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Pricing Challenges in Global Marketing: A Model for Export Pricing

Article  in  SSRN Electronic Journal · June 2007

DOI: 10.2139/ssrn.988627

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 Pricing challenges in global marketing: a Model for Export
Pricing
1
Mehdi Zaribaf PhD
mzrbf@yahoo.com

Abstract
Among the four marketing mix, product, distributing channels, promotion and price, only price creates
income and the other three generate costs. Price, besides creating income, plays a major role as a
strategic factor in developing competitive advantage in the market. The amount of income and
promotion of a company regarding the positioning and finding a suitable position in the mind of
customers are related to suitable pricing. Decision making for pricing is not an easy task and many
factors are affecting in this decision. The reason for some companies which are not so active for export
pricing is that they have a good sale in internal market because of their product character which has
good internal market or in some countries due to limiting import regulation. These companies are
worried about heir global competitive positions too, and need a prescription for their future activity
because they also feel that in the global marketing acting ethnocentric will not be enough. Two main
factors for this company to be considered are internal market condition and the amount of authority
granted to export managers for declaring price to different customers. In this article we discuss kind
of factors affecting pricing and kinds of pricing and demonstrate a model which could be important in
export pricing for the global marketing pricing by considering the amount of authority for pricing and
the conditions of internal market.

Key words: pricing objectives, pricing policies, global strategic pricing model

Introduction
A number of different pricing strategies are available to global marketers. An overall goal
must be to contribute to company sales and profit objective worldwide. Customer-
oriented strategies such as market skimming, penetration, and market holding can be used
when customer perceptions, as determined by the value of equation, are used as a guide.
Global pricing can also be based on other external criteria such as the escalations in costs
when good are shipped long distance across national boundaries. The issue of global
pricing can also be fully integrated in the product design process, an approach widely use
by Japanese companies. Pricing in global markets must be evaluated at regular intervals
and adjusted if necessary. Similarly pricing objectives may vary, depending on product’s
life cycle stage and the country-specific competitive situation.
Any pricing system should address price floor, price ceiling and optimum prices in each
of national market in which the company operates. The pricing consideration for
marketing outside the home countries are the reflection of quality in price,
competitiveness, the kind of pricing objective i.e. penetration, skimming holding, the type
of discount, market segmentation, the pricing option in case of costs increase or decrease,
the logicalness of price by the host- country, and its laws and the probable dumping. [1]
Three major objectives known in pricing are market skimming, price penetration and
market holding. The market skimming pricing strategy is an attempt to reach a market

1
Academy member of Islamic Azad University of Iran, Firoozkuh Branch

Electronic copy available at: http://ssrn.com/abstract=988627

segment that is willing to pay a premium price for a product. In such case the product
must create high value for buyers or the knowledge of customer regarding the technology
used for the product is not sufficient. This pricing strategy is often used in the
introductory phase of product life cycle, when both production capacity and competition
are limited by setting high price the demand is limited to early adopters who are willing
and able to pay the price. The goals of this pricing are maximize revenue on limited
volume to match demand and to reinforce customers’ perception of high product value.
Penetration pricing uses price as a competitive weapon to gain market position. The
majority of companies, located in Pacific Rim, use this type of pricing. Scale-efficient
plans and lo-cost labor allow these companies to attack the market. Usually a first- time
exporter do not use this type of pricing because it may call for some losses for some
length of time which his company can not afford it. Some innovative companies, when
their product is not patentable, use this strategy to achieve market saturation before the
other competitors can coy. The sale volume it expects to achieve in the markets leads to
scale economies and lower costs.
The market holding strategy is frequently adoptee by companies that want to maintain
their share of the market. In single- country marketing, this strategy often involves
reacting to price adjustments by competitors. One of the changes factors in the price in
global marketing is the currency fluctuations which often trigger price adjustments.
Adjusting prices to fit the competitive situation may mean lower profit margins. A strong
home currency and rising costs in the home country may also force a company to shift its
sourcing to in-country or third- country manufacturing or licensing agreements, rather
than exporting from home country, to maintain market share. Market holding means that
a company must carefully examine all its costs to ensure that it will be able to remain
competitive in target markets.
Another strategy, frequently used by companies new to exporting is cost-plus to gain
toehold in global marketplace. There are two cost-plus pricing methods: historical
accounting cost method which defines cost as the sum of all direct and indirect
manufacturing and overhead costs, and estimated future cost method which is used
mostly in recent years. Cost –plus pricing requires adding up all costs required to get the
product to destination, plus shipping and ancillary charges, and a profit percentage. It is
relatively easy to arrive at a quote, assuming that accounting costs are available. This
approach, however, ignores demand and competitive conditions in target market. There
fore this approach is either too high or too low in the light of market and competitive
conditions. Novice exporters do not care because they react to the market opportunities
rather than having proactive seeking for them. Price escalation is the increase in a
product’s price as transportation, duty, and distributor margins are added to the factory
price. Beginning exporters might use this approach to determine the CIF price plus any
inland charges as duty, inland transportation, distributor margins etc.

