Determination of export prices
The ever-increasing competition in the world markets increases the importance of the price factor which is one of the company's marketing tools. It is almost impossible to sell products and services on international markets without clear marketing policies and marketing plans. Above all, it is required to conduct the international market research and prepare marketing complex for elaboration of such policy and plan. Various factors should be considered for determination of prices for different markets. Price is one of the key factors affecting demand and sales. A businessman who intends to export products or services and achieve success in foreign markets must properly determine the pricing policy. The price of similar products in the same market, demand, competitive environment etc. factors have to be studied and taken into account when determining the price for foreign markets. Factors affecting the prices of export products have to be carefully examined and pricing policy have to be properly defined. Otherwise, it is almost impossible for the company to succeed in these markets and get the desired income.
The key factors affecting the pricing policy in foreign markets are as follows:
Role of the price in target market
Cost calculation method
Pricing policy on new products
Same and different prices in different markets
Adjustment of the price to the life cycle of the product
Price restrictions etc.
The exporter can select two main approaches while identifying the price policy:
Active Price approach
In this method the company tries to achieve the targets set in the target market using the price actively as a main tool of marketing. This approach should be used to monitor target markets and respond quickly to changes in the market, and the company's price policy should be adapted to the requirements of the target market.
Passive price approach
This approach is particularly used by the company who's main sales market is domestic market and whose products are only exported. Usually they are not aware of the business environment in the target market and determination of prices for the foreign market is the responsibility of foreign partners of the company
The Price is associated with the following issues as the key element of the Internation Trade:
Right quantity (number) (the price goes down as the quantity increases)
Right quality (quality demand of the target market)
Right time (when and which target market is better to get out)
Right costs and right price (role of the costs in determination of the price and the selected methodology)
Primary objective of the price is as following as the marketing tool:
Maintain and increase market share;
Compare price with the price of other competitors;
To be competitive;
To achieve the intended profits or increase profits;
Make full use of the production capacity;
To create high quality image;
Achievement of the business sustainability.
All of the above are the key factors for determining the right price.
What is the correct price?
Several factors affect the determination of the price. Some of these factors can be controlled and these factors are called internal factors. Factors beyond the control are called external factors.
Internal factors (controllable factors)
Prime cost of the product
These factors include production and packaging costs of the goods (raw material, labour cost, rent, management and administration costs)
Sales and delivery costs
Shipment and delivery costs play an important role in international trade. It is important to correctly understand these costs during exportation of goods.
Unique or rare products can be sold at a higher price.
Costs to make progress in the market should be taken into account in order to sell good in the developed markets.
Promotion and image of the product
Ads and other information can increase product's attractiveness and demand for the product.
External factors (Factors beyond the control)
Adopted prices in the targed market
In some cases price of the target markets are determined by the price of similar products.
Demand and supply
This is determined with the demand for product in the target market. For example, seasonal fruit and vegetable etc.
Tough competitive environment affects the prices. In many cases the exporter must to adhere to these prices.
Foreign exchange rates
Sometimes the prices can change according to the change in foreign exchange rate. It should be considered during price determination.
Particularly, the main two approaches are used in pricing:
Pricing according the costs
In this method profit margin intended to be obtained by the manufacturer is added to the prime cost of the product. The main weakness of this method is that the demand for the product is not taken into consideration and consequently it is possible that the seller can not sell the products.
The main methods of this approach are:
Pricing according to the all costs
All variable and fixed costs, as well as the net income that the manufacturer intends to acquire is taken into account in this method. According to this method, the calculated price is equal to 6.9 AZN.
3,5 AZN – total production costs
2,4 AZN – total sales costs
1,0 AZN – envisaged net profit
Identification of the break-even point
Costs can be classified as variable and fixed costs. Changed costs increase as the production increases, while fixed costs remain unchanged regardless of the production capacity.
Break-even point reflects the sale volume that includes no profit and loss.
