Step 4: Export pricing strategies at your disposal Introduction

In the process of determining a final export price, there are a number of pricing strategies that you could follow, but obviously only one strategy that you will follow at any time. These strategies are briefly discussed below and the strategies are associated with the pricing approach that you have decided to follow in the previous section (see step 3). Whatever pricing approach and associated strategy you choose, your starting point is always the costing exercise we discussed in step 2. Unless you know exactly what your costs are, whichever approach and strategy you follow will always be a risk as you may be selling at a price that does not cover your costs and therefore you will be loosing money with every sale that you make! Your costs represent the basis upon which your final export price is built. Once you have calculated your costs as outlined in step 2, then you may want to choose from one of the following strategies (which have been organised according to your approach to pricing outlined in the previous section):

1. Approach to pricing: Competitor-orientated

Commodity-based pricing In the case of commodity markets, e.g. wheat, tea, coffee, grain, prices are established through the interaction of a large number of buyers and sellers. There are usually publicised world prices that set the pricing levels in these types of markets. As an exporter competing in such markets, you will need to keep to these prices - this is known as commodity-based pricing. Any exporter quoting prices in excess of the price prevailing in the marketplace would effectively cut themselves out of the market - they would, of course, be equally foolish to quote below the prevailing rate. If you operate in commodity-type markets your primary function would be to keep production costs and overheads as low as possible in order to increase profits. Competition-based pricing Of course, commodity markets are not the only markets in which this type of competitor-orientated pricing takes place. There may be industries in which many participants compete with one another, and, although there is no publicised world price for the products in question, there is an accepted narrow range of prices within which you will need to compete. Follow-the-leader pricing Another form of competitor-orientated pricing occurs in markets where there is an extremely dominant supplier (or perhaps two) that has the largest market share and that essentially sets the price levels for that particular market. The other, usually smaller, producers play a follow-the-leader approach to pricing and keep to the pricing set by the market leader (although they may offer a small discount compared with the market leader's price to entice buyers to purchase their goods).

2. Approach to pricing: Cost-orientated

Cost-plus pricing In this instance, you would calculate your firm's costs very carefully and then you would add a fixed percentage as a profit margin to the total cost. In this instance, you would probably quote the same price for different markets. What is more, you are likely to use the same base price (or Ex Works price) for the domestic market as for export markets. The problem with this approach is that it does not take into consideration market and country differences, or the role of foreign competition. Early cash recovery If your company regards its position in the export market as being somewhat precarious (e.g. impending import restrictions could exclude it from the market altogether, or where liquidity is a problem), it might adopt

a strategy aimed at rapid cash generation. The objective here is to pay back your investment as quickly as possible and thereafter to make as much profit as possible, as quickly as possible. Satisfactory rate of return on investment The cost-oriented producer of industrial goods who wants to achieve a uniform rate-of-return on investment often adopts this strategy. Near standardised prices are set at a level that will realise a certain percentage of profit for a given amount of investment and level of risk.

3. Approach to pricing: Demand (market)-orientated

Market penetration The intention behind a market penetration strategy is to stimulate market growth and/or to capture a substantial share of the market. This strategy is often used when the product has a lot of competition or is very ordinary. This usually requires the establishment of a relatively low price within a price sensitive market. This strategy, which is dependent on production economies of scale and other cost reduction factors, obviously carries a high degree of risk. Careful consideration would need to given beforehand to the possibility of adverse movements in exchange rates, the imposition of import restrictions, etc., that could result in unexpected financial losses. Market skimming With market skimming, you would enter the foreign market initially with a high price. You can really only do this if your products are in demand or are very unique. The intention with this approach is to take advantage of the perceived uniqueness of the product or demand for the product while it is new or while there is little other competition. In such instances, it is usually not long before the price has to be reduced to attract more price-conscious buyers, or to defend against competitors as they come onto the market or as the demand drops. This approach is often used in the marketing of computer products and other technology items, clothing, as well as books where relatively expensive hard-cover editions precede the cheaper paperback editions. (Think about the introduction of a new technology such as DVD and the high prices that are initially charged for this technology.) What the market will bear With this strategy, you set a price that you believe the customer will be prepared to pay. This is an approach to take if you have done quite a bit of research on what customers are prepared to pay or can afford to pay. Differential pricing In adopting this approach, the demand-oriented exporter - usually of consumer products - takes advantage of different price levels in various countries by establishing a different price, based on what the market will bear, for each export market. The success of differential pricing depends to a large degree on the extent to which markets can be kept separate. Where markets are integrated, such as in the EU, for example, problems could arise where the product is purchased at a low price in one country and resold at a higher price (but one that undercuts the original supplier) in another country. With the advent of the Internet, it is becoming more difficult to introduce differential pricing. In most cases, where a company uses its web site to sell its products (e.g. Amazon.com), buyers visiting this web site would surely query why different prices exist for different markets. They would inevitably demand that they also enjoy the benefit of the lower prices available to other markets and for this reason it is becoming less feasible to have differential pricing when selling over the Web.

Moving on to setting an actual export price

The next step in the export pricing process is to decide on a specific export price that covers your costs and meets the objectives of your pricing strategy.

