Pricing of a Product in International Market: Factors, Methods, and Pricing Process!
Factors Affecting Price in International Marketing:
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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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, and
(iv) Margins of profit.
9. 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.
Methods of Pricing in International Marketing:
The price structure in international marketing, like the domestic market price structure, begins on the factory floor. But there is no similarity in the costs included in the two structures. The pricing of the products for domestic and export purposes shall be calculated in a somewhat different manner.
International market price structure is the basis of all export price quotations, discounts and commissions. There are various methods of pricing the product in the foreign markets. The methods may be grouped into two, i.e., cost-oriented export pricing methods and market- oriented export pricing methods.
(A) Cost-Oriented Export Pricing Methods:
The cost-oriented pricing methods are based on costs incurred in the production of the products. Total costs include fixed costs and variable costs. Thus export pricing may be based on full cost (fixed and variable) or only on variable costs. A reasonable profit will be added to the base cost to arrive at the export pricing.
Thus cost-oriented export pricing methods may be divided into the following two methods:
1. Full Cost Methods or Cost-Plus Method:
The most frequently used pricing method in exports is cost-plus method. This method is based on the full cost or total cost approach. In arriving at the export pricing under this method, the total cost of production of the article (fixed and variable) is taken into account.
Over and above the fixed and variable costs incurred in the production of exportable articles, all direct and indirect expenses incurred for the development of product such as research and development expenses and other expenses necessary for the export of the articles such as transportation cost, freight, customs duties, insurance etc., are included.
Then a reasonable profit margin is added to the costs and the value of the subsidy and assistance from the Government or other bodies of the country, if any, is deducted. The net result is the total export price for the commodities produced. Price per unit may be calculated by dividing the total price, thus arrived, by the number of units manufactured.
The various elements of cost, forming part of the total cost are:
(i) Direct Costs:
(a) Variable Costs:
Direct materials, direct labour, variable production overheads, variable administrative overheads.
(b) Other Costs Directly Related to Exports:
Selling costs—Advertising support to importers abroad, special packing, labelling, etc., commission to overseas agent, export credit insurance, bank charges, inland freight, forward charges, inland insurance, port charges, export duties, warehousing at port, documentation and incidentals, interests on funds involved, costs of after-sale service.
(ii) Fixed Costs or Common Costs:
It includes production overheads, administration overheads, publicity and advertising (general), travel abroad and after-sale service minus Govt., assistance, duty drawback and import subsidy etc., received and then freight and insurance are added to arrive at the final cost.
Advantages:
The main benefits of this system are as under:
(i) Under this method the exporter realises the total cost in marketing the product in a foreign market.
(ii) Marginal targets are thought of.
(iii) No chances of loss.
(iv) This is logical and universally accepted method.
(v) It is easier to understand and calculate.
Disadvantages:
Main limitations are as under:
(i) Cost is considered in advance. But there is difference between estimated and real cost. So this method does not give exact result.
(ii) When a company’s cost is higher than its competitors, this method is of no help.
(iii) In this method only cost and expected profit are considered. Hence, chances of increasing price are often lost.
(iv) Change in demand and supply is not taken care of.
(v) It does not help in competition.
(vi) There is little scope for change according to time and circumstances and hence, this method of pricing is not useful.
2. Marginal Cost Pricing:
Another cost oriented method of pricing in international market is to determine the price on the basis of variable cost or direct cost. In this method fixed cost element in the total cost of production is totally ignored and the firm is concerned only with the marginal or incremental cost of producing the goods which are sold in foreign markets.
We know that the fixed cost remains fixed up to a certain level of output irrespective of the volume of output. Variable costs, on the other hand, vary in proportion to the volume of production. Thus, it is the variable or direct or marginal costs that set the price after a certain level of output is achieved, that is, output at Break-Even Point (BEP).
This method is based on the assumption that the export sales are bonus sales and any return over the variable costs contributes to the net profit. Under this system it is assumed that the firm has been producing the goods for home consumption and the fixed costs have already been met or in other words, Break-Even Point has been achieved.
Thus, if the manufacturers are able to realise the direct costs, including those involved in export operations specifically, they would not affect the profitability of their firms. The profitability of firms should be assessed with reference to marginal cost which should normally constitute the basis for export pricing. Other elements in calculating price will remain the same.
Advantages:
There are a number of advantages by the use of this method:
(i) Export sales are additional sales hence these should not be burdened with overhead costs which are ordinarily met from the domestic trade.
(ii) This method is advocated for firms from developing countries who are not well-known in foreign markets as compared to their competitors from developed countries, and therefore, lower prices based on variable costs may help them enter a market. Price may be used as a technique for securing market acceptance for products newly introduced into the market.
(iii) Since the buyers of products from developing countries usually are in countries with low national income, it is advisable for the firm to serve a large segment of the market at low prices.
