Concept of International Pricing, Objectives of International Pricing, Factors Affecting International Pricing

24th November 2021 0 By indiafreenotes

Price may be defined as the exchange of goods or services in terms of money. Without price there is no marketing, in the society. To a manufacturer, price represents quantity of money (or goods and services in a barter trade) received by the firm or seller. To a customer, it represents sacrifice and hence his perception of the value of the product. Conceptually, it is:

Price = Quantity of money received by the seller/Quantity of goods and services rendered received by the buyer

The term ‘price’ needs not be confused with the term ‘pricing’. Pricing is the art of translating into quantitative terms (rupees and paise) the value of the product or a unit of a service to customers at a point in time.

According to Prof. K.C. Kite, “Pricing is a managerial task that involves establishing pricing objectives, identifying the factors governing the price, ascertaining their relevance and significance, determining the product value in monetary terms and formulation of price policies and the strategies, implementing them and controlling them for the best results”.

Pricing refers to the value determination process for a good or service, and encompasses the determination of interest rates for loans, charges for rentals, fees for services, and prices for goods. Pricing decisions are difficult to make even when a company operates only in a domestic market, and the difficulty is still greater in international markets. Multiple currencies, trade barriers, additional cost considerations, and longer distribution channels make price determination more complex in international markets.

Globalisation of business has put increased pressure on the pricing systems of companies which enter international markets. These companies have to adapt their pricing structures as they graduate from being purely domestic players to exporters, and then to overseas manufacturers.

The earlier pricing structures used by them may no longer be appropriate in the complex international environment characterized by high competition, more global players, rapid changes in the technology, and high-speed communication between markets.

Companies operating in international markets have to identify:

1) The best approach for setting prices worldwide.

2) The variables those are important in determining prices in international markets.

3) The level of importance that needs to be given to each variable.

4) The variance in prices across markets.

5) The variance in prices across customer types.

6) The factors to be considered while determining transfer prices,

Pricing decisions cannot be made in isolation because pricing affects other marketing decision variables and determines:

1) The customer’s perception of value.

2) The level of motivation of intermediaries.

3) Promotional spending and strategy.

Pricing, an important decision in any business, be it domestic or international, directly affects revenue and thus profitability. Further, appropriate pricing aids proper growth, as development of a mass market depends to a large extent on price. For businesses dependent on acquiring business contracts through competitive bidding, such as the construction and mining industries and drilling companies, a poor pricing decision threatens survival. Too high a price may mean no business, while a lower price may lead to a unprofitable operation. In many cases, the price indicates a product’s quality. If the Mercedes car, e.g., were priced in the same range as the Oldsmobile, the Mercedes would lose some of its quality image. Finally, price affects the extent of promotional support to be allocated to a product.

Objectives of International Pricing

Penetration:

The first objective of a new entrant to an international market is to create demand for the product. For this, the firm will be tempted to adopt low-price strategy, which may divert demand from a regular channel of supply or to generate new demand. Low price strategy is justified for the new entrant in the light of his image disadvantage and the nature of his product. However, the danger of this strategy is that it may invite anti-dumping charges from foreign competitors apart from yielding low profits for the exporter.

Skimming:

Another objective of pricing policy may be to use a very high price to skim the cream of the demand. High price strategy is generally used if the export firm is selling a unique or a new product, or the exporter intends to establish a high-quality image for the product. The advantage of this strategy is that the exporter can earn higher profit margins but it can limit the product’s marketability. This may also attract more competition in the market for that product. Hence, this strategy should be used only when an exporter has gained a strong foothold in a foreign market and has built up a good image for his product and himself.

Holding Market Share:

Another objective of pricing in international marketing is to maintain their share in the market, i.e., to survive in the face of strong competition in the market. In a market where there is strong competition, weaker export firms will disappear and the stronger ones will survive the competition. Price of the product should be fixed keeping in mind the competitive situation. Hence, the export firm likes to fix a relatively low price for its product to discourage potential customers.

Enhancing the Share:

One of the objectives of pricing decision maybe capturing the export market. A company fixes comparatively lower prices for its products. Sometimes, prices are fixed at the lowest. which may result in no profit to the business, but the main aim is to enhance the market share of the product and the firm. Besides above-mentioned objectives, other objectives of pricing of international marketing may be listed as under:

  • Preventing new entry
  • Fighting competition
  • Shortening pay back period
  • Optimum capacity utilization
  • Early cash recovery
  • Profit maximization.

Factors Affecting International Pricing

It is far more difficult to fix price in international market as compared to domestic market.

The following are the main factors to be considered while fixing prices in international market:

  1. International Marketing Objectives:

Mostly price is decided with a view to capture international market, e.g., when a company wants to enter in the market the product is sold at lower rates. When it intends to maximise use of its additional production capacity, marginal cost of production is considered. When an export target is to be achieved then in that context price is determined. Other motives like getting entry in market, to get a certain share in market, to get definite return on investment, etc., are also of special importance.