Using sourcing as a strategic pricing tools

There are several options when addressing the problem of price escalation described
earlier. Domestic manufacturers may be forced to switch to lower income, lower wages
countries for the sourcing of certain components or even finished goods to keep costs and
prices competitive. Some people believe low wage approach a one- time advantage, and
can not be substitute for ongoing creativity which causes value. Another option is to

Electronic copy available at: http://ssrn.com/abstract=988627

source 100 percent of a finished product offshore near the local markets. In this case the
manufacturer can enter into one of the arrangements such as licensing, joint venture, or a
technology transfer agreement. In this case the manufacturer has presence in the market
and high costs of home land and transportation will no longer be an issue. Another option
is a through audit of the distribution structure in the target market. A rationalization of
the distribution structure can substantially reduce the total markups required to achieve
distribution in international market. Rationalization may include selecting new
intermediaries, assigning new responsibilities to old intermediaries, or establishing direct
marketing operations.
Exporters also encounter to dumping, which is sale of an imported product at a price
lower than that normally charged in a domestic market or country of origin. Many
countries have their own policies against dumping but the main point is how to prove a
company is dumping and the time it take to get the losses from this action.[ 2]

Environmental factors affecting pricing

Marketers must deal with a number of environmental factors when making pricing
decisions. Currency fluctuation, inflation, government controls and subsidies, competitive
behavior, and market demand are among these factors. Some of these factors work in
conjunction with others; for example, inflation may be accompanied by government
controls.
When currency fluctuation occurs, there are two options for pricing: one is to fix the
price of products in country target market. In this case, any appreciation or depreciation
of the value of the currency in the country of production will lead to gain or losses for the
seller. The other option is to fix the price of products in home country currency. If it is
done, any appreciation or depreciation of the home country currency will result in price
increases or decreases for customers and no immediate consequences for the seller. In
actual practice, a manufacturer and its distributor may work together to maintain Market
share in international market. Either party, or both, may choose to take a lower profit
percentage. In the long term contracts, both parties agree an exchange rate clause, which
allows them to agree to supply and purchase at fixed prices in each company’s national
currency. In this case if the exchange rate fluctuate within a specified range, say plus or
minus of five percent, the agreed price will not be changed, but if more than that, say plus
or minus of ten percent, then new discussion or negotiation for adjusting the prices
should be opened.[ 3]
Inflation, or a persistent upward change in price levels, is a worldwide phenomenon.
Inflation requires periodic adjustments. These adjustments are caused by rising costs that
must be covered by increased selling prices. An essential requirement when pricing in an
inflationary environment is the maintenance of operating profit margins. LIFO costing
method is prescribed by some practitioners under conditions of rising prices.
Government control can also limit the freedom to adjust prices, and the maintenance of
margins should be compromised. In a country that is undergoing severe financial
difficulties and is in the midst of a financial crisis (e.g., a foreign exchange shortage
caused in part runaway inflation), government officials are under pressure to take some
type of action. Governmental actions in the case of hard financial problems include use of
broad or selective price controls, prior cash deposit requirements for imports, customs
duties for imports, value added tariffs, proliferation of rules and regulations, and

