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
Here are the most influential elements in determining pricing strategies:
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.
In international marketing there are three fundamental strategies when it comes to pricing:
Let’s see each in detail.
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 product\service 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.
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:
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.
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:
These are the different typologies of terms of payment that a buyer and a seller can agree upon:
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:
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:
Payment is collected after presenting documentation of completion of their end of the agreement showing documents such as invoices.
The payment process goes through a 4-step process:
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.
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. 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.
MORE ARTICLES FROM OUR BLOG
Internationalisation theories help international managers understand how to make a company develop and grow internationally. Let’s see how.
Firms have several options when entering foreign markets. In this post we analyse how each entry strategy comes with a unique set of risks and rewards.