competition.
Free gifts
Gifts such as glasses, caps or cups may be given to customers if they buy the producer’s goods.
Point of sales
In a trade fair or exhibitions, the producer of a product has a stall where the salesmen do a free product demonstration and at the spot, sale is done with offers and gifts.
Sponsorship
The manufacturer or a wholesaler or a large scale retailer come forward to sponsor a musical programme, or a film, or a drama, or a sport event on a public media like TV, Radio, National daily etc., by incurring all the expenditure to conduct the programmes. The manufacturer or a wholesaler or a large scale retailer advertise their product/service while a film, or a drama, or a sport event on a public media like TV, Radio, are either telecast or broadcast so that they can draw public attention.
Special offers
During festivals many traders announce special offers. These offers carry a special discount or a free service during a specific period of time. Customers tend to buy more when there are offers. Example, during New Year eve, manufacturers announce 20 – 30% special offers on certain range of consumer goods like home appliances, consumer durables and fabric items.
TRENDS IN ADVERTISING
DIGITAL BILLBOARDS
This is an advertising media. In this media, very large screens are used to display the advertisement. Digital billboards are placed in busy streets so that the advertised messages can be reached to large number of people. The information about the product is given orally to passersby.
Internet
This is the recent development in communication. Through World Wide Web, information can be browsed. Nowadays, advertisers wish do advertise through Internet as ads can be seen by millions through out the world.
| The internet | 1. It is an interactive medium where the user can key in input and obtain response immediately. 2. The medium uses multimedia to create realism in advertisements. 3. The advertiser can place the advertisements in a popular website or he can create his own home page. 4. The advertising message has longer life span than a television commercial or a radio message as the user can always go back to the website previously visited. 5. The advertising message can reach selected target groups. 6. The cost of advertising in this medium is relatively low compared with the television. | 1. The coverage is limited only to those who surf the internet and visit the website. 2. The advertising message placed has to compete with many other messages for attentions. |
E-COMMERCE
E-Commerce, abbreviation for electronic commerce, usually defined as the conduct of business online, via the internet. Until recently, e-commerce was limited mainly to large companies and their suppliers, who connected their computer together to speed up ordering and payment system. Today, millions of people are involved in e-commerce on the internet when, for example, they visit World Wide Web sites to buy books or CDs, order flowers or pizzas, or check their bank accounts.
In the narrow definition of e-commerce, the term covers the buying and selling of goods and services using computer communications.
Successful e-commerce ultimately leads to some form of payment, and ideally this will involve “electronic fund transfer” (EFT): in other word, the payment will be made via an electronic message, not in physical form such as cash or a cheque.
Advantages of E-commerce to the customers
- Online catalogues can be viewed
- Their is much bigger choice for products
- Products review can be obtained before we buy the goods
- Orders can be placed 24 hours a day
- Goods or services are usually cheaper on internet as the middlemen are cut
- Once the customer has placed an initial order, the customer details are stored and makes shopping online very fast
- You can buy goods and services from anywhere in the world
Advantages to the traders
- Global marketing is easy
- Can offer goods at highly competitive price
- Payments can be collected easily and fast through online
- Middlemen are not required so the selling cost can be cut down
- Traders can provide or demonstrate any product information through online
Disadvantages to the customers
- The product seen on online may not be matching with the product specification
- No customer and trader direct dealing
Disadvantages to traders
- Increase through sales is too difficult as the accessibility to internet for the customer is too narrow
- Absence of customer personal service can discourage online shopping
- The sales cost through online shopping can be more when compared to direct
- selling
ROLE OF BANKS
Banks play very important roles as financial intermediaries in trade and commerce. They bring the savers and the lenders together, i.e. funds are transferred from the savers to those who wish to borrow or invest the funds. To encourage the savers to deposit funds with them, the banks pay them a certain rate of interest on their deposits. On the other hand, the bank charges those who wish to make use of these funds at a higher rate of interest. This charge is to cover the cost of the funds (interest paid to the savers), administrative and operational expenses and to earn some profits for the shareholders.