3
subsidization. All of these controls are against exporting pricing when a company wants
to export products to an importing country which is under control of the government. In
fact the more control rendered by a government the more difficult to enter in that country
market. In this case the availability of this market is not so suitable.
Pricing decisions are also bounded by competitive action. If competitors are
manufacturing or sourcing in a lower costs country, it may be necessary to cut prices to
stay competitive.
The other fact is the study of relationship between quality and price. Recent four country
international study found that there is a weak relation between price and quality. The
authors concluded that the lack of strong price- quality relationship appears to be an
international phenomenon.[4] Consumers with limited information rely more on product
style and appearance and less on technical quality as measured by testing organizations.
Still some marketers believe that this relation is strong and has the major role in product
value. The recent following model shows strong relationship between price and quality
which offers four strategy of economy, when the price and quality are both low,
penetration, when the price low yet the quality is high to get more market share or
penetrate in a new market, skimming, when the price is high but the quality is high and
the goods are not supplied by too many competitors, and premium, when the price and
quality are both high and there is a uniqueness about the product or service.[5]

Source: www: // marketingteacher.com

The knowledge of customer about the technology of new product and the amount of his
or her awareness can play a major role in pricing. As much as the knowledge of a
customer about the product is low, the producer can use this margin to skim the market or
get a better premium from this market. [6]

4
Transfer pricing
Transfer pricing refers the pricing of goods and services bought and sold by operating
units or divisions of a single company. In other word, transfer pricing concerns intra
corporate exchanges- transactions between buyers and sellers that have the same
corporate parent. For example Toyota subsidiaries sell to, and buy from each other. This
happens when the company expands and profit centers are shaped in the corporate
financial picture.
There are three alternative approaches to transfer pricing: (1) cost based pricing, (2)
market based transfer pricing, and (3) negotiated prices.
Some companies using cost- based approach may arrive at transfer prices that reflect
variable and fixed manufacturing costs only. Alternatively, transfer prices may be based
on full costs, including overhead costs from marketing, R&D, and other functional areas.
The way costs are defined may have an impact on tariffs and duties sales to affiliates and
subsidiaries by global companies. Cost plus pricing is also based by costs but different
approach. In this approach, profit must be shown for any product or service at every stage
of movement through the corporate system. It may be set at certain percentage of fixed
costs such as 15 percent of cost. It is unrelated to competitive and demand conditions but
many exporters use it.
Another approach to transfer pricing is market- based approach. A market –based transfer
price is derived from the price required to be competitive in the international market. The
volume level also plays a major role in pricing. To use market- based transfer prices to
inter in a small market, third country sourcing may be required. This enables a company
to establish its name or franchise in the market without committing to a major capital
investment.
A third alternative is to allow the organization affiliates to negotiate transfer prices
among themselves. In some instances, the final transfer price may reflect costs and
market prices, but this is not a requirement. [7]
In a research conducted by Horngren and foster (1991), was found that 46 percent of U.S.
based companies, 33percent of Canadian, 41 percent of Japanese and 38 percent of U.K.-
based companies use some form of cost based transfer pricing.
Corporate costs and profits are also affected by import duties. The higher the duty rate,
the more desirable is a low transfer price. The high duty creates an increase to reduce
transfer prices to minimize the customs duty.
The companies also may use three policies on world wide pricing: extension
ethnocentric, adaptation/poly centric and invention/ geocentric.
In the first policy, the price of an item is the same around the world and the importer
absorb freight an import duties. In this policy, no information on competitive or market
condition is required and does not respond to the every market neither it maximize the
company profits in each national market nor globally. Its only advantage is to simply
entering a market if it suit to their price which the exporter has no information about it.
In the second policy the exporter tries to match the price with any individual local
market. This policy permits subsidiary or affiliate manager to establish any price they feel