(iv) When fixed cost can be gained from domestic market, total profit can be raised by exporting at a price higher than marginal cost price.
(v) An order which may be refused on the basis of total cost can be accepted on the basis of marginal cost and profit can be increased.
Disadvantages:
Following are the main disadvantages:
(i) Generally, this method is applied only when a company has idle production capacity in addition to optional cost.
(ii) Developing countries might be charged for dumping their products in foreign markets because they would be selling their products below net prices and thus may attract anti-dumping provisions which will take away their competitive advantage.
(iii) The use of this method may give rise to cut-throat competition among exporting firms from developing countries resulting in loss in valuable foreign exchange to the exporting countries.
(iv) Marginal cost pricing is not advisable in the following cases:
(a) If the importers are regularly purchasing the product at a low price, it will be difficult for exporters to increase the price of the commodities later on. It may result in loss of market.
(b) This policy is not useful or is of limited use to industries which are mainly dependent upon export markets and where overheads or fixed costs are insignificant.
Feasibility:
The system of marginal cost pricing is feasible in the following circumstances:
(i) There must be a large domestic market for the product so that the overheads may be charged from products manufactured for domestic market.
(ii) Mass production techniques must have been adopted so that the gap between the full and marginal costs may be reduced.
(iii) The home market has a capacity to bear the higher prices.
(iv) Additional production for exports is possible without increasing overhead costs and within permissible production capacity.
Marginal Cost Sets the Lower Limit:
It is generally advocated that marginal cost should be the basis for export pricing. This method based on marginal cost only sets the lower limit up to which a firm can sell its product without affecting its overall profitability. It does not follow that one should invariably charge the variable cost.
The situation in different markets may be different and in many a case, contribution towards fixed cost might be possible and all efforts should be made to take advantage of this possibility. Even in cases where only marginal cost is possible to realise, the long-term objective of the firm should be to recover direct costs plus some contribution towards overhead costs as well.
(B) Market-Oriented Export Pricing:
Both the methods are based on cost considerations, while under market- oriented pricing, price is changed in accordance with market changes. The costs are, no doubt, important but the competitive prices should also be considered before fixing the export price. Competitive prices mean the prices that are charged by the competitors for the same product or for the substitute of the product in the target market. Once this price level is established, the base price or what the buyer can afford, should be determined.
The base price can be determined by following the three basic steps:
(i) First, relevant demand schedules (quantities to be bought) at various prices should be estimated over the planning period;
(ii) Then, relevant costs (total and incremental) of production and marketing should be estimated to achieve the target sales volume as per demand schedules prepared; and
(iii) Lastly, the price that offers the highest profit contribution, i.e., sales revenues minus ‘all fixed and variable costs.
The final determination of base price should be made after considering all other elements of marketing mix. Within these elements, the nature and length of channel of distribution is the most important factor affecting the final cost of the product?
The above three steps, though appear to be very simple, is actually not so because there are various other factors that should be considered. The most appropriate method to estimate the demand of the product shall be the judgemental analysis of company and trade executives. One other way may be the extrapolation of demand estimates for target markets from actual sales in identical markets in terms of basic factors.
Advantages:
The main advantages of this method are as follows:
(i) This method is more flexible, hence benefits of market opportunity can be obtained.
(ii) Business unit can face competition as price is fixed as per market position.
(iii) When product life is short, this method is most suitable.
(iv) Capital is regained quickly.
(v) We make sales quickly and cash flow can be maintained.
(vi) Risk of product becoming out of date decreases.
(i) It is not easy to estimate market changes.
(ii) It is possible to overlook relation between price and demand.
(iii) If demand is less in a market compared to others, it may mislead.
Pricing Process in International Marketing or Information Necessary to Determine Export Price:
Before arriving at export price in international market, an exporter has to obtain information about foreign market and price participants. Information about opportunities in a foreign market, competition, transport, government policy and regulations etc., is available from Commerce Ministry, chambers of commerce, trade directory, foreign embassies, international institutions and shipping agents. Export Promotion Councils also provide information to exporters.
In general, the following information is necessary for facilitating export price decisions:
1. Production Cost:
(a) Cost of production,
(b) Cost of distribution, and
(c) Cost of marketing support.
2. Nature of the Product:
(a) Consumer or Industrial
(b) Seasonal
(c) Range of product available
(d) Demand level
(e) Supply
(f) International taxes
(g) Export incentives
(h) Price regulations
(i) Product design
(j) Delivery time
(k) Guarantee, and
(l) After sale service.
3. Market Information:
(a) Competition level
(b) Market size
(c) Scope
(d) Payment terms
(e) Brand image
(f) Distribution channel
(g) Market segmentation
(h) Advertisement
(i) Trade agreements
(j) Market fluctuation
(k) Financial structure, and
(l) Credit conditions.
