Thursday, May 20, 2021

The factors to be considered in pricing for international marketing

 The factors to be considered in pricing for international marketing

The factors to be considered in pricing for 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. The factors to be considered in pricing for international marketing 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.

The factors to be considered in pricing for international marketing 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. The factors to be considered in pricing for international marketing 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. The factors to be considered in pricing for international marketing 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.

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