MAIN FUNCTIONS OF BANKS
With the expansion of trade and commerce, banks began to play more important roles to facilitate trade and commerce. Their functions are as follows:
(a) To provide safe keeping for cash deposited in the current, savings and fixed deposit accounts
(b) To provide a convenient and safe means of making payments through the current account or by way of bank drafts, bank transfers and bills of exchange
(c) To provide finance by way of loan, overdraft, or discounting bills of exchange
(d) To provide finance in foreign trade by way of documentary credit or discounting foreign bills of exchange
(e) To give advice on financial investment or on the credit standing of the customers
SERVICES OF COMMERCIAL BANKS
1. Accepting deposits
2. Providing a convenient means of making payments
3. Lending to customers
4. Other services
1. ACCEPTING DEPOSITS
Savings Account
- These are known as time deposits or deposit accounts.
- Seven days notice of withdrawal is required.
- Interest is paid on these accounts.
- There are no bank charges for operating such an account.
- It is suitable for investors with small savings.
Fixed Deposit:
- Large amounts of money can be deposited for a fixed period.
- Higher rates of interest are paid on this account.
- There are no bank charges for this account.
- A certificate of deposit is given to the accountholder.
- Money deposited can be withdrawn only when the specified date expires.
Current / cheque accounts
- Money can be deposited and withdrawn at any time.
- Overdrafts, standing orders, direct debits and credit transfers are allowed on these accounts.
- No interest is paid on these accounts.
- There are bank charges for operating such accounts.
- It is suitable for businessmen, who need to deposit and withdraw money at any time.
DIFFEERENCE BETWEEN SAVING ACCOUNT, FIXED DEPOSIT ACCOUNT AND CURRENT ACCOUNT
| Saving account | Fixed deposit account | Current account |
| 1. It can be opened with a minimum deposit of $1. 2. No recommendation is required to open account. 3. Account holder is given a passbook for all deposits into and withdrawals from the account. 4. Money can be deposited and withdrawn anytime although withdrawal at a branch or ATM is limited to a certain amount. 5. It earns lower interest than the fixed deposit account. 6. Account holder need not pay bank charges for operating the account. 7. It is suitable for the individual who wishes to save small sums of money. | 1. It can only be opened with a minimum of $500 (or $1000 in some banks). 2. No recommendation is required to open account. 3. Account holder is given a fixed deposit certificate which can be presented for payment upon the expiry date. 4. Amount of deposit remains fixed and can only be withdrawn when the specified period expires unless the depositor is willing to forgo the interest. 5. It earns a higher rate of interest since the bank is certain as toi the duration of the funds at its disposal. It can make use of the money for investments and for loans. 6. Account holder need not pay bank charges for operating the account. 7. It is useful to the businessman who has excess funds which can be set aside to earn interest. His deposit account enables him to build up sufficient reserves to finance his business when the need arises. | 1. It can only be opened with a certain minimum sum ($500 in some banks). 2. Recommendation is required to open account. 3. Account holder is given a cheque book for making withdrawals by cheques. 4. Cash and cheques can be deposited anytimes and withdrawals without notice can be made by means of cheques. 5. It does not earn interest (unless the amount deposited is very large) as the deposit is subject to withdrawal on demand. 6. Account holder has to pay bank charges for operating the account when the deposit falls below a certain minimum amount. 7. It is useful to the businessman who needs a convenient and safe method of facilitating his receipts and payments. He can make use of the other current account services like overdraft, standing order, direct debiting and credit transfer. |
Paying in slip
It is a form used for paying money into bank account
Bank statement
A regular intervals, or on request, the bank will send to a customer a bank statement which provides a record of all that has taken place.
Amount which reduce the balance in the account are shown in the payments column, and the amounts which increase the balance in the accounts are shown in the receipts column. As each payment or receipt is recorded a new figure is shown as a new balance figure in a third column.
2. PROVIDING A CONVENIENT MEANS OF MAKING PAYMENTS
The cheque system
A cheque is an order to a bank to pay a stated sum to the bearer of the cheque or a named person.
