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EXPORT PRICING

Pricing is recognized as one of the most important tools to achieve a successful export operation. The starting point in every pricing effort is the process of creating pricing objectives. Pricing objectives are the strategic and economic goals desired by management in pricing the product. Pricing objectives constitute the basis on which pricing methods and policies are formulated. Therefore, a better understanding of the pricing objectives should direct the companys overall pricing process. Any pricing objective must be consistent with the overall organizational objectives, including both shortterm profits and longterm strategic objectives. Export pricing objectives as an integral part of export pricing strategy are influenced by both internal and external environmental factors. Successful realization of export pricing strategy depends on explicit identification of influencing price factors and the congruence of pricing decisions and actions by the company.

To establish an overseas price, you need to consider many of the same factors involved in pricing for the domestic market. These factors include competition; costs such as production, packaging, transportation and handling, promotion and selling expenses; the demand for your product or service and the maximum price that the market is willing to pay. Export Pricing assumes strategic importance because of Lower Technology Base in India Prices depend on Cost , Demand , Competition. Reduction on Price may not help in Increase of Demand. Custom, Taste, Adaptation for particular Country are important to get right Price. Competition is Severe. Quality, delivery is essential for getting right price. Higher Price Higher Quality . Lower Price Low Quality. Pricing For Export Normally Price given to Developing Countries is 15 to 20 % Lower than known products from developed countries. While cost price Relationship is important, cost does not determine price while other way round is True. Marked differences between cost of Two producers but Price is Same. Non Price Factors Presumed Relationship between Quality & Price. After Sale Service. Before Sale Service in consumer Goods. Prompt deliveries. Settlement of claims. Ability to Supply complete Range of product. Sales Promotion. Fancy Prices for Handicraft Goods. Fro Industrial Goods, demonstrating the product, spare parts, Trg. After Sales Service Financial Credit gets Related to price.

Traditional Products India is able to get Reasonable Prices. To Reduce cut throat unfair Prices UNCATAD help is being sought. Indian Exporter 55 cents for shims Sold at $ 2.1 a pound. Non Traditional Products Intermediate Product. Consumer Products. All developing countries are put to Serve dis-advantage.

Marginal Cost Pricing Direct cost are covered Total Cost = Fixed Cost + Variable Cost Variable Cost ? Direct material + Direct Labor Marginal Cost ? Export Price Variable Cost + Other Cost Directly related to Export Special Packing. Commission to Oversea Agent. Export Credit Insurance. Bank Charges. Inland Fright.

Variable Cost + Other Cost Directly related to Export.. Port Charges. Forwarding Charging. Export duty. Documentation & Incidental. Cost of after sales. Promotional. Pre-shipment Inspection Prot Charges. - Less duty Drawback = Export Price Based on Full Cost Add : Fixed Costs/ Common Cost Production Overhead, Material overhead, Publicity Charges Freight (Volume or lost bases) Insurance. Import of Contract Condition on Export Prices Base of Export Quotation :- i.e. FOB, C$F, CIF Exchange Rate Variation. Packing Export Consignment. Guarantee Spare Parts. Price Variation Formula. Penalty/ Liquidated Damages There are three common methods of pricing exports: Domestic Pricing is a common but not necessarily accurate method of pricing exports. This type of pricing uses the domestic price of the product or service as a base and adds export costs, including packaging, shipping and insurance. Because the domestic price already includes an allocation of domestic marketing costs, prices determined using the method might be too high to be competitive. Incremental cost pricing determines a basic unit cost that takes into account the costs of producing and selling products for export, and then adds a markup to arrive at the desired profit margin. To determine a price using this method, first establish the "export base cost" by stripping profit markup and the cost of domestic selling. In addition to the base cost, include genuine export expenses (export overheads, special packing, shipping, port charges, insurance, overseas commissions, and allowance for sales promotion and advertising) and the unit price necessary to yield the desired profit margin. Cost modification involves reducing the quality of an item by using cheaper materials, simplifying the product or modifying your marketing program, which lowers the price. In addition, consider your company's objectives and the price sensitivity and uniqueness of your product.A Price Determination Worksheet has been included in Appendix H in order to aid you in calculating the proper export price of your product. FACTORS DETERMINING EXPORT PRICING For achieving the desired rate of growth in exports, effective pricing policy for exports constitutes an essential element. Export pricing assumes strategic significance specially because if the relatively lower technological base of the developing economies resulting in higher cost of production. Again, in international marketing, being marginal supplies, exports from the developing countries have practically no control over the price and have often to sell their products below cost. As products have to be competitively priced, formulation of appropriate strategy becomes a pre-condition for the success of export operation. Pricing is like a tripod, there three legs being cost, demand and competition. It is more possible to say that one or another of these factors determines price than it is to assert that one leg rather either of the other two supports a tripod. As regards demand in International markets, it is subject to a number of factors which are different from those operating in the domestic market. For example, tastes and customs of the foreign importers may differ widely from those of the domestic population. What is necessary, therefore, is that the product must be adapted to the special requirements of the foreign markets. Elasticity of demand for the products is an equally important factor. A reduction in price may not help an exporter sell more if the demand for the product is not price elastic. The demand for some products may be elastic in relation to income as, for example for technological products made in the USA and other industrially advanced countries. The competition in foreign markets is much more severe than in the domestic market. In the domestic market, a manufacturer has to face competition only from domestic manufacturers but in foreign markets, exports have to compete with not only the domestic manufacturers but also with foreign

