In any country, three basic factors determine the boundaries within which market prices should be set. The first is product cost, which establishes a price floor, or minimum price. While it is certainly possible to price a product below the cost boundary, few firms can afford to do this for extended periods of time. Second, competitive prices for comparable products create a price ceiling or upper boundary. International competition almost always puts pressure on the prices of domestic companies. A widespread effect of international trade is to lower prices. Indeed, one of the major arguments favoring international business is the favorable impact of international competition upon national price levels and, in turn, upon a country’s rate of inflation. Between the lower and upper boundaries for every product there is an optimum price, which is a function of the demand for the product as determined by the willingness and ability of customers to buy. The interplay of these factors is reflected in the pricing policies adopted by many Global companies in the mid-1990s.
A global manager must develop pricing systems and pricing policies that address these fundamental factors in each of the national markets in which his or her company operates. The following is a list of eight basic pricing considerations for marketing outside the home country.
- Does the price reflect the product’s quality?
- Is the price competitive?
- Should the firm pursue market penetration, market skimming, or some other pricing objective?
- What type of discount (trade, cash, quantity) and allowance (advertising, trade-off) should the firm offer its international customers?
- Should prices differ with market segment?
- What pricing options are available if the firm’s costs increase or decrease? Is demand in the international market elastic or inelastic?
- Are the firm’s prices likely to be viewed by the host-country government as reasonable or exploitative?
- Do the foreign country’s dumping laws pose a problem?
A firm’s pricing system and policies must also be consistent with other uniquely global constraints. Those responsible for global pricing decisions must take into account international transportation costs, middlemen in elongated international channels of distribution, and the demands of global accounts for equal price treatment regardless of location. In addition to the diversity of national markets in all three basic dimensions of cost, competition, and demand, the international executive is also confronted by conflicting governmental tax policies and claims as well as various types of price controls. These include dumping legislation, resale price maintenance legislation, price ceilings, and general reviews of price levels.
Global Pricing Strategies
An effective pricing strategy for international markets is one in which competition and costs have influenced the pricing decision. Only examining the price levels of competitive and substitute products in target markets can determine competitive prices. An excellent way to get this information is to visit the market personally. Once these price levels have been established, the base price can be determined. The four steps involved in determining a base price are:
- Determine the price elasticity of demand. Inflexible demand will allow for a higher price.
- Estimate fixed and variable manufacturing costs on projected sales volumes. Product adaptation costs must be calculated.
- Identify all costs associated with the marketing program.
- Select the price that offers the highest contribution margin.
The final determination of a base price can be made only after the other elements of the marketing mix have been established. These include the distribution strategy and communication strategy. The nature and length of channels utilized in the marketing program will affect margins, as will the cost of advertising and communications. Clearly, the marketing program has a dramatic effect on the final price of the product.