Contents of a Cheque:
- Date: The date is written on the top right hand corner of the cheque. A cheque has to be presented to the bank within six months of the mentioned date on the cheque. If not the cheque will be a stale cheque and it will be dishonoured.
- The Drawee: This is the bank on which the cheque is drawn. This is printed on the cheque and helps when queries arise.
- The Branch Code Number: This appears on the top right hand corner and at the bottom of the cheque.
- The Payee’s Name: This is written on the top line of the cheque.
- Amount: The amount should be written in words and in figures. The amounts should be the same. If not the cheque will be dishonoured.
- The Drawer’s Name: This is printed or written at the bottom of the cheque.
- The Drawer’s Signature: The drawer’s signature should appear below the drawer’s name. If the signature is not the same as the specimen signature given to the bank, the cheque will be dishonoured.
- The Cheque Number: This appears at the bottom left hand corner of the cheque.
- The Account Number: The cheque number also appears at the bottom of the cheque. This helps in the automatic handling of cheques.
Types of Cheque:
Open Cheque
Anyone who finds an open cheque can cash it. So it is not safe to send an open cheque. This cheque is sent to persons who do not have bank accounts. Money for this type of cheque can be received over the counter.
Bearer Cheque
This has bearer written on the cheque. This cheque has the same features of an open cheque.
Crossed Cheque
When two parallel lines are drawn across the face of a cheque, it becomes a crossed cheque. Such a cheque has to be deposited in the bank account and sent for clearing. Money is not paid over the counter in the case of a crossed cheque. There are different types of crossings:
- General Crossing: These cheques can be paid into any bank. General crossed cheques with “A/c Payee Only” written within the two parallel lines have to be paid into the account of the payee only.
- Special Crossing: These cheques must be paid into the bank written between the two parallel lines.
- Not Negotiable Crossing: The payee cannot negotiate such cheques to another person.
Dishonoured Cheques
A cheque may be dishonoured for the following reasons:
· There may not be sufficient funds in the drawer’s account to make the payment.
· The cheque may be a stale cheque. That is it is presented to the bank six months after the mentioned date on the cheque.
· The drawer’s signature may not be the same as the specimen signature.
· The amount written in words and figures may not be the same.
· The cheque is mutilated or defaced.
Credit transfers
1 A current account holder can instruct his bank to pay directly into the bank account of the payee. The bank will debit his account and credit the account of the payee.
2. Credit transfer system can be used to make single or multiple payments. Single credit transfers are frequently used by debtors to pay bills.
3. This facility is useful to the businessman who has to make a large number of payments at one time to those with bank accounts. Credit transfers can be used to pay salaries, rents, hire purchase instalments, etc. In the payment of salaries, for example, the employer has only to make out one cheque for the total amount together with a list of the employees' names and account numbers and the amount of salary to be credited.
4. This method of payment is advantageous because it is:
(a) convenient - both to payer and payee as the former is spared the trouble of writing and posting several cheques, and the latter need not go to the bank to cash the cheque.
(b) economical - the payer pays the stamp duty for only one cheque and he also saves on postage.
(c) safe - there is no risk of cheques getting lost or being dishonoured.
Standing order or banker’s orders:
1 These are orders to a banker to pay regularly a fixed sum of money from one's current account in order to settle recurring payments like mortgage repayments, hire purchase transactions, rents, insurance premiums, subscriptions to clubs, etc.
Advantages
1. Regular commitments are met punctually
2. Debtors need not remember due dates for payments.
3. Creditors need not send reminders to debtors to pay up their debts.
Disadvantages
1. The current account holder using the facility is informed of the payment made by the bank on his behalf only when he receives the monthly bank statement, so it is possible that he may inadvertently overdraw his account if he has only a small balance in it.
2. It is restricted to only payments of a specific amount and where payments are of an irregular sum or have increased in amounts, new instructions have to be made to the bank. To overcome this problem, direct debiting facilities are provided to the customer.
