12 – Pricing Decisions for International Markets

Introduction

Pricing is a significant decision in international marketing management since it influences a firm’s export revenue and profitability. No thumb rule or scientific or statistical method can be used to price a thing accurately. Without a doubt, the interaction of market forces, such as demand and supply, affects the price at which the product can be sold in the foreign market, just as it does in the home market. Aside from this, various other elements, such as economic, social, political, marketing environment, and product features, influence international marketing decision-making.

In any marketing, three main criteria govern a firm’s pricing decisions: product costs, customer purchasing power, and demand and supply forces.

12.1 Pricing Decisions

Pricing is an essential issue for most marketers, but the attention devoted to this crucial area is generally far less than that provided to other marketing decisions. One explanation for the lack of focus is that many people feel price setting is a mechanical procedure that requires marketers to use financial tools like spreadsheets to construct their case for setting price levels. While financial tools are commonly used to assist in pricing setting, marketers must consider various other aspects when determining the price at which their product will sell.

The marketing manager employs the parameters economists recommend to arrive at a price. These parameters can be listed as follows:

1. Costs: Costs are the starting point for determining the price. In other words, costs constitute the price ceiling at which prices cannot be reduced. As previously said, costs are divided into two categories: fixed costs and variable costs. Fixed costs cannot be avoided, whereas variable costs are the expenditures that may be avoided. Variable costs are often referred to as marginal costs or incremental expenses. Each component is valuable when pricing a product, but its significance depends on the marketing goals and other comparable elements.

2. Demand and Supply: The demand and supply situations in the market serve as a marketing manager’s upper limit. The demand conditions are interpreted based on market conditions and customer behaviour, whereas the supply conditions are interpreted based on a competitive analysis. The pricing that rivals charge and the features and quantities they sell determine the supply parameters. For example, the prices for clothing by Italians and South Asians will govern the extensive range that apparel exporters can charge. Once more, if the foreign buyer is aware, he will bargain against the government subsidies given to the exporter, forcing the Indian exporter to price the actual costs.

3. Economic, legal, and political circumstances: These factors are independent of market dynamics and impact pricing structure. It has been noted that the government can, by policy, alter market circumstances, making them unbalanced. As a result, in nations where the government drives economic policies, economic and political situations significantly impact price structures. Taxes and duty drawbacks are perfect instances of this.

Legalities lengthen and complicate any process, influencing the pricing structure. The greater the legal limits that must be met, the higher the price customers pay to pass on the cost increases.

The above criteria propose upper and lower limits, but the actual price is in the middle. Every manager strives to create a simple process that reduces deviation from the target price to maximise profit. As a result, numerous pricing approaches that emphasise one element over another, such as cost-plus pricing and competitive pricing, have become popular. Competitive pricing reflects a supply-side thought process, whereas cost-plus pricing reflects an accounting thought process.

It should be noted that marketing efforts are aimed at meeting the needs of the targeted consumers. Price is an intrinsic need factor. As a result, price must represent managerial thought and be consistent with the whole marketing plan.

The following steps might be included in a suggested procedure for determining the price:

1. Examine the marketing objectives
2. Selecting the Marketing Mix
3. Putting together the marketing mix
4. Establishing the price policy
5. Establishing a pricing plan
6. Obtaining a specified price.

Of course, the chronology is unimportant, but considering each preceding process would allow the marketing manager to arrive at pricing that meets his marketing objectives while staying within the higher and lower limits. In summary, the marketing manager arrives at pricing within the parameters of cost, demand and supply, as well as economic, political, and legal parameters, by employing a process that achieves his marketing aim.

In general, the following data is frequently required to facilitate export price decisions:

Product Specifications

1. Production cost breakdown:
   1. Prime cost
   2. Factory overheads
   3. General Administration overheads
2. Distribution costs
   1. Packing costs
   2. Selling costs
   3. Transportation costs, including insurance
   4. Distribution costs
3. Marketing support costs (advertising, sales promotion, and technical publications). These figures may need to be gathered for exporting, competing, and consuming countries.
4. Nature of Product
   1. Whether it is a consumer or an industrial product,
   2. Demand Elasticity
   3. Promotional Demand
   4. The importance given to the price-quality mix
   5. The product’s supply elasticity
5. International charges and taxes, etc.
6. Export Promotional Measures
7. Product Warranties
8. Installation and after-sales service needs, as well as
9. The percentage of rejects.

