Price is perhaps the most important element of the marketing mix. It is, after all, the only element of the marketing mix that generates income – all the others (i.e. product, promotion and distribution) cost money! In addition, in order to penetrate international markets, a competitive edge is important and price is a major contributor to competitiveness. You should bear in mind, however, that it is not the sole determinant of competitiveness – technological superiority, world-wide company image, or scarcity of supply, for example, could also ensure success in the foreign marketplace. However, although a non-price competitive edge can result in customer acceptance of premium prices, this is not usually achieved without considerable investment in both time and money, and it is usually on the basis of price that the less affluent or smaller firm establishes itself in a new market.
Factors that impact on price setting
Determining the right price for a specific market depends on a number of factors, namely:
- The cost of producing and marketing the product
- The cost of getting the product to the customer
- The unique features of the product
- The quality and design of the product
- The impact of your promotional effort
- The potential export volume and cost of securing these export sales
- What the market will bear
- The competition
- What the authorities in the importing country may permit
- The amount of investment required
- The risks involved
A seven-step process in setting your export price
When we come to implementing your export marketing strategy, we will help you deal with most of these issues. In setting an export price, there are essentially seven steps to follow:
- An important input to your export pricing exercise is the information you gathered when doing a pricing analysis in your target market. This pricing analysis will have formed part of your export marketing research that you undertook earlier on in the export process. The information gleaned from your pricing analysis you will use throughout this export pricing exercise.
- Your next step is to identify all the costs associated with producing the product in question (some of this information will come from within your firm, while information will come from the pricing analysis you did earlier). After all, whatever price you set, you want to at least cover your costs – if you don’t then you may soon go out of business. Marginal costing is the one pricing strategy in which you purposefully do not strive to cover all your costs and we discuss this strategy a little later on.
- Once you have identified your costs, the next step is to review your export objectives take your pricing analysis of your target market into consideration and then to decide on a pricing approach – the pricing approach you decide on will influence the ultimate pricing strategy you for export market.
- With your pricing approach in mind, choose a pricing strategy that you believe will meet your needs.
- With your pricing analysis, total costs and this strategy in mind, your next step is to decide on an export price for your product. Remember that your export price is not necessarily the final selling price in that market.
- Working with this export price, you now need to estimate the other additional costs that are likely to affect the final selling price of your product (such as commissions of intermediaries, VAT or other sales taxes, excise taxes, credit terms to be offered to customers, etc.). These additional costs will also have been determined during your pricing analysis. Add these cost estimations to your export price and then estimate what your final selling price is likely to be.
- Finally, you would compare your final selling price with the market-related prices of similar products (namely, your competitors) – this information you will have obtained when doing your pricing analysis – see step 1 above. It is highly unlikely that your first costing exercise will translate into a selling price that is competitive. If your estimated selling price is not inline with the competition, you may have to work backwards and review all of the costs involved in marketing your product abroad, to see where you can still make some savings! You will more than likely need to review your costing and price-setting process and try to make changes to the product and/or packaging, reduce costs, rethink your channel intermediaries, consider alternative promotional activities, and consider lower margins, in order to end up with a final selling price that is more realistic and competitive.
Preparing a pricing strategy statement for your export plan
These above-mentioned issues we discuss in detail in subsequent sections. Once you have worked through these various pricing issues, you should be able to prepare a statement outling your export pricing strategy. This statement should:
- Sumarise your price analysis undertaken in step 7 of the 21-step export process
- Briefly discuss your costing exercise (you might attach a copy of your costing sheet as an appendix)
- Identify the pricing approach and pricing strategy you intend to follow
- Propose an export price