Direct debit:
1. The bank may provide direct debiting facilities for payments of varying amounts at irregular intervals.
(a) Under this arrangement, when the supplier sends an invoice to the buyer a direct debit form is also sent to the buyer's bank informing the latter to debit the buyer's bank informing the latter to debit the buyer's account and to transfer the money to his account. Such payments have to be authorized by the buyer.
(b) This saves the buyer the trouble of remembering due dates of payment and sending off cheques.
(c) The supplier or creditor gets prompt settlement of debts.
(d) This differs from standing orders in that it is the creditor who gives payment instructions and not the debtor. The amount and date of payment are not fixed as in the case of standing orders.
Remittance
1.Remittances are used to send money from one place to another without the actual physical movement of cash. Examples of bank remittances include bankers' cheques, bank drafts, mail transfers and telegraphic transfers:
(a) A bankers' cheque or cashier's order is a bank's cheque drawn upon itself. It can be used for payments of any amount within the same town. It is highly acceptable since the drawer of the cheque is a bank.
(b) A bank draft is an unconditional order in writing drawn by one bank on another requesting the drawee bank to pay a third party on demand a specified sum of money.
(c) A mail transfer is a written instructions given by a remitting bank to its branch or agent bank to pay a certain sum of money to a third party Such a remittance is sent by mail. The remitter has to pay the commission and postal charges.
(d) A telegraphic transfer is an instruction that is cabled or telexed to a branch or agent bank by the remitting bank to pay a certain sum of money to a third party. The remitter will be charged commission and cable or telex cost.
2. All local remittances are payable in local currency while foreign remittances are payable in foreign currencies drawn on an overseas bank. For the latter, the remitter has to pay the equivalent amount in local currency
3. To the remitter, bank remittances are safe, cheap and convenient to use. To remitting bank, remittance service provides income from commission, foreign exchange and the short-term use of interest-free funds.
Documentary credits (letter of credit)
Documentary credit is a letter of undertaking issued by importer’s bank (hereafter called the issuing bank) to pay an overseas exporter against the exporter’s shipping documents such as the bill of lading, certificate of insurance, invoice, etc. which must adhere strictly to the terms and conditions of letter of credit. The exporter can receive payment for the amount due the instant he deposits the shipping documents with the agent bank (or advising bank) which is in his country.
Bank draft
§ It is a cheque drawn by one bank on another bank, demanding that the latter pay a specified sum to the payee named on the draft.
§ The advantages of using the bank draft to remit money are the same as those of a cashier's order.
§ It can be used to remit money to other towns in the same country or even abroad.
Debit cards
This is an example of the Electronic Funds Transfer at the Point Of
· There should be electronic equipment installed at the retail outlet.
· There should be cards with Personal Identification Numbers issued to bank’s customers.
· There should be a system for transmitting messages from the retailer’s terminal to the bank’s terminal.
The customer’s card is inserted in the retailer’s terminal and if there is sufficient money in the customer’s account, the right amount will be transferred from the customer’s account to the retailer’s account.
Credit cards:
This enables the customer to obtain instant credit and also cash advances. The bank charges interest from the day cash is withdrawn or from the day goods are bought on credit. The advantage to the retailer is the increase in sales. The best- known credit cards in
The bank gives the credit card to the customers, who can then get credit from retailers. The retailers prepare three copies of the bill. One is sent to the bank, one is given to the customer and one is kept by the retailer. The bank pays the retailer immediately on receiving the copy of the bill. At the end of the month the bank sends the statement to the customer who has to pay the money within 25 days on receiving the statement. Interest is charged on the amount of goods purchased.
Electronic Fund Transfers
EFT offers several services that consumers may find practical:
- Automated Teller Machines or 24-hour Tellers are electronic terminals that let you bank almost any time. To withdraw cash, make deposits, or transfer funds between accounts, you generally insert an ATM card and enter your PIN. Some financial institutions and ATM owners charge a fee, particularly to consumers who don't have accounts with them or on transactions at remote locations.
- Pay-by-Phone Systems let you call your financial institution with instructions to pay certain bills or to transfer funds between accounts. You must have an agreement with the institution to make such transfers.
