Is the Price Right?

Is the Price Right? Carrying out an International Price Review

In previous articles, we have looked at the challenge of pricing for international markets. For several reasons, prices need to be reviewed regularly and adjusted. What are the key criteria?

Pricing is a nebulous issue, a curious mixture of science, arithmetic and black art. In many ways it’s more challenging in international trade than in our own country as some of the factors we need to consider are cultural, and these can be particularly difficult to evaluate.

Pricing should always be determined as an essential part of marketing strategy, and therefore when we adjust our strategy, we ought to be reviewing and (when appropriate) revising prices.

Depending on the way that our products or services are distributed, there may be very good reasons to either avoid changes or minimise the number of changes we impose. For example, our distributors or re-sellers may have contractual rights to a minimum period of notice, or other conditions that restrict price changes. This is usually a very reasonable thing that was agreed to practical reasons, for example if the distributor publishes a large printed catalogue with price information, or regularly agrees prices over a fixed period with their customers.

So we should always be starting from a position where we know how our current prices were set, and the reasons why. Chances are, we are considering price changes because one or more of the factors that went into setting those prices have changed. This could be our own costs (either specific to the product or general), competitor pricing (or other competitor activity), increasing or decreasing sales or a change in our market share.

We may also want to change our prices because of a change in our marketing strategy. If we introduced a product to a market at a low price in order to gain customers (penetration pricing), that was a decision that was intended to be temporary, and we should know when this has achieved the objective, and be prepared to adjust our prices upward. Conversely, if we set high prices, perhaps to take advantage of a unique technological advantage (price skimming), then we should be aware of changes in the market that mean that advantage is no longer valid, and consider the case for lowering our prices.

When carrying out a price review, we need to consider:

  • When the current prices were agreed
  • Changes in costs (remember to consider export-related costs such as freight, documentation etc.)
  • Changes in sales volumes since the last revision
  • Market trends
  • Competitor activity
  • Changes to our products

Traditionally, price reviews almost always implied a price rise, and this is still usually the case. However, the shift of manufacturing to lower waged economies over the past thirty years has meant that the prices of many consumer goods are now lower in real terms than they once were. It has become much more common for manufacturers to find that they either cannot impose a price rise, or may even need to cut their prices due to market trends.

Nevertheless, an exporter shouldn’t be afraid of increasing prices when circumstances justify it. In a competitive market, the exporter may wish to try and mitigate the effect on business is some of the following ways:

  • Give distributors or other buyers sufficient notice to adjust their own prices. This may lead to a short term surge in demand as buyers seek to avoid the increased cost by buying early
  • Introduce improvements to the product, packaging, description or after sales service in order to adjust its market positioning
  • Promote temporary offers

Exporters should also take care to consider the product life cycle. Every product has a limited life-span, even if we are reluctant to admit it. A business typically seeks to maximise profit during the peak period by keeping prices high. As market share declines, the business may decide to stop investing in product development and improvement, and may over time decide to lower the price to acknowledge the declining competitive position of the product. Bear in mind also that a product’s life cycle may be quite different in different markets. This is particularly true for technical products, because the technological infrastructure may profoundly affect their suitability.

We need to consider the affect that changes in one market may have on another. This is increasingly important in the age of the internet, and in particular with consumer goods. As more and more business is concluded online, buyers or end-users in one country are finding it easier to get price information from other countries, and in many cases it’s straightforward for them to buy from a cheaper supplier abroad.

We also need to bear in mind all legal restrictions. In particular, there are very strong regulations against what is known as “dumping.” This is where a suppler sells goods to another country at an artificially low price, in order to drive out competition. Countries have different rules about this, but in principle any pricing offered by an exporter that is considered to be below their “normal price” may be considered to be dumping if it threatens material injury to a competitor in the domestic market.

Strong & Herd LLP are introducing a new series of training seminars on export marketing and sales management, this will include a brand new event on export pricing, contact us for more details

Article written by Tim Hiscock - Export Development & International Trade Advisor at Strong & Herd LLP

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