Three broad approaches will guide your pricing strategies
You have completed the formal costing exercise and you now know what your costs are. The next step is to decide on an export price. This decision is divided into to parts; the first is to decide on the broad pricing approach you intend to follow (which we discuss below) and the second is to decide on a specific pricing strategy. As far as the broad approaches to price setting are concerned, there are essentially three ways in which you can approach your pricing in foreign markets. These are discussed below:
1. Competitor-oriented pricing
In terms of this approach, your pricing decisions would depend on what the competition does. Competitor-oriented pricing is the approach to follow when you are dealing with a market where prices are openly set through the process of supply and demand as in the case of most commodity markets such as coal, coffee, wheat and gold. It is also common in markets where there are one or two powerful competitors that set the price levels, for smaller suppliers to follow.
2. Cost-oriented pricing
In the case of cost-orientated pricing, you would calculating your total unit cost and add on a profit margin to arrive at an export price. Consumer demand or competitor actions thus have little bearing on your decision-making. This approach is commonly used in the case of industrial goods where it is often difficult to differentiate between products in terms of their perceived value to the customer.
3. Demand-oriented pricing
Also referred to as market-orientated pricing, the demand-oriented company sets prices according to the intensity of demand for the product. Where demand is strong high prices are normally set, and where demand is weak lower prices are the norm. The unit cost is not a major determinant of pricing in this case, although it is obviously taken into consideration when the lower limit on a price is considered. Demand-oriented prices are usually applied to branded consumer goods but they may also be appropriate in respect of many industrial products.
From pricing approaches to pricing strategies
In formulating an optimal pricing strategy for your export markets, it is important to recognise and accept the approach to pricing that you intend to follow (these have been discussed above), as your approach will to a large extent determine the export pricing strategy that you will ultimately implement. In the next section we will discuss the various export pricing strategies at your disposal. The strategy that you will eventually adopt might any one or more of the following objectives in mind:
- Aiming to reach a particular profit level
- Striving to become a low-cost competitor
- Attempting to carve out a specific market share for your firm
- Establishing an acceptable market image (as a bargain or premium supplier)
- Reinforcing a product differentiation strategy that you may have decided to follow in a particular market, i.e. based on a unique feature which differentiates your product from its competitors
- Combating competition
- Attempting to stabilise prices
- Creating a competitive advantage for your firm based on your price
- Securing wider distribution by offering your intermediaries a great share of the income