manufacturers. As a result, the elasticity of demand for the exported products becomes higher than it is otherwise. There is much greater possibility of a developing countrys exports being substituted by products coming from the developed countries and vice versa if there is a price advantages. Thus pricing for foreign markets assumes crucial importance. Role of costs: As regards costs, it is popular fallacy to believe that price depends upon costs. But in actual practice, it is not always so. A rise in costs may justify an increase in process, yet it may not be possible to do so because of demand and market conditions. On the other hand, and increase in demand may lead to an increase in price without any increase in costs. While cost price relationship is important, it does not follow any increase in costs. While cost price relationship is important, it does not follow that costs determine process. Very often, it is the other way round. Price determines the cost that may be incurred. The product is tailored according to the requirements of the potential consumers and their capacity to pay for it. Given the price, we arrive at the cost working backwards from the price consumer can afford to pay. That also explains why declining costs often in better quality at the same price and rising costs lead to deterioration in quality. Over a period of time, cost and quality are adjusted to the given price. There are marked differences in costs between one producer and another, yet the fact remains that the prices are close together for a somewhat similar product This is, if anything the very best evidence of the fact that costs are not the determining factor in pricing. Again, if costs were to determine prices, no firm would suffer a loss yet many firms fail because their costs are out of tune with the market price. Cost may not determine the price but whether the product in question can be profitably produced or not. All this discussion does not purport to show that costs should be ignored altogether while setting prices. The point is that cost is not the only factor in selling prices. Cost must be regarded only as an indicator of the price which ought to be set after taking into account the demand and competitive situation. However, cost at any time does represent a resistance point to the lowering of price. All these three demand competition and cost are applicable to export pricing as much as to pricing for domestic markets. OBJECTIVES OF EXPORT PRICING

Export pricing objectives Export pricing strategy reflects not only export market factors but also the short and/or longterm pricing objectives, which themselves are an indispensable subset of strategic goals of the enterprise (Myers et al., 2002). Many researchers consider pricing objectives as establishing essential guidelines for pricing strategy. The determination of pricing objectives is the starting point of pricing strategies (Indounas & Avlonitis, 2009). According to Shipley and Jobber (2001) pricing objectives offer directions for general action. Export pricing objectives constitute the basis on which export pricing methods and policies are formulated (Tzokas et al., 2000). Therefore, a better understanding of the pricing objectives should direct the companys overall pricing process. Table 1 summarizes the fundamental pricing objectives that have been collected from the pricing literature. Table 1. Pricing objectives pursued by companies achievement of satisfactory profits profit maximization achievement of satisfactory sales sales maximization liquidity achievement and maintenance market share increase achievement of a satisfactory market share sales stability in the market market share leadership coverage of the existing capacity target rate of return on investment (ROI)

discouragement of new entrants into the market price stability in the market

price wars avoidance price similarity with competitors Government investigation or intervention avoidance maintenance of the existing customers attraction of new customers creation of a prestige image for the company survival in the longrun meet customers requirements cost coverage achievement of social goals determination of fair prices for customers price differentiation

