Last reviewed 16 September 2020
Effective pricing of our products and services for export markets is an essential part of a successful strategy. Setting prices too low can be at least as damaging as setting them too high. Here we discuss implementing an effective pricing strategy.
Many companies give too little thought to how they set prices for export customers and markets. The simplest methods, such as cost plus, or recalculating our domestic price list into another currency at a chosen rate, fail to give attention to local market conditions, or to our objectives.
It’s crucially important, of course, to understand the costs involved in selling in another country. There are identifiable direct costs such as shipping, customs clearance, export documentation as well as any product or packaging modification that might be needed. An exporter needs to know what their bottom line is. But costs only tell us the level at which the business is worthwhile. They don’t tell us how much our product or service is capable of generating.
Leaving aside costs, there are two overriding considerations in price setting for export markets. By far the most important is the price that the end user is willing to pay. This, of course, presents all kinds of problems, especially in exporting where the manufacturer or supplier may not ever get to meet the end user and will be selling through intermediaries such as distributors, wholesalers or franchisees. But it’s crucial to focus on what the end user wants. They are the people who can make or break our business.
The other consideration is ourselves and, in particular, our market strategy. An export business should not be entering a market without a clear idea of what they are seeking to achieve. We want to sell, obviously. But what’s the end goal? If we have excess stock we want to sell, our approach might be quite different to approaching an emerging market where we see long-term opportunities. How our product is priced plays a huge part in how it is perceived.
We need to research a market to understand price expectations. Prices for different products, and especially services, can vary considerably between markets, even when they might seem quite similar in other ways. Understanding competitor behaviour is valuable. If we are selling a retail product, it should be quite straightforward to find what competitive products are available and how much they’re being sold for. We might not even need to visit the country, as retailers increasingly offer the opportunity to buy online. But if we have the opportunity, a personal visit just to collect information can be valuable. Because while we are investigating market prices, we can also discover how end users expect to buy, and this can help to determine our distribution strategy.
So, we have identified the following factors in price setting:
end user expectations
All these factors are interdependent. Information about prices our competitors are charging is valuable but not overriding. How we price our product in comparison to competitors depends on our objectives and also the way in which we intend to promote our product. If we are confident we are offering a genuinely superior product with valuable and unique benefits for the end user, then perhaps the price to the end user should be higher than those of our competitors. On the other hand, if the market is crowded with products and we need to fight to get noticed, we may need to set our prices lower, at least initially.
There are numerous pricing strategies, each of which seeks to achieve specific goals in particular circumstances. Among the most commonly used are as follows.
Premium pricing — suitable for a strategy that stresses superior quality or unique benefits. If we want our product to be perceived as superior, what better way than to charge a higher price?
Economy pricing — this turns premium pricing on its head. In a competitive market, a product that is much like others might need to use price to entice customers.
Penetration pricing — setting prices at a lower level than comparable products in order to gain market share quickly. This is commonly used but faces a potential problem. Because price helps to determine value in the mind of a consumer, rising prices to market levels later can be challenging. This phenomenon is called “sticky pricing” and an exporter adopting such a strategy also needs a strategy for normalising prices later. This could be done by making it noticeably clear that the initial price is an introductory offer, or alternatively by introducing an improved product to justify the price increase.
Skimming — setting higher prices to take advantage of “early adopters” (consumers who like to have the latest available product and don’t mind paying a premium to be among the first to own it). This applies in particular to technology products such as mobile phones and computer games.
There are numerous other pricing strategies described elsewhere, some of which are a bit esoteric. Our pricing strategy should be our own and it should be chosen to support our marketing and distribution strategy in the target market.
Of course we have only thought about the end user, and very often in exporting we are not selling directly to them anyway, so we can’t expect to have control over the final price. Nevertheless, it’s crucially important to have taken them into account. We will be negotiating with an intermediary such as a distributor, and for those negotiations, it’s crucial that we have an idea of the optimum final price. That’s because, we’ll work backwards from that point to include the expected steps in distribution. For example, a retail product may move from us to a national distributor, perhaps to a local wholesaler, to a retailer and finally to the end user. We need to approach our negotiations with our target distributor by thinking about what margins will be expected at each step, so we can offer a price that takes the local market into account. Note that we are not trying to control price, simply allow for everyone in the chain to make a reasonable margin while arriving at a final price that’s in line with customer expectations and our market strategy.
If the process seems complicated, bear in mind that it’s important to have an informed plan before entering a market. Too many exporters get into trouble by offering a price to an end user based on costs and invariably price too low. The end user is happy but the exporter then finds that there isn’t enough margin to include a distributor in the chain, which means it’s much more difficult to build the market to its full potential. That’s one reason why pricing too low can be as damaging as pricing too high.