  1. Cost of Product:

Price in international marketing cannot be determined without considering the cost of the product. Fixed and variable costs of production, marketing and transport expenses are included in the cost of production. Sometimes a company sells at a price lower than cost and increases its share in market. It aims to recover production cost in long run. Price depends on production cost. Hence, it is necessary to analyse the cost and to consider the fixed and variable costs while fixing the price.

But cost alone cannot fix the price. It is true that the price cannot be fixed below cost for long. Cost determines the floor price below which an exporter may not agree to sell the goods. But this principle does not always hold good. An increase in costs may justify the increase in prices, yet it may not be possible to do so because of the marketing conditions, i.e., demand and supply. On the other hand, it may also be possible that any increase in demand may lead to an increase in price without an increase in costs.

Although the costs-price relationship is important, it does not support the claim that costs determine the price. In some cases, the prevalent price may determine the costs that may be increased. The manufacturer-exporter cuts the cost according to the prices prevailing in the market.

Another factor that proves that the costs do not determine the price is that costs of each producer differ substantially due to different internal and external factors. If cost is the determining factor, the price must also vary substantially. Again, if costs are to determine the price, no firm would suffer a loss. It does not mean that costs should be completely ignored while setting price. Cost is one of the most important factors in setting price.

  1. Demand:

Demand is another factor that determines the prices in the international markets. The demand in international markets is also affected by a number of factors which are different from those operating in domestic market. Customs and tastes of foreign customers may differ widely.

Elasticity of demand is another factor which affects the pricing. If the demand of the product is elastic, a reduction in price may increase the sales volume. On the other hand, higher price may be fixed if the demand is inelastic and the supply is limited.

  1. Business Competition:

Competition in the foreign market is also an important factor. Competition in foreign market may be so severe that the exporter has no other option except to follow the market leader. In monopoly an exporter can fix high price of its patented product. Greater competition reduces freedom for fixing the price. Price cannot be determined without considering the strategy of competitors.

  1. Exchange Rate:

Foreign exchange rate plays a vital role in the price fixing in international marketing. For example, when rupee falls against dollar an importer hesitates in filling tender. An importer has to pay more rupees per dollar. In such circumstances rupee is considered to have become weaker against dollar.

  1. Product Differentiation:

This factor plays a vital role in price fixing. When a product has specialities or is totally different compared to those of its competitors, the company is more-free to decide price. Usually, prices of such products are quoted higher than that of others up to certain extent.

  1. Prestige:

Prestige of the producer and of the country is reflected in the price of the product. Prestigious companies determine higher price for their products. Underdeveloped countries cannot quote high price, even if their product is better than that of the developed country. In foreign markets, as a developing country India finds it difficult to keep prices high though our many items like H.M.T. watches, woollen garments, readymade wear, leather bags and Ayurvedic medicines are of superb quality.

  1. Market Characteristics:

In addition to competition the following are some other factors which also affect price:

(i) Trend of demand

(ii) Consumer income levels

(iii) Importance of the product to the consumer

(iv) Margins of profit.

  1. Government Factors:

Government’s policy and laws affect pricing as under:

(i) Ceiling and Floor Prices:

Some countries fix top and bottom prices of their products. When government regulates the price, one has to keep its price between them. India had fixed minimum export prices of cotton cloth and other products. Normally, such a policy may be applied for national development, industries position, stock of goods, and protection of industries.

(ii) Regulation of Margins:

Sometimes government decides the profit margin or percentage of mark-up for producers or distributors. As a result, marketer loses most of the freedom of pricing.

(iii) Taxes:

While deciding price of an exportable product, custom duties and other taxes have to be considered. When import duties are levied, an exporter has to reduce his price. In foreign markets price has to be kept up because of such taxes.

(iv) Tax Concessions, Exemptions and Subsidies:

To promote exports many countries give tax reliefs or freedom. Products can be exported at lower prices in such cases. For example, under Duty Draw Back Scheme, if raw-materials are imported for production of export goods, the import duty or excise duty paid for this is refundable. To promote export, Govt., gives financial subsidies also. Such subsidies also affect price determination in export market.

(v) Other Incentives:

To promote export the government gives many incentives. Among these, supply of raw-materials, electricity and water supply at lower rates, aid in selling etc. are main incentives. While fixing prices of export goods these factors are kept in view.

(vi) Government Competition:

Sometimes the government enters in market to keep control on international prices. For example, the American Government sells aluminium from its stock at a fixed price to American companies. The companies are unable to increase prices in such circumstances. Hence, while fixing price Government competition should also be considered.

(vii) International Agreement:

Prices of some products are controlled by international agreements about stock, buffer stock agreement, bilateral or multilateral agreements. In view of such agreements companies have to fix prices in international market.