International marketing requires companies to create an international marketing mix, whereby a firm’s product and service offer needs to be either standardised or adapted in order to meet the demands of foreign customers.
In this post, we are going to discuss the elements that each firm will need to take into account in order to establish a successful pricing strategy.
To help you find the information you are looking for right away we’ve divided the article in the following sections:
1. Factors influencing pricing decisions in international marketing
2. International marketing pricing strategies
3. Pricing standardisation and differentiation
4. Terms of payment in international marketing
5. Export Financing
1. Factors influencing pricing decisions in international marketing.
Here are the most influential elements in determining pricing strategies:
- Firm Factors. A firm will be required to maintain a coherent approach towards its past pricing points as well as towards an overall company philosophy. Pricing is a very customer-sensitive variable, forcing companies to maintain a coherent pricing approach towards their market segment and customer base.
- Environmental Factors. Environmental factors relate to tariff barriers, exchange rates, currency fluctuations, governmental influences, inflation etc. All of these factors are usually called ‘political risks’ as they are closely connected to a country’s political stability and prosperity.
- Market factors. These factors depend on the specific nature of the foreign market and include customer’s purchase power, nature of the competition as well as customer’s perceptions of the entrant’s products or services.
- Product Factors. Other most immediate elements influencing price can be linked to a product’s innovation potential, or to the availability of product alternatives or substitutes Moreover, the price can increase proportionally to the length of a firm’s distribution channel (this is called price escalation). To counter this phenomena firms are required to optimise and rationalise their distribution channels or to lower base export price to reduce multiplier effects and export markup. An additional strategy can be establishing a foreign presence through local production facilities, as this would eliminate costs such as transportation.
All of these different elements need to be compounded to come up with a price point which will make the firm’s price competitive and profitable.
In the following section, we are discussing in which ways price can change, according to strategic decisions pursued by the firm.
2. International marketing pricing strategies.
In international marketing there are three fundamental strategies when it comes to pricing:
- Market Pricing.
Let’s see each in detail.
- Skimming. The name relates to the idea of ‘skimming the cream’ or to focus on achieving the highest possible price point. This is done in different types of industries for a variety of reasons. In the fashion industry, for instance, skimming is achieved through high media presence and the delivery of aspirational in order to push the boundaries of luxury and lifestyle. In the technology industry instead, a higher price on entry is usually necessary to recover from the high research and development costs that companies need to sustain in order to develop new product lines.
- Market Pricing. This is the approach followed by companies who need to match the market price for their product or service and then use reverse price escalation in order to calculate the cost threshold of the company’s value chain and supply chain.
- Penetration Pricing. This is a more aggressive approach whereby new market entrants what to stimulate market growth and gain market share by offering products at lower prices. By offering products at lower prices can discourage purchase by suggesting low-quality standards. Penetration can be used by companies who resort to international marketing, to manage excessive stock by selling it at a lower price abroad. In this case, however, a company may develop ‘grey marketing strategies’ whereby a firm may see its domestic customers purchasing company products from foreign distributors in order to obtain lower prices.
Extra: Strategic Pricing Across Products. Firms may also decide to price their product line in three different segments: economy, average, premium. By doing so firms may try to attract a wider variety of consumer segments, using lower-tier products as gateways to the brand.
A similar approach is often pursued in the context of creating a synergy between products sold below the profit point, in order to sell a more expensive productservice to a wider customer base. This can be seen in both physical products (like razors, or printers) and in digital products (such as applications or cloud software).
You don’t have to pick one in particular: pricing strategies – as well as the other “Ps” in the marketing mix – are highly dependent on the product life cycle. Companies usually adopt multiple pricing strategies over time in order to expand a product’s shelf life.
3. Pricing standardization and differentiation.
If establishing pricing in one foreign market wasn’t hard enough, companies need to maintain a coherent approach across a variety of markets. This is usually done by taking into account two opposing forces: pricing standardisation and differentiation. Let’s look at them individually:
Pricing Standardisation. In this case, a company sets a price for the product as it ‘leaves the factory’. All products reach the final foreign consumer with a surplus which is added by any ‘unavoidable’ factor pertaining to the supply chain. This approach safeguards company profits but it has two limitations: it does not respond to local conditions, but being a low-risk strategy it doesn’t maximise potential profits.
Pricing Differentiation. In this case, for each country, a different price can be identified. This approach is more ‘local’ and responds more naturally to foreign market conditions, but leaves a firm’s HQ with less managerial power over its subsidiaries abroad.
These two forces create 4 alternative scenarios for companies defining an international marketing mix:
- Local Price Follower. As a firm has limited international experience, it is likely to adopt pricing of the foreign market, without seeking distribution or manufacturing cost efficiencies.
- Global Price Follower. This may relate to companies who are influenced by highly globalised industries, pushing them to pursue a standardised pricing approach across markets.
- Multi-Local Price Setter. Companies who are more experienced in international marketing management may be better able to assess market conditions through a more in-depth analysis. This information advantage will allow them to efficiently adapt their pricing to each market.
- Global Price Leader. Companies that fit this profile hold strong positions in key markets. Moreover, they compete with a limited number of companies and are able to maintain (relatively) high prices in each market, despite selling global (standardised) products.
Now that we’ve clarified the elements that pertain to pricing decisions, we can move towards another important element of international marketing: establishing terms of payment.
