International Pricing Strategies
International Pricing is often considered the most critical and complex issue in international marketing. When talking about the price of a product, it is important to notice that it is a sum of all monetary and non-monetary assets the customer has to spend in order to obtain the benefits it provides. The main pricing decisions in international marketing comprise the following:-
The overall international pricing strategy determines general rules for setting (basic) prices and using price reductions, the selection of terms of payment, and the potential use of countertrade.
- The price setting strategy determines the basic price of a product, the price structure of the product line, and the system of rebates, discounts or refunds the firm offers.
- The terms of payment are contractual statements fixing, for example, the point in time and the circumstances of payment for the products to be delivered.
There are several options in terms of general price determination. They represent different levels of adaptation to local requirements.
A standard pricing strategy is based on setting a uniform price for a product, irrespective of the country where it is sold. This strategy is very simple and guarantees a fixed return. However, no response is made to local conditions.
With standard formula pricing, the company standardises by using the same formula to calculate prices for the product in all country markets. There are different ways to establish such a formula. For example, full-cost pricing consists of taking all cost elements (e.g. production plus marketing, etc.) in the domestic market and adding additional costs from international transportation, taxes, tariffs, etc. A direct cost plus contribution margin formula implies that additional costs due to the non-domestic marketing process and a desired profit margin are added to the basic production cost. The most useful approach in standard formula pricing is the differential formula. It includes all incremental costs resulting from a non-domestic business opportunity that would not be incurred otherwise and adds these costs to the production cost.
While these strategies accentuate elements of international standardization in pricing, in price adaptation strategies prices are typically set in a decentralized way (e.g. by the local subsidiary or local partner). Prices can be established to match local conditions. While this ability to comply with local requirements constitutes a clear advantage, there can be difficulties in developing a global strategic position.
Additionally, the potential for price adaptation is limited by interconnections between the diverse international markets. Therefore it is necessary to coordinate the pricing strategy across different countries because otherwise reimports, parallel market or grey market situations can emerge. In these situations, products are sold outside of their authorized channels of distribution. As a specific form of arbitrage, grey markets develop when there are price differences between the different markets in which products are sold. If these differences emerge, products are shipped from low-price to high-price markets with the price differences between these markets allowing the goods to be resold in the high-price market with a profit. Parallel markets, while legal, are unofficial and unauthorized and can result in the cannibalization of sales in countries with relatively high prices, damaging relationships with authorized distributors.
To avoid these drawbacks in totally standardized or differentiated approaches, geocentric pricing approaches can be chosen. There is no single fixed price, but local subsidiaries are not given total freedom over setting prices. For example, firms can set price lines that set the company’s prices relative to competitors’ prices (i.e. standardised price positioning).
It is important to notice that international pricing decisions also depend on the degree of industry globalization. Global industries are dominated by a few, large competitors that dominate the world markets. Which international pricing strategy is appropriate depends on the firm’s ability to respond to the diverse external, market-related complexities of international markets.