Objectives of International Pricing

The pricing objective of a firm is one of the very important determinants of price. A firm’s
pricing policy can be guide by any one or more of the following objectives:

(1) Penetration of Market

Penetration of market may be a very significant objective, particularly for new exporters. A
firm may attempt to penetrate the target market with low price of its products. A penetration
pricing is applied to stimulate market growth and capture market share by deliberately selling
products at low prices.

(2) Increasing Market Share

The price may be manipulated by the firm to increase market share. In several cases, it is a
corollary of market penetration. Prices are sometimes reduced to increase sales of one’s
product, i.e., to increase one’s market share.

(3) Market Skimming

Market skimming is applied often with innovative product in which competition has not yet
started. Market skimming means the product is introduced with a high initial price in order to
skim the cream of the market. The price may be subsequently reduced to achieve market
penetration to a greater degree when the competition starts.

(4) Combating Competition

Sometimes price can act as a tool to combat competition. A reduction in price by the
competitor may have to be countered by price cuts. Moreover, in some cases price cuts may
be employed to discipline the competitor or to compel him to reduce price so that his cash
flows will be affected.
(5) Preventing Entry of New Firms

A firm may charge a low price even though there is scope for high price so that the industry
does not appear to be very attractive to new entrants. Low prevailing prices in the industry
may drive away the prospective competitors.

(6) Shorten Payback Period

When the market is uncertain and risky due to factors, such as, fast technological changes,
shorter product life cycles, political reasons, threat of potential competition etc., recouping
the investment as early as possible would be a significant objective. In such a situation the
manufacturer will try to recover his investment quickly by charging high price.

(7) Early Recovery of Cash

A firm facing liquidity problem might give priority to generate a better cash flow. Therefore,
it would adopt a pricing that might aid it to liquidate the stock and or encourage prompt
payment by the channel members or buyers. A firm with shortage of ready cash may like to
generate more sales by reducing prices of its products or offer more cash discounts for timely
recovery of debts.

(8) Meeting Export Obligations

A firm with specific export obligation may be compelled to take into account a pricing
policy that enables it to discharge its export obligation. At times, it may even mean a price
lower than the cost.

(9) Disposal of Surplus Stock

A company having surplus stock may be motivated to export to dispose of the surplus.
Sometimes exports take the form of dumping in such cases. Thus, a firm confronted with
huge piling of stock may have to reduce prices to dispose it and it may even resort to
dumping.

(10) Optimum Utilization of Capacity

Sometimes exporting is considered to enable the firm to achieve optimum capacity utilization
in order to minimize the unit cost of production. In such a case, achieving the requisite
quantity of exports may be the objective of export pricing. Thus, a manufacturer may have
large production capacity and it might have to sell at very low prices to increase sales so as to
utilize its optimum production capacity.

(11) Return on Investment

In numerous cases, achieving the target rate of return on investment is the most important
pricing objective. Thus, prices are generally fixed to achieve the targeted rate of return.

(12) Profit Maximization

In several cases, the primary pricing objective is maximization of profits.

(13) Follow the Leader Policy

Where inadequate market information is available, it may be appropriate to follow the market
leader. In such a condition, the price is kept lower than the leader’s product. However, this is
not a rational mode of fixing prices.

(14) Charging Less for the Product and More for Spares

Several firms follow the policy of keeping the price of product low but prices of its spare
parts are kept high. This can be done only in case of machineries and durable goods.

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