Firms may choose to use financial (e.g. return on investment, profit maximization) and no financial or competitive (e.g. matching competition, maintain/increase market share) goals to guide their strategic decisions (Myers et al. (2002) classify pricing objectives as profit and competitive positioning goals. Perreault et al. (2008) suggest to classify pricing objectives into three main groups: profitoriented objectives include pricing to realize a target return on investment or to maximize profits; salesoriented objectives aim to increase sales either in currency or unit terms or to penetrate markets and increase share; status quopricing objectives include meeting competition or choosing to compete on a nonprice basis. In terms of their nature, pricing objectives can be divided into quantitative or qualitative. The quantitative objectives can be measured more directly and are related to profits, sales, cost coverage, market share, and production output. However, Avlonitis and Indounas (2004) point out that an excessive emphasis solely on quantitative objectives may even risk the longterm position of a firm in the market. The qualitative objectives are hardly operational and describe the relationship with customers, competitors, distributors, the longterm survival of the firm and the achievement of social goals. Although these two categories of pricing objectives might seem mutually exclusive, Avlonitis and Indounas have suggested that there is a hierarchy of pricing objectives where pursuing qualitative objectives (e.g. satisfaction of customers' needs) may further lead to the achievement of quantitative objectives (e.g. achievement of satisfactory profits) as well. Pricing objectives may be categorized into shortterm and longterm too. The shortterm objectives seek to satisfy specific goals in a short time period (i.e. six months or one a year), whereas the impact of the longterm objectives may be realized only after a long period of time Kehagias et al. point out that although the various pricing objectives are discussed separately, in practice they are interwoven into a combination that reflects the equilibrium of short and long term objectives that drive a company to profitability and growth. Jobbers and Hooleys study has demonstrated that concern for profit is a prime motivator for the majority of firms when setting prices. Similarly, Shipley studied the use of pricing objectives in practice and found that the vast majority of firms pursued profit objectives. Profit objectives typically reflect shortterm concerns as measured by margins, target returns, and various financial ratios (Shipley & Jobber, Samiee found that U.S. and foreign firms ranked satisfactory return on investment, maintenance of market share, specified profit goals, largest market share, and profit maximization as the five most important pricing objectives. Furthermore, findings of Jobbers and Hooleys study demonstrate that companies who place profitmaximization and market share attainment/maximization as prime objectives appear to perform better than their close competitors in these terms than companies who employ other prime pricing objectives. Hornby and Macleod (1996) found that the most profitable firms emphasize market share and profit in their objectives, while less profitable firms regard cash flow objectives as more important. Anyway, all of the types of pricing objectives are related to profit requirements, either directly or indirectly. For example, survival is not possible without shortterm and longterm profits, and all of the other objectives noticed in this article are connected to the generation of either shortterm or longterm profits. Avlonitis and Indounas found out that the pricing objectives are associated with the pricing methods. Competitionrelated objectives have a bearing on competitionbased pricing methods such as pricing according to the dominant price in the market and pricing below competitors. Financial objectives, meanwhile, have a bearing on costbased pricing methods such as target

return pricing, where the price is determined at the point that yields the firms target rate of return on investment. It should be noted that firms can have more than one pricing objective at a time. Pricing objectives can be conflicting as well as complementary (increased market share brings increased profits, yet to increase market share the firm may have to experience losses in the short term by undercutting competitive price offers), as well as subject to hierarchical considerations regarding level of importance (Myers et al., In addition, pricing objectives are not constant. The relative importance attached to some pricing objectives is not invariant over time and priorities may change based on market pressures or organizational conditions . This fact suggests that there is not a single pricing objective that serves as a definite benchmark for all situations. In the first instance, the Producer/Exporters pricing objectives must be clearly identified in order to ascertain the optimal pricing that can be demanded for the product in a particular export market. Common product pricing objectives should incorporate a combination of the following corporate strategies, which are dependent upon the characteristics and requirements of each of the specific markets being targeted:Profit maximisation trying to maximise current profit by taking into account revenue and costs. Current profit maximisation may not always be the best objective if this results in lower long-term profits. Revenue maximisation seeking to maximise current revenue with no consideration for generating good profit margins. The underlying objective here is often to maximise long-term profits by increasing market share, through the lowering of costs. Quantity maximisation seeking to maximise the number of units sold or the number of customers served in order to decrease long-term costs. Profit margin maximisation attempting to maximise the unit profit margin through the lowering of product quality and costs. Quality leadership - using price to signal high quality in an attempt to position the product as the quality leader in a market. Partial cost recovery some companies that have other sources of revenue may seek to only partially recover their product costs by subsidising the costs from their other sources of product revenue. This could be used for various reasons, including:Using a particular product on a loss-leader basis to enter or sustain a market position on a shortterm basis, OR As a mechanism to write-off corporate tax, OR Some other business reason. Survival strategy - in some serious market situations (such as market decline and/or overcapacity in the market), the goal may need to be to select a price that will only recover the costs and, thereby, enable the company to remain in the market. In such cases, survival may take precedence over profit generation - this objective is only considered to be a very short-term strategy. Status quo situation where the company may seek price stabilisation in order to avoid price wars and maintain a moderate but stable level of profit from a particular marketplace.