4. Other Informations:
(a) Shipping services
(b) Bilateral agreements
(c) Political situations
(d) Company policy
(e) Export import policy
(f) Tax policy
(g) Chances of change in market
(h) Export packing
(i) Delivery of goods and penalties, and
(j) Goods insurance.
Exporter must consider different price participants in international marketing very carefully.
It is not very easy to acquire foreign market by exporting the goods. For this, price fixing for export requires greatest care. To face foreign competition and to obtain reasonable profit, an exporter must have following information.
1. Information of Cost:
To sell the goods in selected market very competitively the exporter should compare the sale and profit of each county. For this, company must have following information regarding cost.
(i) Factory Cost:
Primary cost and factory overheads are included in factory cost. For this, direct materials, direct labour, other direct expenses, indirect material and expenses are taken into account.
(ii) Selling and Distribution Costs and Margins:
Selling and distribution expenses and profit by exporting the goods cannot be same in all countries. For this, following expenses should be considered. Exporter’s expenses related to sale, i.e., salary to sale force, travelling expenditure, and expenses connected with the direct sale, insurance, sea, railway or air fare for goods, port expenses, document expenses etc.
(iii) Administration Costs:
Salaries of administrative employees, office expenses, audit and legal fees, stationery, computer, internet expenses, office machinery expenses are included in administrative costs.
2. Information of Foreign Market:
For price determination, information about foreign market, competition, nature of demand and proportion in total market is considered vital. For this information, Ministry of Trade, export promotion bodies of exporting countries, chambers of commerce, commercial embassies, international institutions, technical magazines, shipping agents, brokers and others are of help. But information gathered from these sources should be checked.
3. Prices of the Product:
Price determination is not easy. Here, it must be watched always. In recent times general attitude is to fix such prices that people can pay. It is not advisable just to keep in mind one’s cost or profit. Economic conditions of all countries or purchasing power of their people are not similar. If prices are kept high, turning a blind eye to these, will make us lose business. Published price list does not help customers to make a decision.
With price, the discount, on price paid, cash discount, etc., should be taken into account. A producer should take advantage of his sales staff and market research. Study of effects of price change on market should be undertaken. Efficient sales staff can contact customers and can study, why they prefer competitor’s product for price or quality of product or for service after sale or for any other cause.
4. Check-List of Information Required:
For price fixing, information is required. But the company should check the information. The market in which the product is to be sent ought to be studied. It should also enquire about own competitive industries.
Following information is required for these purposes:
(a) Information on Total Market:
(i) In which market the product is reliable?
(ii) Who are the main competitors?
(iii) What is the market size?
(iv) What is the scope of development?
(v) What is the impact of one department on another?
(vi) Is the market bullish or bearish?
(vii) Which companies dominate the market?
(viii) What are the customs and traditions of the market and other details to be gathered?
(b) Information on Competition:
(i) Which are the competitor’s products?
(ii) What is the requirement of consumer?
(iii) What is the scope of changing price?
(iv) What is the share of competitors in Market?
(v) Does the market share fluctuate?
(vi) What are the weaknesses of competitors?
(vii) What is the strength of competitors?
(viii) How is competitors’ financial position?
(ix) What are the chances of change in market?
(c) Information on Government Policies:
(i) How does government policy affect the market?
(ii) How does the government policies affect individual companies?
(iii) Which main companies supply goods to the government?
(iv) What is the effect of government’s import-export policy on trade?
(v) What is the effect of government’s taxation policy?
(d) Information on Prices:
(i) What is the price of competitor’s product?
(ii) Who is the leader who fixes it?
(iii) What is the relation between price and quantity?
(iv) What is the relation between price discount and commission?
(v) How will market react if price is altered?
(vi) What are the controls of government on price?
(e) Information on Production and Cost:
(i) What is the firm’s present level of production and inventory?
(ii) What costs are related at this level?
(iii) What will be the effect of change in production and inventory on cost?
(iv) Which cost is suitable for price fixing?
(v) If cost distribution is unsuitable for price fixing, is it possible to get other related information about cost?
(vi) At which level of production break-even point is possible?
(vii) Is reduction in cost possible by a change in production mix?
(f) Information on Revenue and Profit:
(i) Regarding product, what is the relation between income, profit and cost?
(ii) What is the effect of produce quantity on income and profit?
(iii) What is the margin of profit of the firm?
(iv) What is the difference between our and competitor’s profit margin?
(v) What are the opportunities to increase income and profit of the firm? All these information is required for fixing or to change the price.
Therefore, for fixing prices for international market, it is necessary to check the above list of information, though every detail is not always possible.
Various Price Strategies in International Marketing:
The price of the product for domestic and export purposes shall be calculated in somewhat different manner. There are various methods of pricing the product in international market. Exporter may follow any method to calculate price. But before that he must be able to identify competitor’s price.
