When selling products/services in foreign markets, it is crucial that those in charge of setting the prices of these products/services understand the numerous factors that go into setting these costs. For example, some of these factors include…
- Consumer perceptions, expectations and ability to pay.
- Need for the product in the market.
- Market structure.
- Market growth and whether or not the product is elastic or inelastic.
- Product adaptation or standardization.
- Shipping costs.
- Product lifecycle.
As one can see, there is a lot to think about when doing business in a foreign market. However, these decisions can be broken down and narrowed into four major strategies that will help those responsible for setting international prices make the right decisions.
Let's use the Pricing Strategy Matrix to help explain the four different types of avenues a company can go down.
- Economy – Low Price, Low Quality – This type of pricing strategy is interesting in that it tends to work well only when a company has low overhead and other costs compared to competitors. This low cost will allow the company to set discounts on price and gain more market share. This strategy could be good in markets where the customers are not wealthy. However, it could be a bad move for companies who cannot meet the sales volume necessary to remain profitable.
- Penetration – Low Price, High Quality – This strategy will help companies penetrate the market quickly, as customers will be intrigued to buy a high quality product at a low cost. The theory is that once companies gain a large portion of the market share, they will start to increase prices and move towards a premium pricing strategy. Companies who use this strategy can increase their sales volumes fast enough to achieve economies of scale and lower their costs. There are, however, negatives to this strategy. Due to the price being set low, this may have a big impact on margins and if they are too low, then it could send the perception to customers that the brand is “low quality.”
- Price Skimming – Low Quality, High Price – This strategy aims to generate a high amount of revenue from the small amount of people who are willing to pay this price for a low quality product/service. This strategy is used in markets where a high number of new products are launched. An example would be the book market. A new book will be sold in hardback form for a high price and then for paperback later on down the road. This is a good move for those who are looking to ensure that their production costs are covered, but you may run the risk of losing customer loyalty and interest in the brand.
- Premium Pricing – High Quality, High Price – Use this strategy when you have high production costs, but a unique product/service that you can charge a premium on! This strategy can allow companies to achieve a high profit margin on their products and can enhance the identity of the brand with the high price tag, but there are some disadvantages to this strategy. First, your product/service will be under fire from other companies who want to undercut your prices. Second, it is crucial that the company forecasts sales and try to meet demand. If you overproduce, you risk the production costs negatively impacting profit margins.
Good luck on your international pricing venture!