Pricing ConsiderationsPricing Considerations
[Download the full video (19 MB)]
Quick Links: Next Video | Make the Export Sale | How to Export Video Series
Pricing your product properly, giving complete and accurate quotations, choosing the terms of the sale, and selecting the payment method are four critical elements in selling a product or service overseas. Of the four, pricing can be the most challenging, even for an experienced export
These considerations will help you determine the best price for your product overseas:
At what price should your company sell its product in the foreign market?
What type of market positioning (i.e., customer perception) does your company want to convey from its pricing structure?
Does the export price reflect your product’s quality?
Is the price competitive?
What type of discount (e.g., trade, cash, quantity) and allowances (e.g., advertising, trade-offs) should your company offer its foreign customers?
Should prices differ by market segment?
What should your company do about product-line pricing?
What pricing options are available if your company’s costs increase or decrease? Is the demand in the foreign market elastic or inelastic?
Is the foreign government going to view your prices as reasonable or exploitative?
Do the foreign country’s antidumping laws pose a problem?
As in the domestic market, the price at which a product or service is sold directly determines your company’s revenues. It is essential that your company’s market research include an evaluation of all the variables that may affect the price range for your product or service. If your company’s price is too high, the product or service will not sell. If the price is too low, export activities may not be sufficiently profitable or may actually create a net loss.
The traditional components for determining proper pricing are costs, market demand, and competition. Each component must be compared with your company’s objective in entering the foreign market. An analysis of each component from an export perspective may result in export prices that are different from domestic prices.
It is also very important to take into account additional costs that are typically borne by the importer. These include tariffs, customs fees, currency fluctuation, transaction costs (including shipping), and value-added taxes (VATs). These costs can add substantially to the final price paid by the importer, sometimes resulting in a total that is more than double the price charged in the United States. U.S. products often compete better on quality, reputation, and service than they do on price—but buyers consider the whole package.
|When setting international prices, don’t forget to factor in tariffs, customs fees, currency fluctuation, transaction costs and shipping, and value-added taxes.|
Foreign Market Objectives
An important aspect of your company’s pricing analysis is the determination of market objectives. For example, you may ask whether your company is attempting to penetrate a new market, seeking long-term market growth, or looking for an outlet for surplus production or outmoded products.
Marketing and pricing objectives may be generalized or tailored to particular foreign markets. For example, marketing objectives for sales to a developing nation, where per capita income may be one-tenth of that in the United States, necessarily differ from marketing objectives for sales to Europe or Japan.
The actual cost of producing a product and bringing it to market is key to determining if exporting is financially viable. Many new exporters calculate their export price by the cost-plus method. In that calculation, the exporter starts with the domestic manufacturing cost and adds administration, research and development, overhead, freight forwarding, distributor margins, customs charges, and profit.
The effect of this pricing approach may be that the export price escalates into an uncompetitive range. Although an export product may have the same ex-factory price as a domestic product, its final consumer price may be considerably higher once exporting costs have been included.
Marginal cost pricing is a more competitive method of pricing a product for market entry. This method considers the direct out-of-pocket expenses of producing and selling products for export as a floor beneath which prices cannot be set without incurring a loss. For example, additional costs may occur because of product modification for the export market to accommodate different sizes, electrical systems, or labels. Costs may decrease, however, if the export products are stripped-down versions or made without increasing the fixed costs of domestic production. Many costs that apply only to domestic production, such as domestic labeling, packaging, and advertising costs, are subtracted, as are costs such as research and development expenses if such cost would have been incurred anyway for domestic production.
Other costs should be assessed for domestic and export products according to how much benefit each product receives from such expenditures, and may include:
Fees for market research and credit checks
Business travel expenses
International postage and telephone rates
Commissions, training charges, and other costs associated with foreign representatives
Consultant and freight forwarder fees
Product modification and special packaging costs
After the actual cost of the export product has been calculated, you should formulate an approximate consumer price for the foreign market.
|Carefully consider how different|
types of cost-related pricing can
affect your competitiveness in
For most consumer goods, per capita income is a good gauge of a market’s ability to pay. Some products create such a strong demand (e.g., Levi’s denim jeans) that even low per capita income will not affect their selling price. Simplifying the product to reduce its selling price may be an answer for your company in markets with low per capita income. Your company must also keep in mind that currency fluctuations may alter the affordability of its goods. Thus, pricing should try to accommodate wild changes in the valuation of U.S. and foreign currencies. A relatively weak dollar makes the price of U.S. goods more competitive in many markets around the world, thereby enabling you to compete with domestic producers as well as with other foreign competitors whose production costs are suddenly reflected in their inflated domestic currencies. Your company should also anticipate the kind of customers who will buy your product. If your company’s primary customers in a developing country are either expatriates or local people with high incomes, a higher price might be feasible even if the average per capita income is low.
|Pricing information can be collected in several ways. Overseas distributors and agents of similar products of equivalent quality are one source. Also, traveling to the country where your products will be sold provides an excellent opportunity to gather pricing information.|
In the domestic market, few companies are free to set prices without carefully evaluating their competitors’ pricing policies. This situation, which is found in exporting, is further complicated by the need to evaluate the competition’s prices in each potential export market.
If there are many competitors within the foreign market, you may have little choice but to match the market price or even underprice the product or service for the sake of establishing a market share. If the product or service is new to a particular foreign market, however, it may actually be possible to set a higher price than is feasible in the domestic market.
It’s important to remember several key points when determining your product’s price:
Determine the objective in the foreign market.
Compute the actual cost of the export product.
Compute the final consumer price.
Evaluate market demand and competition.
Consider modifying the product to reduce the export price.
Include “nonmarket” costs, such as tariffs and customs fees.
Exclude cost elements that provide no benefit to the export function, such as domestic advertising.
Cost and Pricing