Factors Influencing International Pricing Decisions

Following factors influence international pricing decisions:

(1) International Marketing Objectives

The objectives of international marketing such as, market penetration, market skimming,
combating competition, preventing entry of competitors are all vital factors determining the
price. For instance, when the objective is market penetration, the price by the firm may be
low. In the same way, when a firm exports to utilize the excess capacity, marginal cost basis
may be adopted for pricing. On the other hand, if profit maximization in the short-run is the
objective of a firm having good domestic demand for its products, it would not export at a
price which does not provide a profit margin at least equivalent to that on the domestic sales.

(2) Supply and Demand

In an efficient, market-oriented economy, demand is affected by competitive activity and

consumers are in a position to make informed decisions. Price as a measure of product
benefits works as the equilibrator of supply and demand. On the supply side, suppliers
compete for consumers’ limited funds by continually cutting costs and enhancing product
value. On the demand side, any increase in demand is followed by a higher price, and in turn
the higher price should moderate demand. However, the higher price generally induces
manufacturers to increase the supply, and more supply should result in reduction in price,
which will then stimulate demand. The demand-supply model of pricing seems to work best
in case of commodities under a monopoly situation. For example, an oil cartel, OPEC at one
time controlled the supply of oil so tightly that the cartel was able to push oil prices up
sharply. The demand remained high for a period of time as the consumers were not able to
adjust their driving habits immediately. However, in the long run, higher prices curtailed
excessive demand, and oil prices fell down during the mid1980s. In this situation, the law of
supply and demand operated in the predicted manner. Thus, it could be deduced that even a
monopolist cannot keep on increasing prices without eventually reducing demand.

(3) Cost

In pricing a product, it is inevitable that cost must be taken into consideration. The typical
costs associated with international marketing comprise of market research, credit checks,
business travel, international postage, cable and telephone rates, translation costs,
commissions, training charges and other cost involving foreign representatives, consultants
and freight forwarders, product modification and special packaging. There are various
schools of thoughts, who advocate different pricing methods for pricing a product for the
overseas market. A company may begin with a domestic price and then adds to its various
overseas costs like freight, packing, insurance, customs duties etc. This pricing practice with
its high degree of centralization is also ethnocentric in approach. In effect, with an allowance
for transportation cost and tariffs, the same price prevails all over the globe. Many
international marketers use marginal-cost pricing, which is more polycentric and
decentralized. This method of pricing is oriented more towards incremental costs. An implicit
assumption is that some of the product costs like administration costs and advertising at home
are irrelevant abroad. Besides that, it is likely that research and development costs and
engineering costs have already been accounted for in the home market and thus should not be
factored in again by extending them to other countries. The actual production costs plus
foreign marketing costs are thus used as the floor price below which prices cannot be set
without incurring a loss. Japanese companies frequently rely on this type of pricing strategy
to penetrate foreign markets and also to maintain market share. The incremental cost method
has the benefit of being sensitive to local conditions. Subsidiaries or affiliate companies are
permitted to set their own prices. A potential limitation in using this method is that because
research and development costs and the costs of running the headquarters’ operation must be
borne solely by the home-country market, full cost may not be taken into consideration by
overseas subsidiaries. Thus, in the long run, it is perilous to be price competitive without
being cost competitive.

(4) Elasticity and Cross Elasticity of Demand

Due to the elasticity and cross elasticity of demand, a company does not usually has the
option of changing or holding its price steady, independent of action taken by the
competitors. For example, assuming that its number-one position was insurmountable, Ford
moved unilaterally to end price wars by eliminating discounts and incentives. This action
proved to a strategic blunder because competitors did not follow suit and Ford’s dominant
market share plummeted from 32 percent to 27 percent. In order to be competitive it is not
necessary that a company’s price must be at or below the market. A superior or distinctive
product can command a higher price. A product with a desirable image can also keep its price
above the market. A company can shield itself against cut-throat pricing to a certain degree
by cultivating a unique and desirable image. A prestigious image may let a firm to act more
or less as a monopolist and to attain additional pricing freedom. For instance, Cartier takes
full advantage of its reputation, as a watch made by its subcontractor for $ 125 was sold by
Cartier for almost five times that amount. For most consumer goods, a country’s per capita
income is a good indicator of a market’s capacity to pay which may indirectly determine a
product’s elasticity of demand. Nevertheless, some stylish products have a strong demand
and low per capita income is not a deterrent. The success of Levi’s 501 jeans worldwide
indicates that a high price can succeed in countries with low per capita income. In fact, a high
price for such products may even propel the rise in demand.

(5) Exchange Rate

The exchange rate of the currency is another factor, influencing price. For example, if the
Indian rupee was steadily appreciating the Indian exporter would be constrained to quote high
dollar prices because an appreciation of the rupee implies a fall in the rupee realization for
every dollar earned by exports. One pricing problem relates to the currency to be used for
billing purposes. As a rule, a seller should negotiate to bill in a strong currency and buyer
should try to obtain acceptance in a weak currency. European firms can also lessen exchange
risk by making use of ECU in place of an individual currency for quotation and billing. The
exchange rate is one factor that has no impact in domestic marketing but is quite crucial in
international marketing. Since March 1985, a severe plunge in the dollar value against other
major currencies has caused the earnings of U.S. MNCs to shoot because their overseas
profits when repatriated brought extra dollars after exchange. On the contrary, the devalued
dollar brought displeasure to Japanese exporters. Due to the upward spiral of the Yen,
Komatsu was compelled to increase it prices thrice in 1985 and 1986. Loss of price advantage
of Komatsu forced the company to set up a plant in the United States in 1986. Other
companies such as Nissan, Honda, and Toyota also had to raise their prices several times.
However, the potential price effects on trade resulting from an exchange rate change require
taking into consideration the domestic price developments for competing products. These
exchange rate/price relationships are fundamental in measuring the impact of an exchange
rate change on countries’ actual trade balances.