Market Knowledge

1. Market Structure—high, moderate, or low competition
2. Distinctions between market-developed and developing countries Certain portions of the developed world may be interested in low-cost goods.
3. Foreign market ruling price, including substitute pricing
4. Payment terms offered by competitors and demanded by importers
5. Import duties, border fiscal charges, quotas, and restrictions
6. Primary supply sources in the importing country—both domestic and international
7. Any trade preferences and trade agreements
8. The extent of any G.S.P. concessions
9. Consumer preferences, brand image, and brand loyalty
10. The nature, if any, of market segmentation
11. Publicity requirements, media, and costs
12. Distribution channels and margins permitted for various middlemen
13. Shipping freight, insurance, packing, banking, transportation, and other export-related expenses, and
14. Requirements for documentation and invoicing, as well as health and sanitary regulations and other government regulations

At the micro level, information is required.

Some of the strategic information points required for pricing decisions at the micro level include the following:

1. Firm-installed as well as used production capacity
2. The proportion of total output that is supplied to the domestic market.
3. Currently exported proportion
4. Domestic company competition in the export market and
5. Additional export opportunities

In terms of supply for extra exports, the following information is essential:

1. Would it imply a reduction in supplies to the domestic market?
2. Whether it would result in the use of idle capacity or
3. Would it necessitate the commissioning of new capacity?

12.2 Influencing Factors on International Pricing Strategies

Pricing strategy is a crucial aspect in determining worldwide prices. The price must be competitive and dependent on the product’s quality. Different foreign countries use different pricing techniques due to environmental considerations such as political, economic, socio-cultural, and legal. In the sections that follow, let us learn more about foreign pricing.

12.2.1 Pricing Decision Influencing Factors

The features of the product and the nature of its demand, the philosophy of its management, and the market characteristics are the three primary variables that influence the exporter’s export price strategy in foreign markets. The pricing strategy is a short-term instrument for adjusting prices in changing competitive scenarios in the short run through pricing policy decisions.

1. Product characteristics and the nature of its demand: It is a crucial determinant in determining the price of a product at any given time. In other words, product quality improvement and adaptation in response to changing competitive conditions in the overseas market should be viewed as a continuous process. Another aspect that determines price is demand elasticity. If a product’s demand is inelastic, lowering the price will not help boost revenue. Considering the market’s competitive position, more excellent prices may be set in such a circumstance. If, on the other hand, the product is very elastic, slightly lowering the price can significantly improve sales revenue. Thus, demand elasticity and competitive position heavily influence pricing strategy, i.e., whether to set a higher or lower price than the competitor’s.

2. The management philosophy: As we all know, the primary goal of any company’s management is to maximise profits. Hence, there is an inverse relationship between price and demand. If demand is more elastic, management can earn more profit and higher revenue by lowering prices. On the other hand, if the management’s goal is to export a certain amount of merchandise, the price may be much lower than the marginal cost.

3. Market characteristics: Market features such as the number of rivals and degree of competition, supply position, product quality, market substitutes, and so on influence the firm’s pricing strategy. These market features differ from one country to the next.

12.3 Pricing Strategies

Export price quotations for all markets may not be the same. Prices may fluctuate from market to market for various reasons, including political influence, purchasing capacity, finance and import facilities, total market turnover, and other pricing and non-pricing elements, among others, to keep the product’s local price competitive. Profitability will be greatly influenced and may differ significantly between markets. However, there is nothing wrong with making larger margins in minor export markets and lower margins in others as long as the export business makes a profit overall.

