Pricing for export is different than domestic pricing. Additional consideration needs to be given to the cost of modifying product or support materials for the foreign market, the logistics of getting the product to the foreign market, insuring the product, financing costs, transportation and other costs unique to exports such as long-distance communication costs and exchange rates.
As pricing strategy is a key component of an export-marketing plan, the pricing structure has to be an integral part of the marketing objectives. These will vary depending on the target overseas markets. For example, a firm might regard the foreign market as a secondary market and consequently have lower expectations regarding market share and sales volume. Pricing decisions are naturally affected by such views.
An exporter must thoroughly evaluate all the variables that have a bearing on the price for the product/service may not sell. On the other hand, too low a price may not justify any exports at all. It is important that an export market research. Various sources could be tapped to collect price relevant information like other exporters to same markets, overseas distributors and agents dealing in similar products, searching the internet, foreign travel etc.
Price for any product is affected by the following three major factors:
- Costs: Costs serve the basic purpose of arriving at the minimum price, also known as the floor price. These are basically bounded to production and other incurred costs. Costs serve as the foundation of any pricing as the objective of every business is to make some profit and even for non-profit organizations. It is not to incur any losses. Profits will commence as and when one is able to recover all the incurred costs.
- Competition: Competition plays a very important part in any pricing decision as it defines the price ceiling or maximum price. Based on your costs and the competition prices, you will have to work on your own prices.
- Customer Expectation: Exporter must take into account the customer demand at various price levels. Pricing is done for customer acceptance and it should be an optimum price to suit the customer expectations.
Export Pricing Strategies
Following three strategies are used in export pricing
- A low price (Penetration) refers to volume policy. Products are priced low to gain speedy acceptance in the market.
- Products are priced high (Skimming) where the product is an innovation, unique in the market, setup costs are high and demand is relatively inelastic.
- Market (Holding) is a strategy intended to hold market share. Products are priced based on what the market can take.
Methods of Export Pricing
1. Cost Plus Pricing:
This method is based on adding a desired markup on costs–including domestic costs and exporting costs(Documentation expenses, freight charges, custom duties and international sales and promotional costs) to arrive at the prices for export markets. Domestic marketing and promotional costs are not taken into account. This method permits the exporter to maintain his desired profit percentage to set a suitable export price.
Export related costs here will include Packaging, Foreign Market Research, Advertising and Marketing, Exchange Conversion/Fluctuation Costs, Translation, Consulting and Legal fees, Bank charges & other Financial Costs, Foreign Agent/Distributor Product Information and Training, After-Sales Service Costs etc.
Normally, exporters are guided by any one of the following:
- High Price Option: This approach will use higher mark-ups to produce big profits. It may work if a company is selling a new and unique product targeted at the upper-end of the market. This option is likely to attract competition and limit the market for the product while, at the same time, yield bigger margins.
- Moderate-Price Option: This is the middle path focusing on a lower risk as compared to the high-or-low -price option. The emphasis is on matching competition, building a market position and earning a reasonable profit margin.
- Low-Price Option: This route is generally taken to impede competition to penetrate a market, suitable in case one is trying to reduce inventory and does not have a long term commitment. Such pricing will result in low profit margins.
2. Marginal Cost Pricing:
An improved version of cost plus method is called marginal cost pricing. The fixed cost including expenses incurred on modifications to the product for producing an additional unit for export is determined first. Variable export costs are then added to arrive at the realistic total cost for exports. Such costs invariably include Packaging, Foreign Market Research, Advertising and Marketing, Exchange Conversion/Fluctuation Costs, Translation, Consulting and Legal fees, Bank charges & other Financial Costs, Foreign Agent/Distributor Product Information and Training, After-Sales Service Costs etc. Margins are then applied to arrive at the export price. This result is a more realistic determination of cost of producing products for export.
3. Competitive Pricing:
Costs are important in pricing decisions. However they should be looked at alongside the prices of competitive products in the target markets. Prices need to be set in tune with the competition. Most customers compare prices of alternatives before coming to a final decision. If one’s prices are set in isolation, these may not find favor with the customer except in cases where there is no competition.
4. Market Pricing:
Extensive competition and availability of a variety of products have necessitated market pricing-also known as target pricing. Here, the exporter has to work on a price that the customer is willing to pay and focus shifts on managing costs as efficiently as possible. This has happened because the customer today is highly informed-he knows most costing and is ready to pay only what suits him. The exporter needs to work backwards from target price down to the costs and find margins for him by managing his overheads and other costs better.