Finally, the pricing objective depends on many factors including production cost, existence of any economies of scale, barriers to market entry, product differentiation, rate of product dispersal in the market, the companys internal resources, and the product's anticipated demand fluctuation over time in the various targeted export markets.

Factors influencing export pricing objectives There are a number of factors which have an impact on export pricing objectives. The pricing objectives of the firm will change within the export market, such factors as competitive intensity, market evolution, and product age change One of the most important factors influencing the formulating export pricing objectives is the competitive intensity. Export markets are experiencing rapid rates of change, as technology, governmental regulations, and economic foundations shift. Often this increases the differentiation across markets. Myers et al. emphasize that the exporter may meet with difficulties, which arise if local competitors (i.e. those from the export market) remain unaffected by economic or regulatory shifts within that market, shifts which affect the exporters price and not the local competitions. This is considerably different from domestic competitive environments where each competitor is affected by the same economic changes, as is the buyer. As competitive levels within the export market increase, the company must price its product at or near that of the competition in order to survive. If companies attempt to maximize ROI or profit growth in competitively intense environments, then competitive price margins will detrimentally affect the attainment of these goals, so the company must choose a price at or near that of competitors Similarly, Indounas and Avlonitis state that a strong competitive environment will lead many companies to adopt the existing market pricing. Hornby and Macleod analyzed the relationship between prime pricing objectives and the nature of competition and found that profit maximization was regarded as being the most important in both non and highlycompetitive markets. Shipley , and Jobber and Hooley found a relationship between pricing objectives and firm size (i.e. number of employees, sales volume, financial resources). Shipleys findings that target profit and market share objectives were practiced more by larger firms were confirmed by Jobbers and Hooleys (1987) study. Moreover, Jobber and Hooley found that profit maximization was the single most important objective for all sizes of firm and at all stages of market evolution. However, this pricing objective was used by a higher proportion of small and mediumsized firms than larger ones, who tended to be more market shareoriented. Their study have also demonstrated that other objectives, notably market share objectives for large firms and cashflow Another important factor influencing the export pricing objectives formulation is the stage of market evolution. Jobber and Hooley found that revenueacquisition is a more prevalent objective guiding pricing decisions in new emerging markets and declining markets than in growing and mature markets. Conversely, profitorientation is a more widespread guide to pricing decisions in growing and mature markets than new emerging and declining markets. Pricing objectives will also change, as the product develops from its introductory stage through growth and maturity, with profitoriented pricing being standard for new products and more competitive pricing being standard for mature products. Moreover, exporters are often faced with different product life cycle (PLC) scenarios in various export markets with the same product. Since we talk about export pricing, we have to pay attention to international economic factors affecting pricing objectives, such as inflation and exchange rate fluctuations. The relationship between the export market currency and the exporter home currency will affect not only the affordability of the exported product but also the exporters ability to raise prices and still reach sales targets.

