Setting prices for international markets is not an easy task. Decisions with regards to product, price, and distribution for international markets are unique to each country and will inevitably differ from those in the domestic market.
Furthermore, other factors such as: the rate of return, market stabilization, demand and competition-led pricing, market penetration, early cash recovery, prevention of competitive entry, company and product factors, market and environmental factors are all important in the decision making process.
When pricing for international markets, one has to take into consideration local culture, language, geography, climate, education, religion, attitudes and values. Firms need to examine carefully target market country’s characteristics and purchasing behaviours, to select an appropriate pricing strategy.
In developing a sound pricing strategy, firms must be aware of foreign consumers’ preferences, perceptions, and purchasing behaviours with respect to various price levels.
Reasons for Selling Abroad
Firms sell internationally for “pull” factors, based on the attractiveness of a potential foreign market, as well as for “push” factors. The following are some of the factors that "push" firms to sell abroad:
Sometimes companies develop a product for international and export markets only
The domestic market may be too small and exporting may be a viable option to exploit economies of scale
The nature of the business or product requires firms to operate internationally or in foreign markets – e.g. airlines.
Companies seek foreign expansion in order to minimise and spread the risk, and to reduce dependence on one geographical market
Perhaps the product life cycle has reached its mature (and saturated) stage in the domestic market, while being at earlier stages of its life cycle in less developed markets.
It is important to emphasise that all companies face international competition, not only in export markets, but in domestic markets as well. Becoming internationally competitive is therefore not only an essential requirement for successful exporters, but also the best means of defence that local companies can use to counter foreign imports.
Successful exporting contributes positively to a country's economy not only on the macro level, but on the micro level as well. Exporting offers companies many additional opportunities that they cannot obtain from domestic markets.
These include the following:
added sales volume may lower the production cost;
lower production cost may improve overall profitability;
competing in foreign markets should contribute to increasing the company's overall competitiveness;
improving the status of the company by competing in foreign markets;
reducing risks by selling to diverse markets;
taking advantage of economies of scale by enlarging the sales base in order to spread fixed costs;
compensating for seasonal fluctuations in domestic sales; finding new markets for products with declining domestic sales potential, thereby extending the product's lifecycle;
exploiting opportunities in untapped markets;
taking advantage of high-volume purchases in large markets overseas;
following domestic competitors who are already selling overseas;
testing opportunities for overseas licensing, franchising or production;
contributing to the company's general expansion;
improving the company's overall return on investment;
research and development costs can be offset by a large sales base;
new markets might yield ideas for further innovation;
fluctuations in business cycles can be levelled out by selling in different markets;
declining sales in one market might be offset by a boom in another market.
Pricing decisions are complex in international marketing. A firm may have to follow different pricing strategies in different markets. Whatever might be the strategy followed, pricing has to reflect the proper value in the eyes of the consumer wherever they are situated.
Choice of a pricing strategy is dependent on:
- Corporate goals and objectives.
- Customer characteristics.
- The intensity of inter-firm rivalry.
- The phase of the product life cycle.
Two phenomena may occur when products are sold in disparate markets. When a product is exported, price escalation, whereby the product dramatically increases in price in the export market, is likely to take place. This usually occurs because a longer distribution chain is necessary and because smaller quantities sold through this route will usually not allow for economies of scale.
"Gray" markets occur when products are diverted from one market in which they are cheaper to another one where prices are higher - e.g., Luis Vuitton bags were significantly more expensive in Japan than in France, since the profit maximizing price in Japan was higher and thus bags would be bought in France and shipped to Japan for resale. The manufacturer therefore imposed quantity limits on buyers.
Since these quantity limits were circumvented by enterprising exchange students who were recruited to buy their quota on a daily basis, prices eventually had to be lowered in Japan to make the practice of diversion unattractive.
Where a local government imposes price controls, a firm may find the market profitable to enter nevertheless since revenues from the new market only have to cover marginal costs. However, products may then be attractive to divert to countries without such controls.
Some Pricing Strategies to Use when Selling Internationally
This strategy involves a firm differentiating its price across different market segments. The assumption in this strategy is that different market segments do not communicate or have different search costs and value perceptions of the product. Diversity in the market motivates a firm to adopt this strategy.
A strong and effective pricing strategy takes advantage of a company's position and product offerings to maximise profit. A differential pricing strategy allows the company to adjust pricing based on various situations or circumstances. The price variations come in different forms, from discounts for a particular group of people to coupons or rebates for a purchase.
Offering discounts allows your company to expand abroad to customers who might not otherwise buy your product. The lower price makes your business more attractive to those groups you target.
The company's overall sales increase due to this expanded customer base. In cases when strategies like coupons, sales or rebates are used, the initial discount gives the new customers a chance to try the product. If they like what they experience, they may continue buying the product at full price when the discount is no longer available.
However, your profits on the discounted sales drop since you won't receive the full amount you normally charge. If the prices eventually go back up after a sale or the end of a coupon offer, you may lose those new clients who cannot afford to pay full price.
This strategy seeks to exploit economies of scale by pricing the product below the competitor’s in one market and adopting a penetration strategy in the other. The former is termed as second market discounting.
This second market discounting is a part of the differential pricing strategy where the firm either dumps or sells below its cost in the market to utilize its existing surplus capacity. So, in geographic pricing strategy, a firm may charge a premium in one market, penetration price in another market and a discounted price in the third.
Transfer pricing involves what one subsidiary will charge another for products or components supplied for use in another country. Firms will often try to charge high prices to subsidiaries in countries with high taxes so that the income earned there will be minimised.
Transactions may include the trade of supplies or labour between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities.
Therefore, when divisions are required to transact with each other, a transfer price is used to determine costs. Transfer prices tend not to differ much from the price in the market because one of the entities in such a transaction will lose out: they will either be buying for more than the prevailing market price or selling below the market price, and this will affect their performance.
Pricing is probably one of the toughest problems for businesses, not least when it involves pricing for an overseas market. Proper pricing takes into account costs, market demand and competition. In domestic markets, few companies are free to set prices without considering their competitors' pricing policies.
This is also true in exporting. If a foreign market is serviced by many competitors, you may have little choice but to match the going price, or go below it, to win a share of the market. If your product or service is new to a market, you may, however, be able to set a higher price.
Pricing in the international marketplace requires a shrewd market strategy and companies need to define their pricing strategies, know their products, and understand the host country’s cultural and environmental factors.
- Pricing Strategy: How to Price a Product, Bill McFarlane 2012
- Pricing for Profit: How to Develop a Powerful Pricing Strategy for Your Business, Peter Hill 2013
- Pricing Strategy: Setting Price Levels, Managing Price Discounts and Establishing Price Structures, Tim Smith 2011
- The Strategy and Tactics of Pricing, Tom Nagle and John Hogan 2016