As a result, different strategies may be employed in various markets. Prices in some markets may be higher than the cost price, while in others, they may be lower than the cost price. In the export market, the following pricing techniques are typically used:

1. Market Penetration Strategy: In this strategy, exporters offer a meagre beginning price to increase sales and broaden the market base. The plan aims to acquire products in the market, mainly if the product’s widespread acceptance proves its superiority.

2. Examine Pricing Strategy: Setting a low price for its goods may hurt the firm’s and the product’s image. It may cause purchasers to have worries about the product’s quality if it is less expensive than competitors’ prices or if it is dropped afterwards. When no information on the amount of competition or the probable preferences of the buyers is available, sufficiently higher prices may be quoted for the first few offers. Except for feedback information, no business is expected to grow. As a result, prices may need to be modified.

3. Follow the Leader Pricing Strategy: In a competitive world market or if proper market information is unavailable, it may be advantageous to follow the market leader by comparing its product with that of the leader. The exporter may then establish the price of its product. In such circumstances, the product is less expensive than the leader’s offering. However, there is no reasonable or scientific basis for setting this price.

4. Skimming Pricing Method: In this strategy, a very high beginning price is set to immediately skim the cream of the demand. This policy is generally implemented when there is no rivalry in the market. Such prices will remain high until competitors enter the overseas market. When competitors enter the market, the exporter lowers the cost.

5. Differential Trade Margin Strategy: The exporter’s pricing strategy in the overseas market may include varying trade margins. This method provides for a variety of discounts off the advertised price. Quantity discounts promote large purchases. It could depend on the price, the amount purchased, or the box size. Special discounts may be permitted while the product is being introduced. These are offered with all purchases. Seasonal discounts are intended to alter the storing function in the channels. This strategy is based on the adage “purchase sooner or later.” Cash discounts encourage quick payment. It guarantees a ‘rapid pay-back.’ A trade discount is a price decrease provided to channel members in anticipation of a work they will do.

6. Standard Export Pricing Strategy: In some circumstances, the exporter quotes the standard price or list price, which is the same price for everyone. However, there should be some room for negotiation because price bargaining is a way of life in many markets, particularly developing nations. In such circumstances, set prices might be used as a starting point for bargaining. As a result, it is preferable to provide some room for bargaining. This method is commonly used to export capital goods, such as equipment and machinery.

7. Lower Original Equipment Costs and Higher Spare Parts Costs: In some circumstances, it may be advantageous to quote lower pricing for the original equipment while charging higher prices for spares and replacement parts to be shipped later as needed. This method is appropriate when only the original equipment supplier can supply standard spare parts. This method might be applied to tractors, telephone equipment, defence munitions, railway equipment, and other similar items.

12.4 International Marketing Pricing Issues

Price is best stated in ratio terms, as in Price = Resources given up /goods obtained.

This indicates that the price can be altered in a variety of ways:

• Changes in “Sticker” prices: The price tag is the most visible way to change the price—you get the same thing but for a different (typically more considerable) amount.
• Change quantity: Often, consumers react negatively to increasing sticker prices, and changes in quantity are commonly overlooked. For example, in the 1970s, the wholesale cost of chocolate jumped considerably, and candy manufacturers responded by producing smaller candy bars.
• Lower quality: Confectionery producers have effectively raised prices by lowering quality. A candy bar’s “gooey” material is far cheaper than chocolate. Foreign licensees of a prominent brand name are frequently tempted to use lesser ingredients.
• Modify terms: In the past, most software vendors provided free support for their products—for example, you could call the WordPerfect Corporation at an 800 number to get free assistance. Nowadays, to receive help from many software developers, you must call a 900 number or have a handy payment card. Another option to alter conditions is to eliminate favourable financing arrangements.

Prices as a guide: Consumers frequently establish internal reference prices or expectations about how much something should cost based primarily on their experience. Most drivers with long commutes understand what fuel should cost and can discern the difference between a good deal and a rip-off.

Reference prices are more likely to be precise for regularly purchased and apparent products. As a result, shops frequently promote soft drinks because consumers have a solid notion of prices, and these products are easily visible. The trick is to be more expensive on things with ambiguous price expectations.

