Price is the only one of the 4 P’s that produces revenues. Set the right price is fundamental as pricing for the foreign market is more complex than in the home market. Exporter must decide whether its exported product price will be higher, at the same level or lower than in the domestic market. Too often, in fact, companies forget to think about the customers and define prices just looking at the production costs. This behaviour is likely to drive a company to a below-average performance because it does not take into account the customer’s point of view and the company’s strategy.
Marketers, first of all, have to consider price boundaries such as the price floor, the price ceiling and the optimum price. Price floor (or minimum price) is determined by the cost of the product or service. The competitive prices for comparable products create a price ceiling. In fact, if competitors do not adjust their prices in response to rising costs, management will be severely constrained in its ability to adjust prices accordingly. The higher is the competition in the market, the more difficult will be to push prices up. The USA automobile market is a good example concerning the competitive influence: if a manufacturer decides to move up its price, it is likely to loose market share. Between the lower and the upper boundary for every product there is an optimum price. This is a function of the demand for the product as determined by willingness and ability of customer to buy.
As pricing in international markets is a difficult exercise, marketing decision-makings have to be careful to the surrounding environment, in which the company is placed and works, in order to determine the correct price strategy. Price escalations, or extra costs, are very common factors for exporters. Gathering information, transportation, freight insurance, special documentation, adaptation (modifies to product and/or packaging), administrative fees and export duties contribute to raise in an incredible way prices. For instance, in order to turn a prospective into an effective customer companies may decide to price CIF (cost, insurance and freight) bearing all the costs related.
Distribution channels also influence prices. As a company move on foreign markets, channels tend to be longer and contribute to raise prices. The longer the distribution channel, the higher the sum of margins and allowance added for middlemen will be. Higher costs and numerous intermediaries added have a very significant impact on the final price. For instance, in 1995, Jeep Cherokee in Japan cost 50% more than in the USA. Levi’s jeans in Paris cost twice their price in New York.
Also political controls have to be checked. Government may protect domestic products through high import duties or discourage consumption of certain products thanks to heavy taxation. For example a bottle of whisky in Great Britain cost, on average, 8 pounds more than in Italy. Fluctuation of the currency, and an inflationary environment can affect prices in international markets in a spectacular way.
Dumping, that is to say selling products in international markets at prices below those in the home country or below the cost of production, and parallel importing (grey market) are two particularly controversial pricing issues.
Generally, a company must charge what a product is worth to the customer, cover all the costs, and provide a margin for profit in the process. It is the case of the market-oriented companies. In order to price a product, or service, what the customer is willing and able to pay the company has three possible strategies.
With a price skimming strategy the firm set the highest price possible and lower it after because of the arrival of new products or to target another niche. Sony with Playstation 2 and Intel with its processor used this strategy when launched its products skimming the market segment willing to pay a premium price for the product.
When instead a company decides to acquire market share it can sell, for a limited period of time, at loss. This strategy, called penetration strategy, allows lowering per-unit costs experiencing economies of scale and to push profitability forward. Sony used this strategy when launched its portable CD-player. Japanese companies use this approach to enter a market exploiting high quality for low prices.
When a market is filled, or with a strong competition, a market holding strategy may be applied. In fact, in such a market situation the only way to gain profitability is to be competitive. This mean lower the costs (both fixed and variable) optimising the production process and /or moving the production premises closer to target markets or exploiting the product life cycle. For instance, Peugeot still produces its ‘504’ in Nigeria with very low cost and a good profitability.
To cope with a global developing economy, and in order to have under-control all the aspects and elements that affect international pricing, companies have to define the correct pricing policy.
For the ethnocentric policy the price hat to be the same around the world. For this reason, importers have to absorb freight and import duties. This approach is very simple because no information on competition is required. With this policy the company cannot maximise its profits neither in each national markets nor globally.
The polycentric policy allows each local subsidiary to set a price that is considered to be the most appropriate for local conditions. Prices are not coordinated from country to country. With this policy the problem is the lack of control that the headquarters have on subsidiaries. This can reflect on bad image of the multinational and may favour grey market.
Finally, with a geocentric policy, a company neither fix a single price worldwide, nor remain aloof from subsidiary decisions. Instead strike an intermediate position. Pursuing this policy a company assumes that there are unique local market factors that should be recognised in arriving at a price decision. Local costs plus a return on invested capital and personnel fix the price floor for the long term. However, for the short term, the company might pursue a market penetration objective pricing less than the cost.
In conclusion managers have to take into account many variables (dependent or independent on the firm) to decide how to behave with export prices. Moreover, in setting prices, margins should be regarded as a guide to the ultimate objective that is the profitability. The final factor bearing on the price decision is the local marketing strategy and mix. Price must fit the other elements of the marketing program.
© 2005, Alessandro Fichera. All right reserved