Pricing for Export Part 2 – The Perfect Pitch

In the last article, we covered the importance of understanding our costs as a precursor to export pricing. We saw that the true cost of supplying a customer in another country can be markedly different to the costs we incur in our home market.

So we are now at a stage where we have a strong understanding of what our business needs to make an acceptable return on its export business.

That’s just half the story.

Now we need to look at price as a strategic tool. Marketing texts describe price as being one of the four (or seven) ‘P’s of marketing strategy, meaning that we can use pricing strategically to help to us to achieve our objectives. Then we are going to look at two typical pricing strategies that can be appropriate to an exporter in a new market in specific situations.

How we decide to set our prices in a new market depends on what we plan to achieve and also on the competitive situation. We also need to consider the ultimate route to market, by which I mean the way in which our products will reach the end user. A fast moving consumer product such as a packet of sweets will need to be widely distributed to retailers, as they will need to be in the appropriate place at the time the consumer wants to buy. We need to consider the buying decision of our end user and work back from this point. For the exporter of those sweets, a typical route to market will be through wholesalers to the ultimate retail outlet.

In thinking strategically about pricing, it’s that ultimate end user who really matters, even though we may never meet them. We need to carefully research the current market, and in particular the ultimate prices of any competitive or comparable products.

Next, we need to decide how we want our product to be ‘pitched’ to the end user, as this will help to determine our pricing strategy. Is it just another packet of sweets, a bit like all the others? Or are we offering something exciting, new and different? At this point, we may need a healthy dose of reality. It’s quite normal for a business to be excited and perhaps a little over-optimistic about how our product will be perceived.

If our product genuinely is in the legendary ‘better mousetrap’ league (you probably know that old saying that if you build a better mousetrap then the world will beat a path to your door), then  we can consider what is called ‘creaming’ or ‘skimming’. This means that we are deliberately going to set a price that is higher than comparable products because we want to stress the value of the unique features and their consequent benefits for the buyer. This is a technique that is often used for technology products such as mobile phones, digital cameras and computer equipment. The newest product will be a ‘must have’ for a section of the market, and a high price will not deter these customers. In fact, the pricing needs to be set high in some markets in order to confirm the perception that it is in fact a prestige product.

On the other hand, many products are pretty much like others that are already available with only very marginal differences. If this is really the case, we need to be honest with ourselves about it, there’s no shame in a ‘me too’ product, but the chances are we will have to approach pricing in a totally different way. If it’s a competitive market and our aim is to grab some market share as quickly as possible, we may need to adopt what is known as ‘entry pricing’. In this situation, we are going to use a price that is relatively low compared to competitive products in an attempt to entice our target customers away from their previous choice. We may want to do this as part of an initial promotion, and use low price, advertising and other promotional opportunities such as point of sale to grab the consumer’s attention. Such a strategy is not without risks, and acknowledges the experience of many exporters that there is a relatively high cost to acquiring new sales. The expectation will be that buyers will repeat their purchase and perhaps recommend the product to friends. How relevant any of this is depends very much on the nature of the product, who uses it, how they use it, and how often they will buy.

The biggest risk with entry pricing is that it can cause buyers to undervalue the product, and that may make it difficult to drive prices up to planned levels in the longer term. Methods of minimising that risk will vary in different markets, but may include advertising and point of sale material that refers to the ‘usual’ price and stresses the limited time of the introductory offer. Depending on local practice, introductory offers such as free accessories, bigger quantity or a voucher against a future purchase might all be preferable to simply lowering the price.

Marketing text books describe a number of other pricing strategies that can have their use in certain situations. The important thing for an exporter planning to enter a new market is to have a long term expectation of eventual price levels that is based on careful research and a realistic appraisal of the market and the product’s competitive position. Returning to the discussion on costs in the previous article, the exporter needs firstly to compare the long term price potential with what he already knows about his own costs, and make a decision about whether there is a viable opportunity or not.

With a price strategy in plan, as part of a wider overall strategy, the exporter is now able to negotiate with potential intermediaries in the market, such as distributors.


Written on 28th March 2013 by Tim Hiscock, S&H LLP Associate

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