Explain the Important Methods of Pricing in International Marketing.
List of Important Methods of Pricing in International Marketing:
- Cost Plus Method.
- Marginal Cost Pricing.
- Differential Pricing.
- Probe Pricing.
- Penetration Pricing.
- Skimming Pricing.
- Competitive Pricing.
Cost Plus Method:
Under cost plus method the price of the product is ascertained by adding the margin of profit, to the total cost of the product. In such a case, the exporter is able to decide the amount of margin he would like to take and can thus accordingly fix the price of the product.
Costs include all the fixed and variable costs including all the special costs incurred in international trade such as special packing, marketing, labeling, transportation, insurance handling, duties, taxes etc. This method may result in high prices for the end-users. This policy is followed in these cases where the exporter has monopoly over the product. This pricing method is quite suitable in case of specialized industrial machines or in the case of project exports. As a result, this method is not very common.
Marginal Cost Pricing:
Marginal cost pricing method is a variation of cost plus method. In case of cost plus method, cost includes all the fixed and variable costs under marginal cost pricing, price is determined by adding a certain percentage of margin to the marginal cost. Marginal cost refers to the amount by which total costs are changed if the volume of output of a product is changed by one unit. It means marginal cost is additional variable cost.
Thus, marginal costing is an accounting technique which determines the marginal cost on the basis of additional variable costs. This technique can be applied in those cases when the fixed costs are already fully recovered on the current volume of output and a decision is to be taken regarding pricing of the additional production.
The firm can increase its profits by selling goods at a price which is at least equal to the additional cost incurred in its production. The advantage is that when the order to supply additional quality is accepted, it would result in increase in the capacity utilization and there would be economies of large scale production.
This would lead to reduction in the variable costs. The benefit of this reduction would be available for the entire production and not just confined to the additional quantity of output.
Differential or discriminatory pricing means charging what the traffic will bear, i.e., charging different prices from different customers according to their ability to pay. The manufacturers generally try to differentiate the product prices for the same product by slightly differentiating the features of the product.
A new entrant to a foreign market, who may not have full knowledge of the market and the nature and strength of competition tries to probe the prospective market by quoting price approximation relating to sales volume and value. Concessions on invoice price may be offered to attract the customer. Cost plus profit and competitor’s prices usually constitute the parameters of probe pricing.
Under this pricing policy, prices are fixed below the competitive level to obtain a larger share of the market and to develop popularity of the brand. Unlike skimming price policy, it facilitates higher volume of sales even during the initial stages of a product’s life cycles. This policy helps in developing the brand preference and is useful in marketing the products which are expected to have a steady long-term market.
Penetration pricing is an aggressive pricing strategy which results in lower profits or even losses during the initial stages. But once the product is established in the market, profit level goes up because of economies of large sale production.
Under high pricing policy, higher prices are charged during the initial stage of the introduction of a new product. The manufacturer fixes , higher price of his product in order to recover his initial investment quickly. This type of pricing is resorted to by an exporter who has gained a strong foothold (a near monopoly position), in a foreign market and has acquired a highly competitive position with an image of a dependable supplier of quality product.
With the help of a well thought out promotion program, emphasizing the value derivable from the product, higher price may be charged to maximize gain. Vanity items or items that involve high research development expenditure for manufacturing and marketing or items that are unique to a particular company or country which cannot be easily copied by competitors are amenable to skimming pricing.
In international marketing a watchful and seasoned marketer always keeps track of the prices quoted by competitors. He tries to adjust and adapt his prices to remain in the market. This type of pricing is known as competitive pricing. This policy is used when the market is highly competitive and the product is not differentiated significantly.