- Personal Computer Banking lets you handle many banking transactions via your personal computer. For instance, you may use your computer to view your account balance, request transfers between accounts, and pay bills electronically.
- Point-of-Sale Transfers let you pay for purchases with a debit card, which also may be your ATM card. The process is similar to using a credit card, with some important exceptions. While the process is fast and easy, a debit card purchase transfers money - fairly quickly - from your bank account to the store's account. So it's important that you have funds in your account to cover your purchase. This means you need to keep accurate records of the dates and amounts of your debit card purchases and ATM withdrawals in addition to any checks you write. Your liability for unauthorized use, and your rights for error resolution, may differ with a debit card.
3. LENDING TO CUSTOMERS
1.Commercial banks lend money to their customers in the following ways:
(a) by extending a direct loan in which the borrower's bank account is credited with the amount of the loan and interest is paid on the full loan.
(b) by giving overdraft facilities to their customers who are able to withdraw more than the amount deposited in their current accounts after making prior arrangements with the bank. Interest is charged on the amount overdrawn.
(c) by discounting bills for their customers. Bills are documents bearing the promise of either the government (i.e. Treasury bills) or well-known banking houses or persons of good credit standing (i.e. bills of exchange) to pay a stated sum of money at a stipulated date.
2. Banks purchase these bills from their customers at a discount on their face value. The discount is interest earned by the banks for holding the bills until maturity. The bank pays the holder of the discounted bill the amount stated less the interest on the sum for the number of days still to run before the due date.
3. Discounting bills is a kind of credit facility offered by the bank to its customers because the bank advances payment to a customer who has allowed his debtor a certain period of credit, and collects the debt from the debtor (i.e. the customer's debtor) when it falls due.
4. The commercial bank is able to carry out its lending activities for the following reasons:
(a) It knows from experience that only a small portion of its customers' deposits is withdrawn as cash at any one time; so it keeps a sufficient amount of cash to meet such withdrawals.
(b) It can use the rest of the deposits in the bank profitably by either investing or lending them to customers. In fact, the commercial bank can lend out many times more than the cash deposited with it through multiple credit creation, subject to the limits imposed by the Central Bank with regard to the ratio of cash to total deposits.
(c) It pays interest to its depositors to encourage them to keep their money in the bank. The interest rate charged on loans and overdrafts will be higher so that the difference earned is used to pay for operating expenses and any residue becomes the bank's profits.
5. The differences between overdrafts and loans are summarized in the following table:
| Bank overdraft | Bank loan |
| 1. Customer must have current account. He is allowed to overdraft his account up to a certain amount for an agreed period. The amount of debit balance outstanding is the amount of the overdraft taken. | 1. Borrowers need not have a current. If he has a current account, then his account is credited with the agreed amount of the loan for an agreed period of time, while a special loan account is debited with the same amount. |
| 2. Less formalities are observed as borrower need not fill in forms whenever he wants credit. Being already a customer of the bank, the borrower need not have reference as to his financial standing. Security is unnecessary if he amount of overdraft required is small. | 2. The borrower has to go through the formal procedure of applying for loan. If he is not a customer of the bank, he needs references. The bank must be satisfied with the borrower’s financial position, security on the loan and the purpose of the loan. |
| 3. Interest is charged on the actual amount and the number of the days the account is overdrawn, e.g. if the account is overdrawn by $2,000 for 100 days and the interest rate is 10% per annum then the interest charged = 10/100 ´ $2000 ´ 100/365 = $54.79 Total amount payable at the end of 100 days =$2000 + 54.79 = $2054.79 | 3. Interest is charged on the whole amount borrowed for the full period of the loan irrespective of whether the loan is fully used or not. For example, for a loan of $2,000 for a year at 8% per annum, interest charged for the year = 8/100 ´ $2000 =$160 Toal amount payable at the year =$ 2,000 + $160 =$2,160 |
