International Pricing Strategies
International pricing is often considered the most critical and complex issue in international marketing. When talking about the price of a product, it is important to notice that it is a sum of all monetary and non-monetary assets the customer has to spend in order to obtain the benefits it provides. The main pricing decisions in international marketing comprise the following (Mühlbacher/Leihs/Dahringer 2006, pp. 661-662):
■ The overall international pricing strategy determines general rules for setting (basic) prices and using price reductions, the selection of terms of payment, and the potential use of countertrade.
■ The price setting strategy determines the basic price of a product, the price structure of the product line, and the system of rebates, discounts or refunds the firm offers.
■ The terms of payment are contractual statements fixing, for example, the point in time and the circumstances of payment for the products to be delivered.
A company's pricing strategy is a highly cross-functional process that is based on inputs from finance, accounting, manufacturing, tax and legal issues (Kotabe/Helsen 2014, pp. 358-360), which can be diverse in an international context.
It thus is not sufficient to place sole emphasis on ensuring that sales revenue at least covers the cost incurred (e.g. cost of production, marketing or distribution); it is important to take many other factors into consideration that may differ internationally (Doole/Lowe 2012, pp. 361-362). The most important factors that influence international pricing strategy are summarised in Table 21.2.
Company and Product-specific Factors
* corporate and marketing objectives
* firm and product positioning
* degree of international product standardisation or adaptation
* product range, cross subsidisation, life cycle, substitutes, product differentiation and unique selling proposition
* cost structures, manufacturing, experience effects, economies of scale
* marketing, product development
* available resources
* shipping cost
* consumers' perceptions, expectations and ability to pay
* need for product and promotional adaptation, market servicing, extra packaging requirements
* market structure, distribution channels, discounting pressures
* market growth, demand elasticities
* need for credit
* competition objectives, strategies and strength
* government influences and constraints
* tax, tariffs
* currency fluctuations
* business cycle stage, level of inflation
* use of non-money payment and leasing
Source: Adapted from Doole/Lowe 2012, pp. 358-359.
There are several options in terms of general price determination. They represent different levels of adaptation to local requirements.
A standard pricing strategy is based on setting a uniform price for a product, irrespective of the country where it is sold. This strategy is very simple and guarantees a fixed return. However, no response is made to local conditions (Doole/Lowe 2012, p. 368).
With standard formula pricing, the company standardises by using the same formula to calculate prices for the product in all country markets. There are different ways to establish such a formula. For example, full-cost pricing consists of taking all cost elements (e.g. production plus marketing, etc.) in the domestic market and adding additional costs from international transportation, taxes, tariffs, etc. A direct cost plus contribution margin formula implies that additional costs due to the non-domestic marketing process and a desired profit margin are added to the basic production cost. The most useful approach in standard formula pricing is the differential formula. It includes all incremental costs resulting from a non-domestic business opportunity that would not be incurred otherwise and adds these costs to the production cost (Mühlbacher/Leihs/Dahringer 2006, p. 664).
While these strategies accentuate elements of international standardisation in pricing, in price adaptation strategies prices are typically set in a decentralised way (e.g. by the local subsidiary or local partner). Prices can be established to match local conditions. While this ability to comply with local requirements constitutes a clear advantage, there can be difficulties in developing a global strategic position.
Additionally, the potential for price adaptation is limited by interconnections between the diverse international markets. Therefore it is necessary to coordinate the pricing strategy across different countries because otherwise reimports, parallel market or grey market situations can emerge. In these situations, products are sold outside of their authorised channels of distribution. As a specific form of arbitrage, grey markets develop when there are price differences between the different markets in which products are sold. If these differences emerge, products are shipped from low-price to high-price markets with the price differences between these markets allowing the goods to be resold in the high-price market with a profit. Parallel markets, while legal, are unofficial and unauthorised and can result in the cannibalisation of sales in countries with relatively high prices, damaging relationships with authorised distributors.
To avoid these drawbacks in totally standardised or differentiated approaches, geocentric pricing approaches can be chosen. There is no single fixed price, but local subsidiaries are not given total freedom over setting prices. For example, firms can set price lines that set the company's prices relative to competitors' prices (i.e. standardised price positioning) or they can centrally coordinate pricing decisions in the MNC (Doole/Lowe 2012, pp. 368-369).
In this context, it is important to notice that international pricing decisions also depend on the degree of industry globalisation. Global industries are dominated by a few, large competitors that dominate the world markets (Solberg/Stöttinger/Yaprak 2006). Which international pricing strategy is appropriate depends on the firm's ability to respond to the diverse external, market-related complexities of international markets (see Figure 21.2).
Source: Adapted from Solberg/Stöttinger/Yaprak 2006, p. 31.