(6) Market Share

A high market share offers pricing flexibility as a company has the advantage of being above
the market if it so chooses. The company can also opt to lower its price because of the better
economies of scale derived from lower production and marketing costs. Market share is even
more significant for the late entrants because it acts as an entry barrier. It means that without
market share, a company cannot attain the high volume needed to improve its efficiency.
Market share can be acquired with a very low price at the expense of profit. For example, in
1992 Compaq stunned the Japanese market by selling desktop PCs for less than half the price
of Japanese manufacturers. Soon other U.S firms joined in and captured one third of the
market. Japan’s largest computer company Fujitsu, then begun dumping in its home market
and lost $300 on every $2000 machine that it sold, amounting to more than $1 million each
day. Fujitsu claimed that it sold PCs near cost while excluding costs such as advertising,
distribution, and other overhead. Fujitsu is able to sell computer at a loss for the reason that
vertical integration allows it to profit from sales of semiconductors and telecommunication
equipment. NEC Corp., wanting to regain market share, has matched Fujitsu price cuts, at the
same time even undercutting them in some cases.

(7) Tariffs and Distribution Costs

As a rule, when dumping and subsidies are not involved, a product sold in a host country
should cost more than an identical item sold in a manufacturer’s home market because the
overseas price must be raised to cover tariffs and extra distribution costs. For example, in
Japan both tariffs and quotas combine to restrain imports and force the prices of imported
goods to move upwards. Also, the long distribution channel, (that is, lots of middlemen)
common in several countries around the world is responsible for price escalation, often
without any corresponding enhancement in distribution efficiency.

(8) Culture

In many countries, a flexible or a negotiated price is a common practice, and buyers and
sellers often spend a great deal of time haggling price. Thus, price haggling is an art and the
buyer possessing superior negotiating skills can bargain better on price than those unfamiliar
with the practice.
(9) Environmental Concerns

Because of the awareness created by the media and other agencies, consumers today are
becoming more conscious of the significance of protection and preservation of the
environment. Several products that are sold in the western countries dwell upon
environmental friendliness of the product for deriving price advantages. Many European
buyers are willing to pay price premiums for products that are recycled, recyclable and non-
damaging to the environment.

(10) Competition

Competition is a very important factor affecting pricing decision. A firm cannot price its
products at higher level than that of its competitors. Generally, a monopolist has a high
degree of freedom in pricing because of which patented products could be sold at high prices.
The severe is the competition in the market, lower is the pricing freedom.

(11) Market Characteristics

Besides competition, other market characteristics like demand and supply situations,
consumers’ income levels, standard of living, importance of the product to the consumers,
middlemen’s trade margins also influence pricing policy.

(12) Product Differentiation

The degree of product differentiation also influences pricing. This is in fact an aspect of
competition because if the company’s product is highly differentiated than those of the
competitors or if the product possesses some unique features, the company will have more
freedom to manipulate the price.

(13) Firm’s Image

The price that a firm may charge also depends on the image of the firm and the country. It
may be easier for a firm with good reputation to charge a higher price as company’s image
becomes a hindering factor in obtaining a better price. Products of some countries enjoy good
reputation in the market. Hence, exporters of such countries can charge higher prices.

(14) Governmental Factor

Export pricing is sometimes impacted by government policies and regulations of exporting

and importing countries. The influence of government on pricing may take any one or more
of the following forms:
(i) Regulation of Margins

Sometimes the government may dictate the margins or markups by the producers or
distributors, making the marketers normally lose the freedom in pricing.

(ii) Price Floors and Ceiling

There are numerous cases in different countries involving price floors and ceilings. In case
there are such regulations, the price shall not fall below the floor price or shall not exceed the
price ceiling, as the case may be.

(iii) Subsidies

In order to make export price competitive, government sometimes grants subsidies. A

subsidy enables the seller to cut his price to the extent of the subsidy without incurring any
loss.

(iv) Tax Concessions and Exemptions

When the export sector enjoys certain tax benefits like tax concessions and exemptions, it
helps to quote a lower price for exports.

(v) Other Incentives

Various other incentives and assistances, such as, cheap credit, supply of raw materials etc.,
at regulated prices, marketing assistance, etc., may also influence export prices.

(vi) Government Competition

In some countries, government may even compete directly in the market for controlling
prices. For instance, the US government could effectively combat the increase in aluminum
prices by three companies by way of announcing its decision to release two to three hundred
thousand tonnes of aluminum from its strategic stockpile.

(vii) Taxes

Taxes, such as, custom duties also have an influence on export pricing. For example, an
import duty in the overseas market may compel the exporter to reduce the price if the
overseas market will not take a high price, because the duty will have the effect of increasing
the price in the overseas market. Therefore, to maintain a particular consumer price, the price
which the exporter gets will have to be reduced in case there is an import or increase of
import duty. An export duty too may have a similar effect. Governments often impose
countervailing import duties for combating dumping, subsidy etc.

(viii) International Agreements

International prices of certain commodities are sought to be controlled by way of

international commodity agreements like quota agreements, buffer stock agreements and
bilateral/multilateral contracts, etc.
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