Mastering International Pricing: Strategies, Variables, and Methods
Pricing Determinants
Price is the economic compensation received for the effort and resources used to produce and distribute a product or service. Market characteristics, company objectives, product policy, distribution, promotion, and market entry methods (e.g., export) all influence pricing. Setting the right price is crucial; an incorrect pricing policy can damage a company’s image and financial results. Price determination involves considering internal, external, and product-related variables.
Internal Variables
Costs: Costs are a major factor in pricing. A cost is the monetary value of goods purchased for production. They are classified as follows:
Cost Behavior
Fixed Costs
Fixed costs do not vary with production volume.
Variable Costs
Variable costs change with production or activity levels.
Cost Attribution
Direct Costs
Direct costs are directly attributable to a product or product group.
Indirect Costs
Indirect costs (also called common or general costs) are attributable to multiple products or product groups indirectly. While fixed costs are often associated with indirect costs and variable costs with direct costs, this isn’t always the case. Both fixed and variable costs are determined from a standard production volume, while direct and indirect costs are based on existing information for allocation. Cost-plus pricing, which adds a markup to total product costs, is a simple method used when entering unfamiliar overseas markets. Export costs are usually higher than domestic costs due to tariffs, international transport, intermediary margins, etc. Export prices based on cost-plus can be significantly higher than domestic prices. Manufacturing in the target market can reduce export costs if turnover justifies it.
Objectives
Company objectives in foreign markets influence international pricing. A company may set a low penetration price to gain market share, temporarily adjust prices to counter competitive campaigns, maintain prices while awaiting more profitable conditions, or use an “extinction” price to eliminate competition.
Marketing Mix
Pricing must align with other international marketing mix elements: product, distribution, and promotion. Adapting products to the market simplifies pricing. Market entry and distribution channels also affect pricing. Using certain inputs can increase profit margins, which may vary by market, influencing the final price.
External Variables: Foreign Markets
Demand
Economic and sociocultural factors, alternative products, and consumer habits in each country determine product valuation and acceptable prices. Understanding consumer willingness to pay is crucial, though obtaining this information can be difficult or expensive in some markets.
Competition
Competition significantly influences pricing for businesses of all sizes. Companies must know competitor prices and anticipate their actions. Price variations should be justified by quality differences.
Political and Legal Constraints
Legal and political factors (anti-dumping laws, tariffs, export restrictions, etc.) in each country affect pricing freedom. Tariffs and quotas are government-imposed barriers that increase import prices to protect domestic production. Most industrialized countries have anti-dumping laws to prevent selling in foreign markets below domestic prices or actual cost. Tariffs and taxes directly increase prices and reduce competitiveness. Quotas indirectly increase prices by limiting supply. Exchange rates also impact competitiveness. Currency depreciation increases import prices, potentially forcing exporters to lower prices to compete. This can boost exports due to reduced prices.
Country of Origin
Consumer perception of a product’s country of origin influences pricing. Low prices for products from countries with poor reputations may signal low quality, even if purchased. This can create suspicion and should be considered in future pricing.
Product-Related Variables
Product Life Cycle
The product life cycle stage in each market allows for different pricing strategies. Companies have more pricing flexibility during the introduction phase with limited competition. As the product matures, market prices become more constrained. The product life cycle varies by market, allowing for price adjustments.
Pricing Methods
Product pricing primarily uses three methods based on costs, competition, and market demand. Costs determine the minimum price. Once the minimum price is set, a profit margin is added. However, competitive factors (price leadership, price wars, etc.) and consumer psychology/price sensitivity can significantly influence pricing.
Cost-Based Methods
Cost-based methods set target prices and are often used for their simplicity, typically adding a profit margin to the product cost. This approach results in different prices based on production and sales costs, treating the product as a sum of its parts without considering buyer benefits or willingness to pay. Cost-based methods include cost-plus and target pricing.
Cost-Plus Method: The cost-plus method adds a profit margin to the total unit cost (variable cost + total fixed costs/number of units). It simplifies price determination, is widely used, and facilitates rebate/adjustment calculations. It also leads to similar pricing among competitors using the same method.
Target Price Method: The target price method sets prices to achieve a specific profit or revenue at a given volume. Break-even analysis calculates the sales volume needed at a certain price to cover fixed and variable costs. A drawback is that it doesn’t consider demand elasticity or competitive pricing.
Competition-Based Methods
Competition-based methods use competitor behavior as the pricing benchmark, although costs still determine the minimum price. Pricing strategies vary depending on whether the company is a market leader or follower. Larger firms often lead, setting prices that smaller firms follow. Followers typically set similar prices unless they have quality, availability, or distribution advantages/disadvantages, in which case they may set higher or lower prices, respectively.