Cavusgil established that when the exporters currency is weak, it will be able to stress price benefits, shift sourcing manufacturing to domestic market or speed repatriation of foreignearned income. Conversely, when the exporters domestic currency is strong, it may resort to competitive pricing and/or engage in nonprice competition by improving quality and customer service. The high inflation rates in the export market will limit the exporters ability to pursue profit oriented pricing objectives, since the purchasing power of the buyers will be reduced. Management is more likely to pursue competitive pricing objectives when the competitive intensity of the export market is high; the product is mature in the export market; foreign currency volatility is high; and the inflation rate in the export market is high. Export experience (i.e. the degree to which the exporting company has operated in foreign markets and the level of managements international experience in particular foreign market) also has an impact on the nature of goals a company pursues internationally. Stttinger (2001) found that inexperienced in exporting companies (export sales ratio <20%) mostly set no financial performance goals. These firms seek new opportunities abroad because sales growth in the home market is limited. Therefore, it is more advisable to pursue international market coverage rather than immediate financial performance. More experienced companies (20%80% export sales) commonly pursue financial goals and expect profits to the same extent as in the home market. This decision is reversed under specific market conditions,

such as market saturation or a fierce price war. The more globally active a company becomes (>80% export sales), the more likely it is to go back to no financial goals. Being world market leaders or close to it, these companies want to remain in this position. Another important variable is a companys international distribution system. According to companies that employ their own personnel in international distribution use no financial goals to monitor performance. In contrast, companies that rely on independent distributors apply financial goals. It might be argued that financial goals are easier to establish and evaluate, they give more governance. Summarizing, pricing objectives provide directions for actions. Pricing objectives are an integral part of export pricing strategy. Successful realization of export pricing strategy depends on explicit identification of influencing price factors and the congruence of pricing decisions and actions by the company.

EXPORT PRICE STRTEGIES

Price is one of the four major elements in the marketing mix and it is an important strategic issue, because it is related to product positioning. It also affects other internal marketing mix elements such as product features, distribution and channel outlet mechanisms used, freight costs, and promotion requirements for the products. Further, the level of prices will be determined by external factors such as:The levels of competitor pricing in the targeted export markets. The levels of local imports and local production. The price sophistication of the marketplace. While there is no single formula to establish and set basic pricing levels (for domestic or export markets), the following list is a sequence of steps that determine the market level at which pricing of a product should be set:Developing marketing strategies for target countries - performing marketing analysis, segmentation analysis, product targeting, and positioning evaluations. Estimating demand requirements - understanding how quantity and quality demand varies with price in each marketplace and implementing appropriate policies. Setting pricing objectives such as profit maximisation, or revenue maximisation, or price stabilisation (a situation of status quo with other competitors). Determining pricing levels - using information collected in the above steps to select an appropriate pricing method, develop the pricing structure, and identify any discount policies. Understanding environmental factors - evaluating likely competitors and their expected actions, understanding legal constraints, trade barriers, logistical constraints, etc. in the target markets. Marketing mix decisions - defining the product, distribution, and promotional tactics to be utilised in individual mark

Calculating in-house costs which include fixed and variable costs associated with the production, marketing, and distribution of the product in a particular export market. All of these steps are inter-related and are not necessarily performed in the above order, however, the list serves as a starting point for working out the corporate pricing policies and strategies to be followed by the Producer/Exporter. Since marketing strategy is formulated to include target market selection and product positioning, there is usually a trade-off between product quality and price, hence, price is an important variable in market positioning. Due to the necessity of trade-offs between the various market mix elements, pricing will also depend on other product, distribution, and promotional decisions that need to be made for the target export markets. Methods of Pricing In order to set the specific price level that achieves their pricing objectives, Producers/Exporters to utilise several pricing methods, which include:Cost-plus pricing - setting the price at the production cost plus a certain profit margin. Target return pricing - setting the price to achieve a required/specific target return-oninvestment (ROI). Value-based pricing - basing the price on the effective value to the customer relative to other competitive products in the export market. Psychological pricing - basing the price on factors such as levels of product quality, popular price points for the product in question, and what the customer perceives to be fair and just price for the product. Loss-leader pricing operates on the basis of losing money on certain very low priced advertised products to secure customer interest, so that they will buy other products at a more profitable level. Flexible-pricing policies - offer the same product to customers at different negotiated and contracted prices e.g. cars are typically sold at negotiated prices, while many business to business (B2B) sales are also depend on negotiated contracts. In addition to setting the product pricing levels, companies also have the opportunity to developing innovative pricing models that better meet the needs of both the Producer/Exporter and his export customers.