5
is most desirable in their circumstances. This policy may cause product arbitrage, because
of different prices in different location and enterprising business managers may use it and
foster a grey market for the company’s product. It may also weaken the corporate
strategies of the central company because all local market managers have the freedom to
set the price for their markets. Different prices for different places may have another
disadvantage, because it may send a signal to the rest of the world that is contrary to
company interests. A price move anywhere in the world is known instantly all over the
world.
The third and the best policy to international pricing is termed invention/ geocentric.
Using this approach a company neither fixes a single price nor remains apart from
subsidiary price decisions, but instead strikes intermediate positions. There are unique
market factors, like local costs, income levels, competition, and local marketing strategies
that should be recognized in arriving at pricing decisions. Local costs plus a return on
invested capital and personnel fix the price floor for the long term. This approach lends
itself to global competitive strategy. A global competitor will take in to account global
markets and global competitors in establishing prices. Prices will support global strategy
objectives rather than the objectives of maximizing performance in a single country.
In the study of Samli and Jacobs (1994), for the pricing practices of U.S. multinational
firms, they concluded that 70 percent of the firms standardized their prices, where as 30
percent used variable pricing in world market. They said, it would appear that the
companies should consider renewing the pricing policies.[8]
We conclude that pricing decisions are so important and related to many things. The most
important factors which we should regard are: the profit of the company supporting the
global strategies, costs of arm’s length, transfer price, local prices and charges. This
shows different approaches and policies with different views, which will not solve the
pricing problem of export managers. A good view of the pricing and their problem which
in part translate the policies and strategy of the companies can be shown in the following
table.

Point of Pricing Price policy View of company Market

delivery decision potential and
availability
Ex work and Cost based Ethnocentric/ Short term unknown
FOB Extension
CFR, CIF, Transfer , cost Ethnocentric/ Short term Unknown,
CPT, CIP plus extension with little
information
DAF, DES, Transfer , cost Polycentric/ Mostly Short term Almost known
DEQ, DDU, plus, market adaptation, and rarely long
DDP based, geocentric/ term
competitive invention
based
Seller Transfer , cost Polycentric/ strategic known
destination, plus, market adaptation,
With the based, geocentric/
knowledge of competitive invention

6
 market Price escalation
Source: the author of this article
This table shows the willingness of the exporting company for delivery of goods can
show the amount of involvement of this company in any market and its level of
information which the company has about the market and the market attractiveness.
This means that the more attractive and profitable a market the more likely of the
exporting company involvement for caring their customers.

The above table also shows that as we move from ex- work delivery, which the exporting
company accepts the least amount of risk, to seller destination point, the view of
organization changes from short term to strategic long term.

Other approaches to pricing

There are also new approaches for pricing that has been experience in the global
marketing. We will describe them below:
Psychological pricing s used when the marketer wants the consumer to respond on an
emotional, rather than rational basis. For example ‘price point perspective’ 99 cents not
one dollar.
Product line pricing can be used when where there is a range of products and pricing
reflects the benefits of parts of the range.
In the optional product pricing strategy companies will attempt to increase the amount
customer spend once they start to buy. Optional extras increase the overall price of the
product. For example airlines will charge for optional extras such as guaranteeing a
window seat.
In the captive product pricing strategy companies will charge a premium price where the
consumer is captured. For example the razor price is low but its unique blades are
expensive and the customer should later buy it if the razor breaks down.
Using the product bundle pricing, sellers combine several products in the same package.
This also serves to move old stocks and CDs often sold using the bundle approach.
By using promotional pricing companies try to promote their sale through sale
promotional, like by one get one free (BOGOF)
Geographical pricing is used where there are variations in price different part of the
world. For example rarity value, or where shipping costs increase price.
Value pricing also is used where external factors such as recession or increased
competition force companies to provide value products and services to retain sales e.g.
value meals at McDonalds.
Japanese companies act different in pricing. In Japan, planned sale prices, by deducting
the intended profit is considered as the target cost. In this stage the product design units,
engineering and price suppliers, with the aim of developing value for the customers or
rice based on the customer perception, try to close their costs to target costs so that the
price of products can be reduced. After the company could reach the target costs, the
production process will be started. We conclude that Japanese producers, before
producing the product, consider the market price of goods and try to reach the cost
feasible to sell the market. Meanwhile Japanese competitors don’t care the costs of
goods, before considering the acceptable costs of goods.[9]