Marketers frequently attempt to affect people’s pricing perceptions by employing external reference prices—indicators provided to the consumer as to how much something should cost.

• Manufacturer’s Suggested Retail Price (MSRP). This is frequently purely fictitious. In some categories, suggested retail prices are purposefully set so high that even full-service businesses can sell at a “discount.” As a result, while the consumer can compare the offering price to the MSRP, the latter statistic is highly misleading.
• “NOW $2.99; REGULAR PRICE $5.00.” This method must be legal in most nations if the claim is true (consistency of enforcement in some countries is another matter). Certain products, on the other hand, are on sale so frequently that the “regular” price is meaningless. In the early 1990s, Sears was believed to sell approximately 55% of its inventory on the market.
• “Was $10, now $6.99.”
• “Available elsewhere for $150.00; our pricing is $99.99.”

The international consequences of reference pricing are considerable. While marketers may offer a product at a low price to promote a trial, which is effective in a new market where product penetration is limited, this may have significant consequences because customers may acquire a low reference point and hence reject paying higher costs in the future.

Various International Pricing Issues:

Bargaining may be more prevalent in some cultures, mainly where retail businesses are smaller and customers can contact the owner, making it more difficult for the manufacturer to influence retail-level pricing.

When products are offered in different markets, two things can happen. When a product is exported, price escalation, in which the product’s price rapidly increases in the export market, is likely to occur. This is mainly due to the need for a longer distribution chain, and lower amounts sold through this route generally do not allow for economies of scale. “Gray” markets occur when products are diverted from one market where prices are lower to another where prices are higher; for example, Luis Vuitton bags were significantly more expensive in Japan than in France because the profit-maximising price in Japan was higher, so bags would be purchased in France and shipped to Japan for resale. As a result, the company has set quantity limits for customers. Because these quantity constraints were evaded by clever exchange students who were hired to buy their quota daily, prices in Japan eventually had to be reduced to make the practice of diversion unappealing. Where the local government implements price limits, a corporation may nevertheless find it profitable to enter the market because revenues from the new market have to pay marginal expenses. However, products may be more appealing to redirect to nations where such controls do not exist.

Transfer pricing refers to how much one subsidiary will charge another for products or components supplied for use in a different country. Firms frequently aim to charge high prices to subsidiaries in high-tax nations to limit their income.

Antitrust rules, particularly anti-dumping legislation, are essential in pricing decisions. In general, offering a product at a loss is prohibited, which may make a penetration pricing approach impractical. Japan has persistently pressed the World Trade Organization (WTO) to alter its rules, which generally require enterprises to charge no less than their average fully absorbed cost (including variable and fixed costs). Alternatives to “hard” money transactions: Buyers in some nations lack easy access to convertible currency, and governments frequently try to limit enterprises’ capacity to spend money abroad. As a result, some businesses have been forced to enter into non-cash transactions. In barter, the seller accepts payment for a product manufactured in the buying country.

For example, Lockheed (when it was an independent company) accepted Spanish wine in exchange for aircraft, and sellers in Eastern Europe accepted ham as payment.

An offset contract is slightly more flexible because the buyer can be paid but must purchase or force others to buy things of a particular value within a specific time frame.

Psychological issues:

Most price studies have been conducted on North Americans, creating substantial generalizability concerns. Americans, for example, are accustomed to sales, whereas buyers in poorer countries may relate a deal to poor quality rather than a desire to gain market share. There is some evidence that perceived price-quality links are relatively high in the United Kingdom and Japan (thus, cheap stores have struggled there). In contrast, there is less trust in the market in underdeveloped countries. Cultural variations may impact the amount of work spent reviewing offers (potentially impacting the effectiveness of odd-even pricing and promotion signalling). The fact that consumers in some economies are often paid weekly, rather than biweekly or monthly, may influence the success of framing efforts—”a dollar a day” is a far more significant piece of a weekly paycheck than a monthly paycheck.]