Pricing Decisions

Chapter 11
 Five distinct facets to the pricing problem
facing the export manager

I. Fundamental pricing strategy

II. Relation of export price policy to domestic price
policy
III. Currency issues (exchange rate changes, hedging)
IV.Elements in the price quotation
V. Transfer pricing
 Fundamental pricing strategies
Skimming
A simple objective might be to make the largest profit possible.
This involves the strategy of getting the highest possible price
out of a product’s distinctiveness. A high price is set until the
small market at that price is exhausted. The price may then be
lowered to tap a second successive market or income level.
Penetration pricing
This strategy involves establishing a price sufficiently low to
rapidly create a mass market. Emphasis is placed on value
rather than cost in setting the price.
Sliding down the demand curve
This strategy is a variation of the skimming strategy and in this
case the company reduces prices faster and further than it
would be forced to do in view of potential competition. This is
primarily used by companies introducing product innovations.
 Fundamental pricing strategies

Preemptive pricing
Setting prices so low as to discourage competition is the objective of preemptive
pricing. The price will be close to total unit costs for this reason. As lower costs result
from increased volume, still lower prices will be quoted to buyers. If necessary to
discourage potential competition prices may even be set temporarily below total cost.
The assumption is that profits will be made in the long run through market dominance.
This approach, too, may utilize experience curves.
Extinction pricing
The purpose of extinction pricing is to eliminate existing competitors from
international markets. It may be adopted by large, low-cost producers as a conscious
means of driving weaker, marginal producers out of the industry. Since it may prove
highly demoralizing, especially for small firms and those in newly developing
countries, it can slow down economic advancement and thus retard the development of
otherwise potentially substantial markets.
 Factors that influence the setting of an
export price
1. Costs

2. Market conditions (demand)

3. Competition

4. Legal and political issues

5. Company policies
 Factors that influence the setting of an
export price
Costs
Costs are often a major factor in price determination and there are a number of reasons to have detailed information on costs. Costs
are useful in setting a price floor. In the short run, when a company has excess capacity, the price floor may be out-of-pocket costs, that is,
such direct costs as labor, raw materials, and shipping. However, in the long run full costs for all products must be recovered, although not
necessarily full costs for each individual product. The actual cost floor, therefore, may often be somewhere between direct cost and
full cost.
(A direct cost statement is a cost statement that includes only those expenses that relate directly to the implementation of a project,
such as the cost of labor and materials. A full cost statement, on the other hand, considers all costs associated with a particular venture,
such as environmental or social expenses.)
Dynamic Pricing
Bundling
 Factors that influence the setting of an
export price
Market Conditions (Demand)
 Utility or value
 Price Ceiling
 Factors that influence the setting of an
export price
Competition
 Perfect Competition
 Monopolistic or imperfect competition
 Oligopoly
 Monopoly
Exchange Rate

 Exports and imports

 Interest rate
 Relation of export price policy to domestic
price policy
The export marketing manager can decide between four
price policies:

I. Export prices lower than domestic

II. Export prices higher than domestic
III. Export prices on a par with domestic prices
IV. Differential pricing

Each export price policy has advantages and

disadvantages and should be aligned with the marketing
manager‘s pricing objectives (e.g., largest possible
marketing share)
 Dealing with currency issues: Hedging

• Exchange rates between the currencies of most countries

often change significantly in the short and long run.

• Companies can enter the forward exchange market to

hedge expected incoming currency funds against the risk
of an over- or undervalued home currency for the future.

• It cannot be said categorically that hedging is good or

bad as currency fluctuations can help profits as often as
they hurt them. However, it can stabilize a company’s
earnings.
 Transfer pricing

Prices must be set not only on products sold to independent customers,

but also on products transferred to foreign subsidiaries.

How should transfer prices be set? Three alternatives:

I. Competitive market prices, including competitors’ list prices or bids

II. Costs: production costs, physical distribution costs, foreign and

domestic tariffs, and corporate income taxes

III. Legal restrictions: political policies, government controls, and foreign

laws against practices such as price discrimination and dumping