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Particular factors of an export price
The factors for developing price are costs, the market and customer behavior conditions,
competition and the company policies.
The main factor for pricing is costs. The price base on costs, especially when there is no
information about the market and customer willingness, is a virtually easy approach and
shows the fairness for value added payment of production. The costs are useful for
determining the floor price of a product. In short term, when we have extra capacity, the
floor costs may be the out of pocket costs, i.e. direct costs like labor, material and
transport costs. However, in the long term, the full costs must be considered for the
products, but may not be considered for all products. Direct costs, when using in export,
mean the required costs for developing income. In addition to extra capacity, direct cost
pricing (margin cost pricing) for entering a market in the competitive condition or
preserving a market in the competitive condition can be applied. In a survey of 20 export
managers, they believed there are other reasons for the export pricing less than full costs.
These reasons are: to help intermediate organizations or agents, maintaining the
coworkers working together, selling a product especially out of the normal line of export
and for offering a manufactured sample to a dependent or under license organization,
mass customized production, in many companies, when the conditions of market are not
normal, the pricing less than full costs is applied. The floor price is mostly affected by
floor price. This kind of pricing is highly recommended when the company is sure that
the internal market will guarantees the sale volume at least up to break even point. From
that point the profit margin will be a combination of internal and global sales.
The market condition pricing is based on the market demand and the product
attractiveness in each market. The nature of market can determine the ceiling of the
price. When the demand in a market for the product is high we use higher prices for that
market. Utility, or the assumed value of buyers of a product, determine the ceiling price
of a product.
In demand forecasting of a market, exporter can classify the market based on the price
attractiveness for customer in different price levels. Then the export manager can define a
classified utilities relate to prices. The main problem of this kind of pricing is the lack of
information for demand forecasting and the customer willingness particularly in
developing countries. Therefore the market condition is a difficult factor for pricing.
The third and may be the most important factor of pricing is the condition of competition.
Condition of competition helps for pricing between these two boundaries. The competitor
reaction forces producer to determine new export pricing. The price of competitors
affects the sale volume of exporter and the resulted decision may be less or more than
price of them. When an exporter does not have enough authority for pricing a competitive
market, the main problem of pricing then will be to sell the product with the assigned
price or not. If the floor price of a manufacturer is less than the current price of market,
the product will be produced and sold. The market condition pricing is most suitable
when the new technology used for the product or service is complex or unique for that
market and the knowledge of customer or market about know- how of the product is
little.

8
Pricing can different in each market, depending on different stages of a product. When
we want to enter a competitive market we may use direct costs because of the product
and cherry picking character of the intermediates and possible future agents. When the
product is well known, and well positioned, we may use competitive or market pricing
suitable in that market. When the market is saturated by different competitors we may use
niche pricing and stay in that market and let other competitors to leave this market or we
leave the market, during the last stage of product life cycle, if we feel this market will not
be profitable any more.
Developing export pricing model
Kotler in pricing argument, when focuses on customer needs, classify organizations to
profitable and for- profit organizations. He believes that profitable organization is the one
that sell his product in the present time and tries to gain the maximum profit regarding the
present situation. Meanwhile, for- profit organization focuses on long term profitability,
and is presently ready, for customer satisfaction, to overlook the short term profit
enabling to gain success in the market and developing fame in the customer
consideration.
It seems these two different considerations in the management, is depended on the
management authority and offering logical reasons. A manager, who has enough position
certainty in the future, can develop strategic plans and implement them in the long term.
This manager can plot his logical reasons for penetrating or direct costs pricing to the
board of directors and gain necessary authority which should be delegated to him.
If we concern two factors of the amount of management authority and the internal market
conditions, managers can use 4 pricing strategy for their export pricing as follows:

Internal market condition

Authority granted

Favorable Unfavorable
High

Direct costs pricing Global strategic pricing

Floor pricing Ceiling price based on internal

Low

price

Source: Zaribaf Mehdi, “global marketing Management” volume 2, Gostaresheoloomepayeh, Tehran, Iran
2006, p.201

When the authority of manager is low for export pricing and internal market condition
is unfavorable, manager set floor or finished costs prices for exporting. When the export
manager authority is high and internal market condition is unfavorable, export manager
uses direct costs pricing and uses the remained capacity of production. This pricing is
particularly good when the company wants to enter new markets. If the internal
marketing condition is favorable and the authority of export manager is low, then the
prices for export will be ceiling price based on internal prices. This kind of pricing stems

9
from the short term profitability willingness; which has made the present top managers to
be proud of it. In this approach the management uses local market values and governs the
local customer’s values to international prices. Finally, if the authority of export manager
is high and the internal market condition is favorable, manager take the best advantage of
for- profit organization philosophy (not profitable organization) and use pricing for each
market so that in future the required interests to be gained for the organization.[10]
We can not see different markets with the same glasses. While a product is in the end of
life cycle, i.e. decline stage, it could be in the first stage of life cycle in another market. It
is the export manager who is familiar with different market conditions. He should be first
well aware of corporate and market strategies and also should have enough authority to
handle each market by different pricing regarding different costs, competition and the life
cycle of product in the markets.

Conclusion
Pricing is one the marketing mix and reflects costs and competitive factors. The
maximum absolute price for a product does not exist, yet for each market, the price
should be fixed concerning the customer attitude. The goal of most marketing strategies
is to determine a price which could be accountable for customer perception. Meanwhile it
should not cause too much costs for the company. A company usually fixes prices
regarding the value that a customer concerns for the product, and covers costs and
provide a profit margin.
Pricing strategies include increasing interests regarding the importance of the product in
the market. We can use different pricing strategies, concerning the environmental factors
of markets. Each company should determine competitive market, its costs for each
market, the availability of them, and other environmental dimensions.
Export managers, from their advantage point of their familiarities to markets should have
enough authority to determine strategic prices for each market regarding the life cycle of
the product in each market an their stability and profitability for that market. Export
managers should be qualified and brilliant mind knowing the corporate strategy and
acting different roles o different markets. But they should consider two things. The first is
to program pricing strategies to respond the customer’s needs and to account the
company profits for the long term.

10
 1
Adapted from “Price, Quotations, and Terms of Sales Are Key to Successful Exporting,” Business
America (October 4, 1993):12.
2
Keegan warren, “Global Marketing Management” sixth edition, Prentice Hall Series in Marketing, 2002,
pp.408:417.
3
Damon Darlin, “Trade Strategies: Most U.S Firms Seek Extra Profits in Japan, at the Expense of Sales,”
The wall Street journal, 15 May 1998, p.A1.
4
David J. Faulds, Orlen grunewals, and Denise Johnson, “A cross- national Investigation of the
Relationship between the Price and quality of Consumer products, 1970- 1990,” journal of global
marketing, vol. 8, no.1 (1994): 7-25
5
A group of marketing lecturers from southern England based in Chi Chester (visited site April 18, 2007)
Librarians Index to the Internet. http://marketig teacher.com
6
Khalil, Tarek, “Management of Technology Wealth Creation” translated by Dr. Arabi, S.M.A, Cultural
Research Bureau, 2006, p.73.
7
Charles T. Horngren and George Foster, Cost Accounting: A Managerial Approach (Upper Saddle River,
NJ: Prentice Hall, 1991), p.856.
8
A. Coskun Samli, and Laurence Jacobs, “Pricing Practices of American Multinational Firms:
Standardization vs. Localization Dichotomy,” journal of Global Marketing, 8, no.2 (1994): 51-73.
9
Robert Michel, “strategy pure and simple”: How Winning CEOs outthink their competition( New York:
McGraw-Hill, 1993), pp114-115.
10
Zaribaf Mehdi, “global marketing Management” volume 2, Gostaresheoloomepayeh, Tehran, Iran 2006,
p.20

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