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Step 5: The export price - Your key to success Deciding on an export price - the price that you will sell your product(s) at
Establishing an export price is about covering costs, ensuring sales and generating profits. The longterm objective of pricing setting is to achieve sufficient volumes (i.e. numbers of units sold) to ensure maximum profits after all costs have been covered. Setting a high price could limit the volume of goods sold, whereas a low price might increase volume but could have an adverse effect on profits. As a rule, the total cost of exports (which include the cost of designing, developing, producing, packaging, distributing, marketing and servicing the products), plus a minimum required profit (also referred to as a 'profit margin' or just 'margin'), should be used to set the lower limit on the price. The upper limit of the price will be that price above which the company cannot remain competitive and it is determined by the potential value that customers place on the product and the amount of money that they are prepared to pay for it. Often, this value will depend on the circumstances of the buyer. For example, a moderately priced household product may be considered too expensive by parents with considerable family commitments. On the other hand their son, who has a lower income but no such responsibilities and who pays no more than a nominal contribution towards board and lodging, may consider the same product to be cheap and good value for money. Similarly, a dishwasher may be considered an essential purchase by some consumers, but regarded as a luxury by others.

The impact of the export price on export/sales volumes

Generally, the higher the price the lower the quantity of the product that will be purchased (i.e sold). However, the impact that a particular price will have on sales volumes is determined by a number of factors beyond price, including:

The supply of competing products The current price of competing products How the competition reacts to being undercut (or, alternatively, how they react to a higher price than its own being set) The nature of the market segment the company has chosen as its target How the buyers in this market segment react to the price Competitive advantages which the product might have, e.g. high quality, unique features, a favourable image in the market place, etc.

Price setting does not happen in a vacuum

Within the range of prices permitted by the market place, the competition and various government regulations, the exporter is responsible for setting and attempting to control the actual prices of the goods traded in different markets. The challenge is to arrive at a selling price that will enable all costs to be recovered and that will provide the best possible return on the investment made and the risks being taken. To achieve this goal, an image for a product must be projected that focuses on value-for-money and once customers have decided to purchase, a marketing strategy must be used to convince them that their decision was a sound one.

Export price competitiveness

You have now decided on an export price, but will this price work in the marketplace? Your next step is to check the competitiveness of your export price in the target foreign market. You would do this by

comparing your export price with the market-related price you identified in step 1 of the export pricing process. If you find that your price is too high, you must decide whether your product quality, design, uniqueness, promotion, etc. will offset this higher price (this is unfortunately seldom likely to be the case, especially for a new exporter). If you still consider this price to be too high, you may consider alternative ways of reducing it, perhaps only temporarily, in order to get a foot-hold in that foreign market. Some of the ways in which you can reduce your price, include: 1. Accepting a lower profit margin Recalculate your costs to reduce the contribution allocated for fixed costs, or factory overheads - this technique, is referred to as marginal pricing, is possible only if the exporter has a substantial domestic market to pay for all the fixed costs. Revisit all of your cost items to see where you can reduce costs - click here to read more about cost reduction strategies

2. 3.

If you find that you cannot afford to lower your price, you may need to find ways to improve the attractiveness of the non-price features of your firm's product offering e.g. use of a brand name, better design, higher quality, better packaging, better promotion, faster installation and other initial and aftersales services. If you find that your product is priced lower than other competing products (may you be so lucky), you may decide to raise the price above what you have initially set. Clarification ahead of time as to the discounts, rebates and promotional allowances you may be required to offer your agents or distributors is also important, because, the cost of these items must be included in the calculation of the export price. You should also keep in mind that you might want to have the flexibility to offer a lower price, better credit, on more favorable delivery terms to attract special customers. So the cost of these concessions also need to be built into the overall export price. At this point, you have done everything necessary to prepare an export price strategy for your export plan. The steps that follow really have more to do with implementing this strategy (and will be revisited in step 10 of the 21-step export process). Nevertheless, we also discuss them here, because it is often difficult to distinguish between planning and implementing when it comes to price setting!

Your export price is seldom the final selling price in the marketplace
This is a very important issue. In the case of many products - especially consumer products - is likely that you will be selling your exports to an intermediary - perhaps an importer, distributor, wholesaler or retailer. This intermediary may then sell your products on to other intermediaries who eventually sell the product to the final consumer. But not before having added a whole host of additional costs (such as transportation costs and commissions) to your export price. Depending on what basis you sold your products to your customer, they may have to still pay the import duties and other costs to clear the goods through customs (assuming that you agreed that the importer - and not you - would take care of these costs). This will inflate your export price quite considerably and the final selling price to consumers may be a lot higher - even double or more - than your export price. You should not assume your export price to be the final selling price and you must take these additional costs into consideration when comparing your final selling price with the market-related price you identified from your export research - see step 1. If you do not, you will not be comparing 'apples with apples' and you may find yourself priced out of the market. Of course, it is fair to assume that your initial buyer (i.e. not the final consumer) would not have bought from you had (s)he not thought it possible to sell your products on to these other intermediaries and to the final consumer for a profit! Still, you need to know what your consumer is ultimately paying for your product as this affects your competitiveness. Based on this knowledge, you may decide to reduce the number of intermediaries in your distribution channel, thereby reducing your final selling price and ensuring greater competitiveness for your product. Let's move on to the next step in the export pricing process.

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