BEP = FC1/(P1-VC1)
BEP – break-even point
FC1 –total fixed costs
P1 – unit price
VC1 – variable costs per unit
Pricing according to the direct costs
Pricing is calculated based on a special formula related with the direct costs:
DC = RM+DLC+VC+AC+MP
DC – direct costs
RM - main materials (raw material)
DLC – direct labor costs
VC – variable production costs
AC – additional production costs
MP – manufacturer's net profit
In our example
DC = 1,0 Azn + 1,2 Azn + 0,8 Azn + 0,5 Azn + 1,0 Azn = 4,5 Azn
Pricing according to the marginal costs
Pricing according to the marginal costs is the special accounting method. In this method marginal costs are determined based on the additional variable costs.
Per this method, unit price of the produced goods is determined according to the change in total costs.
For instance: Fixed costs can be not considered while determining the price of the exported products as these costs are covered with the money obtained from the products sold in the domestic market.
The price is as follows in our example:
P = 1,0 Azn + 1,2 Azn + 0,8 Azn + 1,0 Azn = 4,0 Azn
Breakeven-Point Based Pricing allows the company to compare the results of revenues obtained from the sum of alternative prices.
In order to achieve the maximum profit, the company can determine the price based on sales volume.
According to our example, additional fixed expenses spent for the production is 0.5 AZN. According to this calculation, additional fixed costs (AC) for 10,000 pcs equals to 5000 AZN. We do not know the Price (P), costs per unit envisaged for the production is 3,0 AZN. Lets to use formula for calculation of the break-even point and estimate the price.
10000 pcs = 5000 AZN / (Unit Price – 3 AZN)
Price = 3,5 Azn
Note: Sales costs spent in domestic market in no case considered during determination of the price.
Pricing according to the market
Pricing according to the market has two methods:
Pricing according to the demand
Pricing according to the competion
Pricing according to the demand
This methods related with the value price accepted by the customers. High price indicates high customer interest and low cost shows low customer interest in this approach.
Pricing according to the competion
This method is depending on the change of behaviors of competitors. In this method exporters determine their prices based on their competitors.
To do this, the basic forms include:
Tariff price – the price is determined by the leading companies of the market.
Price quotes – the prices defined by the companies to win at the tenders.
The key price types used in an international trade include:
Base price – used to determine the type and quality of the product, and determined in negotiations between Buyer and Seller;
Purchase price – is defined by the terms of delivery of goods (Incoterm);
World price – is determined depending of the type of the products:
raw material – the price determined by export or import countries;
World's leading companies' prices for the same goods;
is defined in stock exchanges or auctions.
Monopoly price – is determined by market monopolists;
Wholesale price – reflects the prices of goods sold in large quantities and is published in various sources;
Retail price – defined for small scale sales
The main pricing strategies:
“Skimming pricing” strategy – mainly the very high prices offered by natural and artificial monopolists for some products / services. The company can use this strategy within a certain period of time due to the great demand in the market.
Market-Based Pricing Strategy - This strategy is mainly used when the pricing level for the similar products in the market are already available, as well as to be competitive in foreign markets. This strategy requires the company to have in-depth knowledge about the production costs.
Market Access Strategy – low prices defined for goods and services, compensated with the increase of the sales capacity. This strategy is applied mostly in large markets when customers are vulnerable to low prices.
The main reasons for the difference of export prices:
Demand in the export market
Competition in the export market etc.
In addition to all listed factors, it is also necessary to consider the non-price factors that affect the price determination. The followings are the main non-price factors:
On due delivery
Claims and demands
Range of possibilities
High prices for handicrafts etc.
As noted, the various factors affect to the determination of the export prices. The key factors influencing the export price determination are as follows:
Special packaging – the requirements of the importing country, the trademarks of the importing country, or specific marketing purposes related with the packaging;
Bank costs – Bank costs can vary depending of the financing of the export transaction and payment method;
Internal transportation in the exporting country – defined depending on the transportation terms of the goods within the country;
Transportation costs – associated with the terms of delivery agreed between the buyer and the seller;
Export customs charges – determined with the type of exported goods and customs regulations and duties of the exporting country;
Additional documents – additional documents required by the importer or exporter's country when exporting goods and services to these or other countries;
After-sales costs – for example, the company's warranty for the sold goods;
Promotion costs – funds spent on active policy, advertising and propaganda activities in export policy;
Inspection costs - (for example, quality certificate, veterinary certificate etc.)
Pricing model based on costs