Hitesh Jhanji, Lovely Professional University Unit 8: Pricing Decisions for International Markets Unit 8: Pricing Decisions for International Markets Notes CONTENTS Objectives Introduction 8.2 Factors affecting International Pricing Strategies 8.1 Factors affecting Pricing Decisions 8.4 Pricing Issues in International Marketing 8.8 Further Readings Objectives After studying this unit, you will be able to: ° Describe Pricing ° Explain the parameters on which pricing decisions are based e Discuss on the information needed for pricing decisions ° Explain the factors affecting export pricing ° Describe the various pricing strategies used by firms e Analyse the pricing issues in international markets Introduction Pricing is a very critical decision in international marketing management because it is a major factor influencing a firm’s total revenue from exports and its profitability. There is no thumb rule or any scientific or mathematical/statistical formula that can be applied in pricing a product correctly. There is no doubt that as is the case in the domestic market the interaction of the market force like demand and supply affect the price at which the product can be sold in the international market. Besides, several other factors: economic, social, political, marketing conditions and product attributes influence the decision making in the international marketing.
In any given marketing three basic factors determine the limits of pricing decisions of a firm. These are product cost, the purchasing power of the consumers and demand and supply force.1 Pricing Decisions The pricing decision is a critical one for most marketers, yet the amount of attention given to this key area is often much less than is given to other marketing decisions. One reason for the lack of attention is that many believe price setting is a mechanical process requiring the marketer LOVELY PROFESSIONAL UNIVERSITY 139 International Marketing Notes to utilize financial tools, such as spreadsheets, to build their case for setting price levels. While financial tools are widely used to assist in setting price, marketers must consider many other factors when arriving at the price for which their product will sell.
The marketing manager uses the parameters suggested by the economists for arriving at a price. These parameters may be enumerated as under: 1. | Demand and supply 3 Economic, legal and political conditions 1. Costs: Costs represent the base line for setting the price.
In other words, costs represent the price floor beyond which prices cannot be dropped. As already explained costs are made up of two components, fixed costs and variable costs. Fixed costs represent the un- escapable element of cost, whereas, the variable cost represent the escapable costs. The variable costs are also sometimes interpreted as marginal costs or incremental costs.
Each of these components has its own significance when pricing a product but the significance is in turn dependent upon the marketing goals, and other similar variables. Demand & Supply: For a marketing manager, the upper limit is demonstrated by the demand and supply conditions as they exist in the market. The demand conditions are interpreted from the market conditions and the consumer behaviour whereas; the supply conditions are interpreted by an analysis of the competition. The prices charged by the competitors, and the attributes and quantity sold by the competitors, set the supply parameters.
Example: the prices being charged for garments by the Italians and the South Asians will determine broadly the range that can be charged by the apparel exporters. Again, if the international buyer is alert he will through his awareness, bargain against the subsidies being provided by the Government to the exporter, thus forcing the Indian exporter to charge as per real costs. Economic, Legal and Political conditions: These represent parameters outside the market forces which influence the price structure. The Government, it has been noted, can through its policy, in fact modify the market conditions, making them lopsided.
Thus, the countries where the economic policies are directed by the Government, the economic and political conditions have an important bearing on price structures. Taxes and duty drawbacks represent excellent examples for the same. Legalities lengthen any process and complicate it and thereby influence the price structure. The more the legal constraints to be adhered to, more the price charged from the customers, in an effort to pass the increase in costs.
The parameters explained above suggest the upper and lower limits but, the actual price lies somewhere in between. The effort of every manager is to arrive at a process that is easy and minimizes the deviation from the chosen price, in order to ensure the resultant profit. As a result of this, various methods of pricing, have come into vogue which emphasise one variable as against the other variable for example, cost plus pricing, competitive pricing. Cost plus pricing reflects an accounting thought rather than a managerial thought whereas competitive pricing reflects a supply side thought process.
It must be pointed out that marketing efforts are directed at fulfilling the need of the identified consumers. Price is an inherent factor of need. Therefore price must reflect managerial thought, and must fit into the overall marketing strategy. 140 LOVELY PROFESSIONAL UNIVERSITY Unit 8: Pricing Decisions for International Markets A suggested process for arriving at the price would include the following steps: Notes Analysis of the marketing goals 2 Choosing the marketing mix 3 Composing the marketing mix 4.
Determining the pricing policy 5 Defining the pricing strategy 6 Arriving at a specific price. Of course, the chronology is not important but thought on each of the above steps would enable the marketing manager to arrive at a price which fulfils his marketing objectives within the set upper and lower limit. Thus, in brief, the marketing manager arrives at a price, within the parameters of cost, demand & supply and economic, political and legal parameters, by adopting a process that fulfils his marketing objective. =/74| Notes An important pre-requisite for scientific export pricing decisions is regular availability of authentic basic data relating to export products, foreign market and other relevant marketing information.