4. Terms of payment in international marketing.
Establishing the terms of payment in international marketing is an essential component of a successful entry strategy. In general, terms, deciding the best terms of payment is not entirely discretionary as there are three categories of factors to be considered:
- Most common practices in the industry
- Terms of payment offered by competitors
- The relative strength of the buyer and seller
These are the different typologies of terms of payment that a buyer and a seller can agree upon:
- Cash in advance
- Letter of credit
- Documents against payment and acceptance
- Open account
In the final part of this post, we’ll also address a variety of options available in export financing.
Let’s look at each term of payment in more detail:
- Cash in advance. In this case, the exporter receives payment before shipment of the goods. This terms of payment minimise the exporter’s risk or any financial cost. For as good as it sounds, It is very unlikely that an importer will agree to these terms.
- Letter of credit. This is a more common term of payment, and it features the following characteristics. Letters of credit are arranged by banks for settling international commercial transactions, as they provide a form of security to the parties involved. Letters of credit ensure payment (by the issuing bank) provided that all the terms and conditions of the credit have been fulfilled. With letters of credit, payment is based on documentary evidence, not on the merchandise or services involved.A letter of credit makes sure that both buyers and sellers have a guarantee of completion of payment when certain conditions are met. Also, a bank issuing the letter of credit is in the midst of the two parties holding relationships in bona fide. Often the agreement specifies that the bank will pay the seller when the goods have been shipped. This is very important because the seller will have insurance of payment whereas the buyer will have insurance for the shipment.
These terms of payment are commonly used, as they allow both the buyer and the seller to rely on a third party, in the case that they are not familiar with each other. Letters of credit provide a binding, clear agreement with all the details of the transaction.
There may be different types of letter of credit, for instance:
- A revocable letter of credit allows cancellation or amends (uncommon).
- An irrevocable but unconfirmed letter of credit, changed only if all parties agree.
Payment is collected after presenting documentation of completion of their end of the agreement showing documents such as invoices.
- Documents against payment and acceptance. In this case, too, the buyer and seller cannot agree on more trust-based forms like cash in advance and open account, so they refer to a bank as an intermediary. In this case, however, both the exporter and the importer have a bank each.
The payment process goes through a 4-step process:
- The exporter ships the goods to the seller
- The exporter issue documents describing the merchandise (bill of exchange) and the instruction for collecting payment. The exporter then sends this information to his bank (remitting bank).
- The buyer (importer) bank will receive the documents and will ask the importer to process the payment to itself (presenting bank) and will then forward the payment to the exporter bank (remitting bank).
- The exporter’s bank will then process the payment to the exporter. In the meantime, the goods will have arrived and through the documents sent the importer will be able to clear the goods from the port.
- Open account. With these terms of payment, the exporter ships the goods simply with an invoice attached to them. The importer can pick up the goods without making payment first. The importer has less work to do and the process is faster because no banks are involved. Nonetheless, the seller expects the invoice to be paid within a shorter time frame. With an open account there are no safeguards for payment, so this viable only if importers have excellent credit ratings.
- Consignment. With this form of payment, the exporter owns the goods until the importer has sold them so that the importer has absolutely no burden in the transaction.
If the exporters need financial support in order to export their products abroad, export financing institutions can assist through a variety of formats that will be discussed in the next paragraph.
5. Export financing.
To conclude our survey of international marketing pricing strategies and terms of payment, we will address the different options available in the context of export financing.
- Commercial Banks
- Export Credit Insurance
Commercial Banks. In order to finance exports, a company can ask for an overdraft to a commercial bank, who is equipped with instruments which domestic private banks do not have access to.
Export Credit Insurance. Protects exporters against importers who don’t pay or against insolvency. An exporter needs money to pay expenses and a non-solvency puts the firm in a position of jeopardy, disrupting the cash flow. There are two types of insurance, one is for political risks and non-convertibility of currency, the other is for commercial risks connected to non-payment. The benefit of having credit insurance is that you don’t have to go to court or chase after invoices, as your insurer will assist you in recovering your profits.
Forfeiting. The buyer pays some of the cost at the initial transaction and commits to paying the balance in regular instalments over an extended amount of time until the invoice is fully covered.
Factoring. A company ‘buys’ a firm’s invoice before it’s due for fulfilment and upfronts 75% of its value. When the seller pays the rest to the factoring firm, the firm gives the rest to the company, less the factoring fees.
Bonding. In this financing agreement, the buyer asks for financial protection through a bank. The bank, therefore, issues a bond which guarantees the compliance of the buyer’s obligation to the exporter, foreseeing an indemnified amount in case the buyer cannot process payment.
Leasing. Leasing allows working with countries where there is a shortage of capital, allowing the exporter to receive payment from a leasing company. Leasing allows exporters to arrange cross-border leases from a bank to the foreign buyer or to obtain local leasing through overseas branches.
Countertrade. This is a concept which generally describes a variety of trade agreements in which a seller provides a buyer with the requested products and agrees to a reciprocal purchasing obligation with the buyer. Some examples include:
Barter, the exchange of goods for goods with no money transfer.
Compensation Deal, a part of the deal is based on goods exchange and the remaining part in money.
Buy Back Agreement, this is a fairly common agreement with turnkey projects where machinery investments are financed by some of the resulting output of the plant.
As we’ve seen there are a many discretionary decision that companies need to address in the context of pricing and international marketing transactions.
Starting with the safer options can allow companies to manage risks, before accessing the pooling capacity which allows them to gain a better contractual and bargaining position over customers or international partners.