Pricing for International Markets, Factors affecting International Price Determination
Pricing decisions are complex in international marketing. A firm may have to follow different pricing strategies in different markets. Whatever might be the strategy followed, pricing has to reflect the proper value in the eyes of the consumer wherever they are situated.
Choice of a pricing strategy is dependent on:
- Corporate goals and objectives.
- Customer characteristics.
- The intensity of inter-firm rivalry.
- The phase of the product life cycle.
Two phenomena may occur when products are sold in disparate markets. When a product is exported, price escalation, whereby the product dramatically increases in price in the export market, is likely to take place. This usually occurs because a longer distribution chain is necessary and because smaller quantities sold through this route will usually not allow for economies of scale.
“Gray” markets occur when products are diverted from one market in which they are cheaper to another one where prices are higher – e.g., Luis Vuitton bags were significantly more expensive in Japan than in France, since the profit maximizing price in Japan was higher and thus bags would be bought in France and shipped to Japan for resale. The manufacturer therefore imposed quantity limits on buyers.
Since these quantity limits were circumvented by enterprising exchange students who were recruited to buy their quota on a daily basis, prices eventually had to be lowered in Japan to make the practice of diversion unattractive.
Where a local government imposes price controls, a firm may find the market profitable to enter nevertheless since revenues from the new market only have to cover marginal costs. However, products may then be attractive to divert to countries without such controls.
SOME PRICING STRATEGIES TO USE WHEN SELLING INTERNATIONALLY
This strategy involves a firm differentiating its price across different market segments. The assumption in this strategy is that different market segments do not communicate or have different search costs and value perceptions of the product. Diversity in the market motivates a firm to adopt this strategy.
A strong and effective pricing strategy takes advantage of a company’s position and product offerings to maximise profit. A differential pricing strategy allows the company to adjust pricing based on various situations or circumstances. The price variations come in different forms, from discounts for a particular group of people to coupons or rebates for a purchase.
Offering discounts allows your company to expand abroad to customers who might not otherwise buy your product. The lower price makes your business more attractive to those groups you target.
The company’s overall sales increase due to this expanded customer base. In cases when strategies like coupons, sales or rebates are used, the initial discount gives the new customers a chance to try the product. If they like what they experience, they may continue buying the product at full price when the discount is no longer available.
However, your profits on the discounted sales drop since you won’t receive the full amount you normally charge. If the prices eventually go back up after a sale or the end of a coupon offer, you may lose those new clients who cannot afford to pay full price.
This strategy seeks to exploit economies of scale by pricing the product below the competitor’s in one market and adopting a penetration strategy in the other. The former is termed as second market discounting.
This second market discounting is a part of the differential pricing strategy where the firm either dumps or sells below its cost in the market to utilize its existing surplus capacity. So, in geographic pricing strategy, a firm may charge a premium in one market, penetration price in another market and a discounted price in the third.
Transfer pricing involves what one subsidiary will charge another for products or components supplied for use in another country. Firms will often try to charge high prices to subsidiaries in countries with high taxes so that the income earned there will be minimised.
Transactions may include the trade of supplies or labour between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities.
Therefore, when divisions are required to transact with each other, a transfer price is used to determine costs. Transfer prices tend not to differ much from the price in the market because one of the entities in such a transaction will lose out: they will either be buying for more than the prevailing market price or selling below the market price, and this will affect their performance.