Methods of Pricing in International Marketing:

The price structure in international marketing, like the domestic market price
structure, begins on the factory floor. But there is no similarity in the costs
included in the two structures. The pricing of the products for domestic and
export purposes shall be calculated in a somewhat different manner.

International market price structure is the basis of all export price quotations,
discounts and commissions. There are various methods of pricing the product in
the foreign markets. The methods may be grouped into two, i.e., cost-oriented
export pricing methods and market- oriented export pricing methods.

(A) Cost-Oriented Export Pricing Methods:

The cost-oriented pricing methods are based on costs incurred in the production
of the products. Total costs include fixed costs and variable costs. Thus export
pricing may be based on full cost (fixed and variable) or only on variable costs. A
reasonable profit will be added to the base cost to arrive at the export pricing.

Thus cost-oriented export pricing methods may be divided into the

following two methods:

1. Full Cost Methods or Cost-Plus Method:

The most frequently used pricing method in exports is cost-plus method. This
method is based on the full cost or total cost approach. In arriving at the export
pricing under this method, the total cost of production of the article (fixed and
variable) is taken into account.

Over and above the fixed and variable costs incurred in the production of
exportable articles, all direct and indirect expenses incurred for the
development of product such as research and development expenses and other
expenses necessary for the export of the articles such as transportation cost,
freight, customs duties, insurance etc., are included.

Then a reasonable profit margin is added to the costs and the value of the
subsidy and assistance from the Government or other bodies of the country, if
any, is deducted. The net result is the total export price for the commodities
produced. Price per unit may be calculated by dividing the total price, thus
arrived, by the number of units manufactured.

The various elements of cost, forming part of the total cost are:
(i) Direct Costs:

(a) Variable Costs:

Direct materials, direct labour, variable production overheads, variable

administrative overheads.

(b) Other Costs Directly Related to Exports:

Selling costs—Advertising support to importers abroad, special packing,

labelling, etc., commission to overseas agent, export credit insurance, bank
charges, inland freight, forward charges, inland insurance, port charges, export
duties, warehousing at port, documentation and incidentals, interests on funds
involved, costs of after-sale service.

(ii) Fixed Costs or Common Costs:

It includes production overheads, administration overheads, publicity and

advertising (general), travel abroad and after-sale service minus Govt.,
assistance, duty drawback and import subsidy etc., received and then freight
and insurance are added to arrive at the final cost.

Advantages:

The main benefits of this system are as under:

(i) Under this method the exporter realises the total cost in marketing the
product in a foreign market.

(ii) Marginal targets are thought of.

(iii) No chances of loss.

(iv) This is logical and universally accepted method.

(v) It is easier to understand and calculate.

Disadvantages:

Main limitations are as under:

(i) Cost is considered in advance. But there is difference between estimated and
real cost. So this method does not give exact result.
(ii) When a company’s cost is higher than its competitors, this method is of no
help.

(iii) In this method only cost and expected profit are considered. Hence, chances
of increasing price are often lost.

(iv) Change in demand and supply is not taken care of.

(v) It does not help in competition.

(vi) There is little scope for change according to time and circumstances and
hence, this method of pricing is not useful.

2. Marginal Cost Pricing:

Another cost oriented method of pricing in international market is to determine

the price on the basis of variable cost or direct cost. In this method fixed cost
element in the total cost of production is totally ignored and the firm is
concerned only with the marginal or incremental cost of producing the goods
which are sold in foreign markets.

We know that the fixed cost remains fixed up to a certain level of output
irrespective of the volume of output. Variable costs, on the other hand, vary in
proportion to the volume of production. Thus, it is the variable or direct or
marginal costs that set the price after a certain level of output is achieved, that
is, output at Break-Even Point (BEP).

This method is based on the assumption that the export sales are bonus sales
and any return over the variable costs contributes to the net profit. Under this
system it is assumed that the firm has been producing the goods for home
consumption and the fixed costs have already been met or in other words,
Break-Even Point has been achieved.

Thus, if the manufacturers are able to realise the direct costs, including those
involved in export operations specifically, they would not affect the profitability
of their firms. The profitability of firms should be assessed with reference to
marginal cost which should normally constitute the basis for export pricing.
Other elements in calculating price will remain the same.

