Viewed broadly, there are three alternative positions a company can take toward worldwide pricing.
The first can be called an extension/ethnocentric pricing policy. This policy requires that the price of an item be the same around the world and that the importer absorbs freight and import duties. This approach has the advantage of extreme simplicity because no information on competitive or market conditions is required for implementation. The disadvantage of this approach is directly tied to its simplicity. Extension pricing does not respond to the competitive and market conditions of each national market and, therefore, does not maximize the company’s profits in each national market.
The second pricing policy can be termed adaptation/polycentric. This policy permits subsidiary or affiliate managers to establish whatever price they feel is most desirable in their circumstances. Under such an approach, there is no control or fixed requirement that prices be coordinated from one country to the next. The only constraint on this approach is in setting transfer prices within the corporate system. Such an approach is sensitive to local conditions, but it does present problems of product arbitrage opportunities in cases where disparities in local market prices exceed the transportation and duty cost separating markets. When such a condition exists, there is an opportunity for the enterprising business manager to take advantage of these price disparities by buying in the lower-price market and selling in the more expensive market. There is also the problem that under such a policy, valuable knowledge and experience within the corporate system concerning effective pricing strategies is not applied to each local pricing problem. The strategies are not applied because the local managers are free to price in the way they feel is most desirable, and they may not be fully informed about company experience when they make their decision.
The third approach to international pricing can be termed invention/geocentric, Using this approach, a company neither fixes a single price worldwide nor remains aloof from subsidiary pricing decisions, but instead strikes an intermediate position. A company pursuing this approach works on the assumption that there are unique local market factors that should be recognized in arriving at a pricing decision. These factors include local costs, income levels, competition, and the local marketing strategy. Local costs plus a return on invested capital and personnel fix the price floor for the long term. However, for the short term, a company might decide to pursue a market penetration objective and price at less than the cost-plus return figure using export sourcing to establish a market. Another short-term objective might be to estimate the size of a market at a price that would be profitable given local sourcing and a certain scale of output. Instead of building facilities, the target market might first be supplied from existing higher-cost external supply sources. If the market accepts the price and product, the company can then build a local manufacturing facility to further develop the identified market opportunity in a profitable way. If the market opportunity does not materialize, the company can experiment with the product at other prices because it is not committed by existing local manufacturing facilities to a fixed sales volume.
For consumer products, local income levels are critical in the pricing decision. If the product is normally priced well above full manufacturing costs, the international marketer has the latitude to price below prevailing levels in higher-income markets and, as a result, reduces the gross margin on the product. While no business manager enjoys reducing margins, margins should be regarded as a guide to the ultimate objective, which is profitability. In some markets, income conditions may dictate that the maximum profitability will be obtained by sacrificing “normal” margins.
The important point here is that in global marketing there is no such thing as a “normal margin”
The final factor bearing on the price decision is the local marketing strategy and mix. Price must fit the other elements of the marketing program. For example, when it is decided to pursue a “pull” strategy that uses mass-media advertising and intensive distribution, the price selected must be consistent not only with income levels and competition but also with the costs and extensive advertising programs.
In addition to these local factors, the geocentric approach recognizes that headquarters price coordination is necessary in dealing with international accounts and product arbitrage. Finally, the geocentric approach consciously and systematically seeks to ensure that accumulated national pricing experience is leveraged and applied wherever relevant.
Of the three methods, only the geocentric approach lends itself to global competitive strategy. A global competitor will take into account global markets and global competitors in establishing prices. Prices will support global strategy objectives rather than the objective of maximizing performance in a single country.