The details of information requirements vary from product to product, market to-market and firm to firm. In general, the following information is usually necessary for facilitating export pricing decision: Product Information 1. Production cost details: a) Prime cost b) Factory overheads c) General Administration overheads 2. Cost of distribution a) Cost of packing b) Cost of selling c) Cost of transportation including insurance d) Distribution costs 3.
Cost of marketing support-advertising, sales promotion and technical literature. These data may have to be obtained for the exporting countries, for competing countries and for consuming countries. Nature of the product a) | Whether a consumer or an industrial product b) Elasticity of demand c) | Demand be pushed up by promotion d) Importance given to the price-quality mix e) Elasticity of supply of the product LOVELY PROFESSIONAL UNIVERSITY 141 International Marketing Notes 5. International levies, taxes, etc.
Installation and after-sales service requirements, and 9. Percentage incidence of rejects. Market Structure-high competition, little competition or low competition 2. — Peculiarities of the market-developed and developing countries.
Particular segments in developed countries may be interested in low price goods. Ruling price in the foreign market including prices of substitutes 4. Terms of payment offered by the competitors and demanded by importers 5. Import duties, border fiscal charges and quota, restrictions.
Major sources of supply in the importing country-local and foreign 7. Trade preferences and/or trade agreements, if any 8. concessions, if any 9. Brand image, brand loyalty and consumer preferences 10.
The nature of market segmentation, if any 11. Publicity-need, media and cost 12. Channels of distribution and margins allowed to various intermediaries 13. Shipping freight, insurance, packing, banking, transportation and other charges incidental to export, and 14.
Documentation and invoicing requirements, health and sanitary regulations and other government regulations. Information Required at the Micro Level Some of the strategic points of information necessary for pricing decisions at the micro level cover the following aspects: 1. Production capacity of the firm-installed as well as utilised 2 Proportion of total production supplied to the home market 3 Proportion at present exported 4, Competition among domestic firms in the export field, and 5 Additional export possibilities As regards the supplies for additional exports, the essential information required is: 1. Whether it would involve curtailment of supplies to the domestic market? 2.
Whether it would lead to the utilisation of idle capacity, or 3. Whether it would require commissioning of new capacity? 142 LOVELY PROFESSIONAL UNIVERSITY Unit 8: Pricing Decisions for International Markets Self Assessment Notes Fill in the blanks: 1.‘ The three basic factors which determine the limits of pricing decisions of a firm are product cost, the purchasing power of the consumers and. Hee represents the price floor beyond which prices cannot be dropped. conditions in the market are interpreted by an analysis of the competition.2 Factors affecting International Pricing Strategies Pricing strategy is an important part of fixing the international price.
The price has to be competitive and based on the quality of a product. Different pricing strategies are adopted in different foreign countries because of certain environmental factors like political, economic, socio-cultural, and legal and so on. Let us learn some more about international pricing, discussed in following subsections.1 Factors affecting Pricing Decisions There are three main factors which affect the export price strategy to be adopted by the exporter in the foreign markets, viz. the characteristics of the product and the nature of its demand, the philosophy of its management and the market characteristics.
The pricing strategy is a short- term tool to make fit the prices in the changing competitive situations in the short run with its pricing policy decisions. Characteristics of the product and the nature of its demand: It is a major factor in fixing the price of the product at a particular time. In other words, improvement in quality of the product and product adaptation according to the changing competitive conditions in the foreign market should be taken as a continuous process. Elasticity of demand is another factor, which influences the price.
If the demand of a product is inelastic, the price reduction will not help to increase the revenue. In such a case, higher prices may be fixed taking in view the competitive position in the market. If, on the other hand, product is highly elastic, the sales revenue can be appreciably increased by slightly reducing the price. Thus, pricing strategy, i.
whether to fix higher price or lower price as compared to the competitor’s prices very much depends upon the elasticity of demand and the competitive position. The philosophy of the management: As we know that the main objective of management of every concern is to maximize profits, this is an adverse relationship between the price and the demand. The management can earn more profit at increased revenue by reducing the price if the demand is more elastic. On the other hand, if the objective of the management is to export a committed value of merchandise, the price may be even lower than the marginal cost.
Market characteristics: Market characteristics such as number of competitors and degree of competition, supply position, quality of the product, substitutes available in the market etc. determines the pricing strategy of the firm. These market characteristics vary from country to country. T Task Write a note on “P&G and its pricing policies”.
LOVELY PROFESSIONAL UNIVERSITY 143 International Marketing Notes Self Assessment Fill in the blanks: 4. The pricing strategy is a. tool to make fit the prices in the changing competitive situations in the short run with its pricing policy decisions. Tf the demand for a product is.
„ then even the reductions in prices will not lead to increase in revenue.3 Pricing Approaches The export price quotations may not be the same for all markets. Prices may differ from market to market due to various reasons viz. political influence, buying capacity, financial and import facilities, total market turnover and other pricing and non-pricing factors etc.