Advantages:

There are a number of advantages by the use of this method:

(i) Export sales are additional sales hence these should not be burdened with
overhead costs which are ordinarily met from the domestic trade.

(ii) This method is advocated for firms from developing countries who are not
well-known in foreign markets as compared to their competitors from
developed countries, and therefore, lower prices based on variable costs may
help them enter a market. Price may be used as a technique for securing market
acceptance for products newly introduced into the market.

(iii) Since the buyers of products from developing countries usually are in
countries with low national income, it is advisable for the firm to serve a large
segment of the market at low prices.

(iv) When fixed cost can be gained from domestic market, total profit can be
raised by exporting at a price higher than marginal cost price.

(v) An order which may be refused on the basis of total cost can be accepted on
the basis of marginal cost and profit can be increased.

Disadvantages:

Following are the main disadvantages:

(i) Generally, this method is applied only when a company has idle production
capacity in addition to optional cost.

(ii) Developing countries might be charged for dumping their products in foreign
markets because they would be selling their products below net prices and thus
may attract anti-dumping provisions which will take away their competitive
advantage.

(iii) The use of this method may give rise to cut-throat competition among
exporting firms from developing countries resulting in loss in valuable foreign
exchange to the exporting countries.

(iv) Marginal cost pricing is not advisable in the following cases:

(a) If the importers are regularly purchasing the product at a low price, it will be
difficult for exporters to increase the price of the commodities later on. It may
result in loss of market.
(b) This policy is not useful or is of limited use to industries which are mainly
dependent upon export markets and where overheads or fixed costs are
insignificant.

Feasibility:

The system of marginal cost pricing is feasible in the following

circumstances:

(i) There must be a large domestic market for the product so that the overheads
may be charged from products manufactured for domestic market.

(ii) Mass production techniques must have been adopted so that the gap
between the full and marginal costs may be reduced.

(iii) The home market has a capacity to bear the higher prices.

(iv) Additional production for exports is possible without increasing overhead

costs and within permissible production capacity.

Marginal Cost Sets the Lower Limit:

It is generally advocated that marginal cost should be the basis for export
pricing. This method based on marginal cost only sets the lower limit up to
which a firm can sell its product without affecting its overall profitability. It does
not follow that one should invariably charge the variable cost.

The situation in different markets may be different and in many a case,

contribution towards fixed cost might be possible and all efforts should be made
to take advantage of this possibility. Even in cases where only marginal cost is
possible to realise, the long-term objective of the firm should be to recover
direct costs plus some contribution towards overhead costs as well.

(B) Market-Oriented Export Pricing:

Both the methods are based on cost considerations, while under market-
oriented pricing, price is changed in accordance with market changes. The costs
are, no doubt, important but the competitive prices should also be considered
before fixing the export price. Competitive prices mean the prices that are
charged by the competitors for the same product or for the substitute of the
product in the target market. Once this price level is established, the base price
or what the buyer can afford, should be determined.
The base price can be determined by following the three basic steps:

(i) First, relevant demand schedules (quantities to be bought) at various prices

should be estimated over the planning period;

(ii) Then, relevant costs (total and incremental) of production and marketing
should be estimated to achieve the target sales volume as per demand
schedules prepared; and

(iii) Lastly, the price that offers the highest profit contribution, i.e., sales revenues
minus ‘all fixed and variable costs.

The final determination of base price should be made after considering all other
elements of marketing mix. Within these elements, the nature and length of
channel of distribution is the most important factor affecting the final cost of the
product?

The above three steps, though appear to be very simple, is actually not so
because there are various other factors that should be considered. The most
appropriate method to estimate the demand of the product shall be the
judgemental analysis of company and trade executives. One other way may be
the extrapolation of demand estimates for target markets from actual sales in
identical markets in terms of basic factors.

Advantages:

The main advantages of this method are as follows:

(i) This method is more flexible, hence benefits of market opportunity can be
obtained.

(ii) Business unit can face competition as price is fixed as per market position.

(iii) When product life is short, this method is most suitable.

(iv) Capital is regained quickly.

(v) We make sales quickly and cash flow can be maintained.

(vi) Risk of product becoming out of date decreases.

Disadvantages:
(i) It is not easy to estimate market changes.

(ii) It is possible to overlook relation between price and demand.

(iii) If demand is less in a market compared to others, it may mislead.