by Pricing on global markets is more difficult than pricing in domestic markets. In the domestic market, the manager knows the effects of the cultural and economic environment on pricing policies. But in the international markets, due to the lack of familiarity with foreign markets and the variety of those markets, it is not easy to decide on pricing policy.
In international markets there are fierce problems in pricing: the difference in customer response to pricing strategies by commodity in different markets, the limits imposed by governments on the level of profits and prices, the competition that determines price changes in the market, and the existence of different rules. But despite these problems, a company that wants to compete effectively and reach its goals in terms of sales and profits should consider pricing, local conditions and coordination with other elements of marketing mix. In international pricing, in addition to factors affecting domestic pricing, other factors should be considered, such as exchange rate fluctuations, currency with which prices are announced, government control over tariffs, and a group of economic and cultural factors that are found in different markets and differ with each other.
A company must have a clear understanding of the international marketing environment before deciding to expand its activities abroad. In an international pricing strategy, managers generally face a wide range of external and internal factors, and the main concern is how the managers come to terms with these factors and determine their final effect. Additionally, they should consider the political, cultural, linguistic, economic and legal differences in each market in global environment.
Penetration pricing in the International market
Penetration pricing is the opposite of skimming in that the initial price is set very low to get the largest international market share. Internationally penetration pricing can allow profitable companies to gain access to market share in foreign countries. However, the trade policies of the foreign government would need to be considered as they might deem the low-priced products to be dumping or anti-competitive and in breach of their local legislation. As opposed to Apple, most manufactures of Android phones have a strategy of penetrating the International market.
Pre-emptive and extinction pricing strategies
Preemptive and extinction strategies are similar to penetration pricing policies in that they set the price very low in order to fight competition. Pre-emptive international pricing strategy sets the price very low so that new entrants to the international market find it uneconomical to enter that market. The example of Nintendo Wii which was first to enter the gaming market, intentionally set a low price to capture the market as a pre-emptive strategy against Sony which was to launch its Playstation. Extinction international pricing strategy is a strategy of driving away existing competitors by setting a low price that makes the business of competitors unviable. This could lead to a price war and is a risky strategy it could also lead to breaching of ‘anti-dumping or fair competition’ legislation in some countries.
Differential Pricing in International markets
As discussed above, customers in different international markets have differing value perceptions of a product as well as differing purchasing power. Besides this there could be other local factors discussed above which could affect the pricing of a product. A differential pricing strategy is a ‘horses for course’ approach allowing the firm to charge different prices across different international segments.
Differential pricing can be used by a multinational firm where it wants to pursue different pricing strategies in different markets. For example, a firm using differential pricing may pursue skimming in one geographical market and penetration pricing in another.
Components:
Costs
The actual cost of producing a product and bringing it to market is key to determining if exporting is financially viable.
Cost-plus method is when the exporter starts with the domestic manufacturing cost and adds administration, research and development, overhead, freight forwarding, distributor margins, customs charges, and profit. However, the effect of this pricing approach may be that the export price escalates into an uncompetitive range once exporting costs have been included.
Marginal cost pricing is a more competitive method of pricing a product for market entry. This method considers the direct out-of-pocket expenses of producing and selling products for export as a floor beneath which prices cannot be set without incurring a loss. For example, additional costs may occur because of product modification for the export market. Costs may decrease, however, if the export products are stripped-down versions or made without increasing the fixed costs of domestic production.
Other costs should be assessed for domestic and export products according to how much benefit each product receives from such expenditures, and may include:
- Fees for market research and credit checks
- Business travel expenses
- International postage and telephone rates
- Translation costs
- Commissions, training charges, and other costs associated with foreign representatives
- Consultant and freight forwarder fees
- Product modification and special packaging costs
After the actual cost of the export product has been calculated, you should formulate an approximate consumer price for the foreign market.
Market Demand
For most consumer goods, per capita income is a good gauge of a market’s ability to pay. Some products (for example, popular U.S. fashion labels) create such a strong demand that even low per capita income will not affect their selling price. Simplifying the product to reduce its selling price may be an answer for your company in markets with low per capita income. Your company must also keep in mind that currency fluctuations may alter the affordability of its goods.
Competition
In the domestic market, U.S. companies carefully evaluate their competitors’ pricing policies. You will also need to evaluate competitor’s prices in each potential export market. If there are many competitors within the foreign market, you may have to match the market price or even underprice the product or service for the sake of establishing a market share. If the product or service is new to a particular foreign market, however, it may actually be possible to set a higher price than is feasible in the domestic market.
Pricing Summary
It’s important to remember several key points when determining your product’s price:
- Determine the objective in the foreign market.
- Compute the actual cost of the export product.
- Compute the final consumer price.
- Evaluate market demand and competition.
- Consider modifying the product to reduce the export price.
- Include “non-market” costs, such as tariffs and customs fees.
- Exclude cost elements that provide no benefit to the export function, such as domestic advertising.