Pricing Tactics To penetrate a product into the export market, the pricing objective can often be to either:- (a) maximise profit margin, or (b) maximise quantity sales to increase market share. To meet these objectives, some demand-orientated tactics can be employed, depending upon circumstance - which can be summarised in the following manner:Skimming prices - attempts to skim the cream off the top of the market by setting a high price for the product and selling to only those customers that are less price sensitive. Initially these customers can be charged a high price, then the prices are lowered to skim off the next layer of buyers, etc. Eventually, the price will drop as the product matures and competitors offer lower prices. Skimming is a strategy used to pursue the objective of profit margin maximisation and is most viable:When demand is expected to be relatively inelastic* - that is when the customers are not highly price sensitive. When large cost savings are not expected at high volumes, or it is difficult to predict the cost savings that would be achieved at high volume. When the company does not have the resources to finance the large capital expenditures necessary for high volume production with initially low profit margins. Inelastic demand the change in quantity demanded is proportionally smaller than the change in price. An increase in price would result in an increase in revenue, an a decrease in price would result in a decrease in revenue. Penetration pricing - pursues the objective of quantity maximisation by means of a low price. A low initial price is set in order to penetrate the market quickly, while it can also discourages competitors from entering the market. It is an approach that can be used when many segments of the market are price sensitive. It is most appropriate:When demand is expected to be highly elastic - that is, customers are price sensitive and the quantity demanded will increase significantly as price declines. When large decreases in cost are expected as cumulative volume incre

When the product is one that can gain mass appeal fairly quickly. When there is a threat of impending competition. Elastic demand the change in quantity demanded is proportionally larger than the change in price. This means that an increase in price would result in a decrease in revenue, and a decrease in price would result in an increase in revenue. Prestige pricing used when cheap products are not taken seriously by some customers unless they are priced at a particular level. In this case the higher price is linked to a perception of better quality product, although this may not be the case always. Odd-even pricing - takes advantage of human psychology that feels that $199.95 is less than $200. Studies of price points by direct marketers have found that products sell best at certain price points e.g. as $197, $297, $397, compared to other prices slightly higher or lower. Demand-backward pricing is sometimes used by producers in certain circumstances. First, the price consumers are willing to pay for a product is determined though research and analysis, then the Producer/Exporter works backward through the standard mark-ups/margins taken by the distribution network to come up with a calculated price that the customer can be charged. Bundle pricing - is offering two or more products together in a single package price. This can offer savings to both the customer and to the producer, who saves the cost of marketing both products separately. The customer is willing to pay more because he perceives that he is getting a lot more for his money, even though the cost to the producer may not really be that much more. In estimating the demand requirements, there is a relationship between the price demanded and the quantity of the product required, therefore, it is important to understand the impact of pricing on the sales of the product. Experiments can be performed on product prices by looking at pricing levels above and below the current price in order to determine the elasticity of demand. Inelastic demand indicates that price increases might be feasible for a particular market. As the products lifecycle progresses (from development, introduction, growth, maturity, and decline), there are also likely to be changes in the demand

requirements and costs during the product life-cycle, although this will vary from one export market to another. For this reason the pricing policy should always be re-evaluated regularly over time for each export market. Structures for Price Discounts The normally quoted price to foreign end-users is the list price. This price is usually discounted for the Producer/Exporters distribution network and some important export end-users. There are several types of discounts that can be offered, which are outlined in the following:Quantity discount - offered to customers who purchase in large quantities. Cumulative quantity discount- a discount that increases as the cumulative quantity increases. Cumulative discounts may be offered to re- sellers who purchase large quantities over time but who do not wish, or are not in a position, to place large individual orders. Seasonal discount - based on the time that the purchase is made and designed to reduce seasonal variation in sales e.g. the tourism sector offers lower off-season rates at certain times of year to minimise and stabilise the peaks/troughs in their annual sales. Cash discount - extended to customers who pay their bill before a specified date an encouragement to customers to pay early and save some money, which also benefit the cash-flow of the Producer/Exporter. Trade discount - a functional discount offered to distributors for meeting or exceeding their agreed sales targets. Promotional discount-a short-term discounted price offered to stimulate sales. All of the above discount mechanisms act to stimulate sales throughout the year and offer incentives to both distributors and some specific end-users who can achieve discounts on large levels of purchases from the Producer/Exporter.

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