In the process of determining a final export price, there are a number of pricing strategies that you could follow, but obviously only one strategy that you will follow at any time. These strategies are briefly discussed below and the strategies are associated with the pricing approach that you have decided to follow in the previous section (see step 3). Whatever pricing approach and associated strategy you choose, your starting point is always the costing exercise we discussed in step 2. Unless you know exactly what your costs are, whichever approach and strategy you follow will always be a risk as you may be selling at a price that does not cover your costs and therefore you will be loosing money with every sale that you make! Your costs represent the basis upon which your final export price is built. Once you have calculated your costs as outlined in step 2, then you may want to choose from one of the following strategies (which have been organised according to your approach to pricing outlined in the previous section):
1. Approach to pricing: Competitor-orientated
In the case of commodity markets, e.g. wheat, tea, coffee, grain, prices are established through the interaction of a large number of buyers and sellers. There are usually publicised world prices that set the pricing levels in these types of markets. As an exporter competing in such markets, you will need to keep to these prices – this is known as commodity-based pricing. Any exporter quoting prices in excess of the price prevailing in the marketplace would effectively cut themselves out of the market – they would, of course, be equally foolish to quote below the prevailing rate. If you operate in commodity-type markets your primary function would be to keep production costs and overheads as low as possible in order to increase profits.
Of course, commodity markets are not the only markets in which this type of competitor-orientated pricing takes place. There may be industries in which many participants compete with one another, and, although there is no publicised world price for the products in question, there is an accepted narrow range of prices within which you will need to compete.
Another form of competitor-orientated pricing occurs in markets where there is an extremely dominant supplier (or perhaps two) that has the largest market share and that essentially sets the price levels for that particular market. The other, usually smaller, producers play a follow-the-leader approach to pricing and keep to the pricing set by the market leader (although they may offer a small discount compared with the market leader’s price to entice buyers to purchase their goods).
2. Approach to pricing: Cost-orientated
In this instance, you would calculate your firm’s costs very carefully and then you would add a fixed percentage as a profit margin to the total cost. In this instance, you would probably quote the same price for different markets. What is more, you are likely to use the same base price (or Ex Works price) for the domestic market as for export markets. The problem with this approach is that it does not take into consideration market and country differences, or the role of foreign competition.
Early cash recovery
If your company regards its position in the export market as being somewhat precarious (e.g. impending import restrictions could exclude it from the market altogether, or where liquidity is a problem), it might adopt a strategy aimed at rapid cash generation. The objective here is to pay back your investment as quickly as possible and thereafter to make as much profit as possible, as quickly as possible.
Satisfactory rate of return on investment
The cost-oriented producer of industrial goods who wants to achieve a uniform rate-of-return on investment often adopts this strategy. Near standardised prices are set at a level that will realise a certain percentage of profit for a given amount of investment and level of risk.
3. Approach to pricing: Demand (market)-orientated
The intention behind a market penetration strategy is to stimulate market growth and/or to capture a substantial share of the market. This strategy is often used when the product has a lot of competition or is very ordinary. This usually requires the establishment of a relatively low price within a price sensitive market. This strategy, which is dependent on production economies of scale and other cost reduction factors, obviously carries a high degree of risk. Careful consideration would need to given beforehand to the possibility of adverse movements in exchange rates, the imposition of import restrictions, etc., that could result in unexpected financial losses.
With market skimming, you would enter the foreign market initially with a high price. You can really only do this if your products are in demand or are very unique. The intention with this approach is to take advantage of the perceived uniqueness of the product or demand for the product while it is new or while there is little other competition. In such instances, it is usually not long before the price has to be reduced to attract more price-conscious buyers, or to defend against competitors as they come onto the market or as the demand drops. This approach is often used in the marketing of computer products and other technology items, clothing, as well as books where relatively expensive hard-cover editions precede the cheaper paperback editions. (Think about the introduction of a new technology such as DVD and the high prices that are initially charged for this technology.)
What the market will bear
With this strategy, you set a price that you believe the customer will be prepared to pay. This is an approach to take if you have done quite a bit of research on what customers are prepared to pay or can afford to pay.
In adopting this approach, the demand-oriented exporter – usually of consumer products – takes advantage of different price levels in various countries by establishing a different price, based on what the market will bear, for each export market. The success of differential pricing depends to a large degree on the extent to which markets can be kept separate. Where markets are integrated, such as in the EU, for example, problems could arise where the product is purchased at a low price in one country and resold at a higher price (but one that undercuts the original supplier) in another country.
With the advent of the Internet, it is becoming more difficult to introduce differential pricing. In most cases, where a company uses its web site to sell its products (e.g. Amazon.com), buyers visiting this web site would surely query why different prices exist for different markets. They would inevitably demand that they also enjoy the benefit of the lower prices available to other markets and for this reason it is becoming less feasible to have differential pricing when selling over the Web.
Moving on to setting an actual export price
The next step in the export pricing process is to decide on a specific export price that covers your costs and meets the objectives of your pricing strategy.