PRICING DECISIONS CHAPTER 7

7.0 INTRODUCTION Increasing in market complexity made the price decisions more critical. Pricing decision include setting the initial price as well as changing the established price of products from time to time. Differential pricing – differential between export prices and domestic prices.

Cont. Decisions on the differential pricing must be made on the relationship between the prices of products sold in multiple national market. Whether the price to customer in one foreign market should be the same, lower, or higher than in other foreign markets or in the domestic market.

7.1 DETERMINANTS OF AN EXPORT PRICE 5 Basic Factors Market Condition & Customer behavior Cost Competition Legal & Political Issues General Company policy

7.1.1 Cost Useful in setting a price floor. Estimating how rivals will react to setting a specific price. Price lining – different product at different price Dynamic pricing – different prices in different market, depend on market condition. Bundling-packaging – package the product with others goods & services, difficult to look trough each item’s price.

7.1.2 Market Condition & Customer Behavior The nature of market is to determine the upper limit for prices – price ceiling. The value of product in export market = demand schedule for the product. Value – measured in term of product utility, translate into monetary terms. Demand schedule – the number of customer who will buy at several levels of price.

7.1.3 Competition Determine where the actual price should lies, between price floor & price ceiling. Pure competition – price tend to be set just enough above cost. Monopolistic / imperfect competition – seller has little discretion to vary the product quality, promotional efforts & etc in order to adapt the prices of product. Oligopoly – the product will be priced depend upon the assessment of other oligopolists’ reaction.

7.1.4 Legal & Political Issues Restrict the freedom of a company to set prices – sovereign state take action to protect / foster the prosperity & wellbeing of their citizens. Some countries may not issue import license, if : a. prices too high b. prices too low Antidumping legislation – enact in nation to protect certain industries from abnormal price fluctuation that would disrupt local production.

Cont. Dumping – selling price at foreign market is low than the prices is domestic market. Tariff level – an incentive for exporter to vary the prices from country to country.

7.1.5 General Company Policies & Marketing Mix Pricing cannot be divorced from product consideration. Management must take the customer point of view & evaluate a product in term of its quality & characteristic relative to its price. The channel distribution utilized also affect price. Certain channel may require high operating margin.

Cont. Promotional policies are interrelated with pricing. The cost of conducting the international promotional activities helps to set the price floor and also contribute to the utility of the product – influent the price ceiling.

7.2 FUNDAMENTAL EXPORT PRICING STRATEGY Start Price advantage Gain in market share & volume Increase in efficiency Reduced unit cost

Sliding down the demand curve 5 pricing Strategies Skimming the market Sliding down the demand curve Penetration pricing Preemptive pricing Extinction pricing

7.2.1 Skimming the Market Use the highest possible price to get the largest short-run profit possible. The price is then lowered as necessary as the market for the high price is exhausted. The company ultimately "retires" from the business. This strategy may be used because the company feels that there is no permanent future for the product.

7.2.2 Sliding Down the Demand Curve This is the same as the above strategy except that the company is forced to reduce prices faster due to potential competition. Companies do desire to remain in business and want to become established before competitors can become entrenched. Primarily used by companies introducing product innovations. Companies following this strategy are seeking to recover development costs as they become an establish entity in the market.

7.2.3 Penetration Pricing Prices are set sufficiently low to rapidly create a mass market. Emphasis is place on value rather than cost in setting the price. The volume created should be large enough to lower costs and produce a profit. The strategy involves the assumption that demand is highly elastic or that foreign purchasers buy primarily on a price basis.

7.2.4 Preemptive Pricing Prices are set low (close to total unit costs) to discourage competition. As costs are lowered so are prices. If necessary to discourage potential competition prices may even be set temporarily below total costs. The assumption is that profits will be made in the long run through market dominance. This strategy may utilize experience curve.

7.2.5 Extinction Pricing The purpose of this strategy is to eliminate existing competitors from international markets. It may be adopted by large, low-costs producers as a conscious means of driving weaker, marginal producers out of the industry. May involve dumping, legal problems.

7.3 RELATION OF EXPORT TO DOMESTIC PRICE POLICIES 7.3.1 Export prices lower than domestic To secure market acceptance and initial purchase the lowest possible price. Foreign competitors can manufacture more cheaply due to lower labor costs, government subsidies, and so on. Lure of increased sales volume in order to assist in absorbing manufacturing and overhead expenses. Domestic customers are nationalistic and will pay the price for domestic product.

7.3.2 Export prices higher than domestic Increased initial cost of equipping an organization to enter the export field is considerable. Due to: Complexities of procedure, difficulties in language, differing commercial customs, varying legal needs, and taste of customers in export countries.

Cont. Some manufacturer thinks that: Cost of extending credit to and financing foreign accounts means a slower turnover of invested capital and higher expense. Added risk in doing business abroad due to unsettled economic and political conditions

7.3.3 Export prices on a par with domestic prices Fix export price that costs and experience in the domestic market have indicated are necessary and fair. Feeling of safety entering the export market and easily altered. Easy to implement but may not be suitable if the domestic price is low.