There exists following steps in arriving at base price:
(i) Identify price elasticity/ demand elasticity
(ii) Calculation of fixed and variable costs
(iii) Calculation of other costs, other elements of marketing, and
(iv) Select such a price level which will offer best contribution margin.
The price quotation for international markets may not be the same for all the markets. Prices may differ from market to market due to various reasons, i.e., political influences, buying capacity, financial and import facilities, total market turnover and other pricing and non-pricing factors etc.
The profitability will also be affected to a great extent and may be different in different markets. Thus, different strategies may be used in different markets. In some markets, prices may be higher, in some others, they may be around the cost price or in many others, and they may be even less than the cost price.
Ordinarily, the following pricing strategies are used in the export market:
1. Skimming the Price Strategy:
Under this policy, a very high price is fixed by an industrial enterprise for its products at the outset. Thus, this policy involves the setting of a very high initial price of the product that enters the market and then reducing the price gradually as the competitors enter the field. It has been rightly said, “Launching a new product with high price is an efficient device for breaking up the market into segments that differ in price elasticity of demand.”
The basic advantage of this policy is that if the market does not accept the product satisfactorily the price can be lowered. Secondly, an initial high price generates more profits which can be used for further promotion and expansion of the market.
This policy is particularly desirable due to following reasons:
The quality of the product that can be sold is likely to be less affected by price in the early stages than it will be when the product is fully-grown and imitation has had time to take effect. This is the period when pure salesmanship can have the greatest effect on sales. A skimming price policy takes the cream of the market at a high price before attempting to penetrate the more price-sensitive sections of the market. This means that more money can be got from those who don’t care how much they pay. This can be a way to feel out the demand.
It is frequently easier to start out with a high refusal price and reduce it later on when the facts of product demand make themselves known than to set a low price initially and then boost the price to cover unforeseen costs or exploit a popular product. High prices will frequently produce a greater volume of sales in the early stage of market development than a policy of low initial stage prices and due to this firm will be able to collect big funds for future expansion.
2. Market Penetration Price Strategy:
The basic objective of penetration pricing is to help the product penetrate into markets to hold a position. The price of the product is kept at a low level until such time as the product is finally accepted by the customers. Such a policy is adopted to capture a market share from a competing product. The low price allows a small profit margin in the beginning which may go up in the later stages. The price fixed under this policy is also known as ‘Stay out Price’.
3. Probe Pricing Policy:
Fixing low price for its product may have an adverse effect on the image of the firm and of the product. It may raise doubts in the minds of the buyer about the quality of the product if it is lower than the price of competitors or it is reduced subsequently.
When no information is available on the extent of competition or the likely preferences of the buyers, sufficiently higher prices may be quoted on the first few offers. No business is really expected except feedback information. The prices may be adjusted accordingly. This is called probe pricing, i.e., fixing high prices only to probe the export markets.
4. Follow the Leader Pricing Strategy:
In a competitive market or where adequate market information is not available, it may be useful to follow the leader in the market. Comparing its product with that of the leader, the exporter may fix the price for his product. In such cases, the price of the product is lower than the leader’s product. However, this policy has no rational or scientific base for fixing the price.
5. Cheaper Price for Original Equipment and Higher Price for Spare Parts:
Under this method of price strategy lower prices are to be quoted for original equipments and higher prices charged for the spare parts and replacement parts, when required. This strategy is useful where standard spare parts can be supplied only by a supplier of original equipment. This strategy could be used for tractors, telephone equipment and railway equipment etc.
6. Differential Trade Margins Strategy:
Variations in trade margins may be adopted by the exporter as the pricing strategy in the foreign market. This strategy allows various types of discounts on the list price. Quantity discounts encourage to procure huge orders. It may be based on the rupee value or on the quantity purchased or the size of packages purchased. Special discounts may be allowed while introducing the product.
These are given on all purchases. Seasonal discount aims at shifting the storing function in the channel. The approach is ‘buy sooner or more.’ Cash discount attracts prompt payments. Trade discount is a reduction in list price given to channel members in anticipation of a job they are going to perform.
7. Standard Export Pricing Strategy:
In some cases, exporter quotes the standard price or list price, i.e., one price for all. But still, there should be some margins for negotiations as in many markets, especially in underdeveloped countries, bargaining over prices is a part of life. In such cases, fixed prices may serve as starting point for negotiations. Hence, it is desirable to keep a certain margin for negotiations. This strategy is generally adopted in case of export of capital equipment, i.e., plant and machinery.
Thus different pricing strategies may be adopted in different markets taking into account the level of competition, the marketing characteristics and the philosophy of the management. Profitability, anyhow, cannot be ignored completely in the long run. However, exports may be continued in the short run, even below the marginal cost.