| 4. Any money paid into the customer’s account reduce the overdraft, e.g. a customer overdraws his account by $2000 on 1 January and pays into his account $1,000 on 30 June and another $1000 on 31 December. No other withdrawals or payments are made into his account during the year. The rate of interest on the overdraft is 11% per annum. Interest payable = Amount standing to his debts ´ rate of interest ´ Period the outstanding amount is overdrawn Interest payable up to 30 June =$2000 ´ 11/100 ´ ½ =$110 Interest payable up to 31 December = $ 1,000 ´ 11/100 ´ ½ =$ 55 Total amount of interest payable for the year =$110 + $55 = $165. Interest payable for overdraft is $165 while the interest payable on the bank loan for the same amount and the same period is $150. This is because the rate of interest charged on a bank overdraft is higher than for a bank loan. ( In practice, interest on overdraft is calculated on a monthly basis, hence increasing the total debit balance by the amount of the added interest payable. So in actual fact the customer will have to pay a large interest than that calculated above.) | 4. Money paid into the borrower’s account doesn’t reduce his debts. However, when the loan is repaid periodically under standing orders, interest is payable on the reduced amounts standing to the debit of the loan account. For example, a borrower takes a bank loan of $2000 on 1 January at an interest rate of 10% per annum. The loan is to be repaid in two half-yearly instalments. Amount payable per period = Instalment + interest payable where (i) Instalment = Loan/ No. of instalments (ii) Interest payable = Interest rate per annum ´ instalment period ´ Amount outstanding (Amount outstanding = Loan – Instalment paid to date) 30 June : 1st instalment Amount payable = $ 1000 + [10/100 ´ ½ ´ $2000] =$1000 + $100 =$1100 31 December : 2nd instalment Amount payable = $1000 + [ 10/100 ´ ½ ´ $1000] = $1000 + $50 = $1050 Total amount paid by the end of the year =$ 1100 + $1050 = $2150 ( If repayment is not made periodically, total amount payable at the end of the year = $2000 + [10/100 ´ $2000] = $2000 + $200 = $2200 The borrower saves $50 ($2200 - $2150) if he pays by instalments. |
| 5. As the banker doesn’t know when and how much of the agreed amount he would be called upon to provide for the customer, he charges a higher rate of interest because of this element of uncertainty. | 5. Since the banker is certain as to the amount of the loan demanded, he charges a lower rate of interest. |
| 6. An overdraft is suitable for the customer who is unsure to how much, when and for how long he needs credit, e.g. loans for business purpose like the purchase of goods for sale. | 6.This is suitable for the borrower who is sure that he will require the loan for a certain time, e.g. loans for personal purposes like the purchase of household equipment and cars, or for business purpose like the purchase of fixed assets. |
TRENDS IN BANKING
Automated Teller Machine (ATM) service
Banks that have computerized their systems of operation are providing ATM services to their savings and current account holders. This facility enables the customer to perform banking transactions anytime in the day at ATMs installed outside the bank and at key locations. Some of the banking transactions include withdrawals up to a certain amount each day, transfer of funds between accounts, deposit of cash or cheques, bank balance enquiry, request for cheque books and statements of accounts. Some banks in
Telebanking
As an extension of ATM services, some banks have introduced telebanking services to their customers. Customers can pay bills or make loan repayments to pre-authorized corporations, check bank balances, order cheque books, request statements of accounts through the use of their telephones. Telebanking operates 24 hours a day anywhere via the push-button telephone linked with the bank's computer centre. With the widespread use of such services, together with ATM and credit card facility, a cashless and chequeless society is emerging.
Internet Banking
Internet banking enables the account holder to instantly search his statements; sign up to receive free mobile text alerts; pay bills and transfer money between accounts.
Banking online is the convenient way to:
- Check the account balances and transactions,
- cut down on paperwork by stopping the postal statements,
- pay bills like credit cards and utility bills,
- transfer money between your accounts or into someone else's bank account,
- set up, change or cancel standing orders and view or cancel Direct Debits.
Night Safe facility
A special wallet provided by the bank is inserted in to safe in the outside of the wall of the bank to which customers are given the key. The following day the wallet is opened by the customer or bank