Market or Demand-Based Methods
Market-based methods are subjective, considering consumer psychology. Perceived product value sets the upper price limit; consumers are willing to pay up to the value they assign to the product’s utility. However, perceived value also considers the costs associated with the good or service.
Pricing Considerations
Currency
Setting export prices in a foreign currency creates exchange rate risk (devaluation or revaluation). Immediate payment eliminates this risk. If using a different currency, fixing the exchange rate at order confirmation is inappropriate; providing a currency basket is better. Exchange rate insurance can hedge against risk. Using the Euro (€) offers stability, cost transparency, and lower foreign exchange risks.
Shipping Conditions: Incoterms
Sales contracts and commercial invoices must specify shipping conditions (care, transportation, insurance, etc.) and responsibility for payment (exporter or importer). Pricing is shared based on obligations and delivery costs. Using appropriate Incoterms (International Commercial Terms) avoids misunderstandings. Export prices vary depending on the Incoterm used.
Timing and Means of Payment
. The timing and means in which agreement provides for payment of export also affect the price. The price will be greater the larger the payment deadline as a result of the financial burden arising from the delay in payment. We will have to calculate this cost to be included in the price. As the deadline for payment is> the risks in the exchange rate of currencies rise .. The safest method of payment is irrevocable and confirmed letter of credit; The following are the most widely used in foreign trade.
Personal check The importer, after receiving the merchandise, write a check to the bearer or nominative and sends it to the exporter. high risk for the exporter, because there is no guarantee of payment .. Another drawback for the seller is the time it takes your bank to repay a personal check and the costs that this process takes. is used when there is great trust between exporter and importer. Cheque offers greater security for recovery. The importer’s bank will issue a check against his account at a correspondent bank of the exporter’s country in the currency agreed. Avoid the risk of default once the check is in the hands of the exporter. However, there remains the risk that the importer, after receiving the goods, do not send the check. Time is much lower than in the case of personal check. Bank Transfer and simple payment order. Bco the im send the payment to the former bank. In the case of transfer payment in this account, while the simple payment order is settled in cash against a receipt signature. Both the bank transfer as the payment order are safer than the cashier’s check, since there is no risk involved in sending a document (loss, theft, etc.).. Remittance simple exporter in this case the procedure starts send the importer a bill of exchange or promissory note received by the agreed amount and maturity. The importer must pay at maturity. is almost always through banks, the bank will process to the imp exp and he shall submit to the payer, ie the imp. It also implies a great trust between the two parties. Remesa documentary The expr imp sent to your bank through the commercial effect receivables and all goods documnt on bank handled this shipment through another bank in the country of impr , but this to receive the documents, shall pay the amount or accept the vta good is q efecto.Lo ownership of the merchandise is not transmitted until the buyer pays or promises. The advantage for the importer is that it can reject the goods if not satisfied to make a check. The risk for exporters is that the buyer does not remove the documents and has to repatriate the goods, store or search for a new buyer. Letter of credit is an d the + used in international trade. + Is sure xa the 2. It is typically used, with new ClTES oq are not very reliable and also for high value operations. The – is that it is more laborious and more expensive than the previous. It starts with the instructions given by the importer to your bank (issuing bank) to issue a credit to q for the export. The bco agree to pay the amount while the export successfully deliver the required documents. If everything is in order: YES. The bank usually use a 2nd bank (advising bank) in the country of the exporter. The documentary credit is also called letter of credit (Ietter of credit. Appropriations documentary can be revocable or irrevocable. They are revocable if the importer’s bank can modify or cancel the agreement at any time On the contrary, in an irrevocable Credit can not be any modification or cancellation by the bank, which means greater security.
Pricing strategy. The company must devise a different pricing strategy based on the markets you want to address. This strategy must match the product and distribution. It is believed that the cost of fixing the minimum price products they may have, since, otherwise, the company incurred a loss every time you sell one unit of the same. On the other hand, consumers and competition are those who set the maximum price to be paid for something. Within these limits there are three main strategies of prices, depending on the objectives that the company is raised:
a) penetration strategy. In this case, the company looks for ways to introduce a new product in a market that ignores the characteristics of the new offer. The company’s efforts are focused on – as + possible prices in order to avoid constituting an impediment to purchase. This strategy is often applied when there is evidence of a strong potential market or when the crowd of competitors is remarkable.
b) maintenance strategy. When the products introduced by appropriate means have reached their plot in the market with optimal participation, the price should be able to play a stabilizing role to consolidate the intended image. For the maintenance of prices should be a potential market representative enough.
c) The strategy of skimming. Is to start the life of the product prices very +, to be perceived as a costly, highly valued. This is affecting a release, if possible, in the elitist image of the good. Get him a minority group whose purchasing power allows you to make use of a good inaccessible to the rest of society.