Why is an international pricing strategy essential?
According to Dr. Eckhard Kucher, the primary objective of an international pricing strategy is to maximize total profitability across countries, while reducing the opportunity for potential global issues to arise. One such issue is parallel trade, where identical products are sold at significantly different prices in different countries, and therefore traded without approval of the owner. The threat of such parallel trade is especially prevalent in intellectual property-intense industries such as pharmaceuticals. In an effort to prevent this, a successful international pricing strategy should maintain an optimal price that is equitable with the consumer’s perceived value of a good or service.
Finding the optimal international pricing strategy for your business:
A number of different international pricing strategies exist, so it is important to find one that is the best fit for your particular business model. Below, we have summarized some of the most relevant characteristics of each.
- Penetration Pricing: The primary focus of this strategy is entering a new market and obtaining significant market share with a low price upon introduction of your good or service. You should ideally have the financial stability to face reduced profit margins for a period of time before economies of scale are established.
- Flexible Pricing: This strategy works best when your good or service appeals to a multitude of consumer groups in the same market, where a different price is optimal for each group. For instance, some segments may place higher importance on quality and accept a higher price point, while another segment may be seeking the greatest value for their money and therefore not willing to pay a premium. This strategy should be employed when there is demand for your product in nearly every corner of the market, whose unique needs can only be satisfied through flexible pricing.
- Example: A company that may choose to utilize this strategy for international expansion is Levi’s. They offer jeans through luxury retailers priced as high as $278, while they also distribute through lower-end department stores with a pair of jeans starting around $40. This flexible strategy allows them to cater to segments of the market that place significant importance on premium quality and brand image, while still servicing those looking for value at a low price.
- Static Pricing: When a company faces high costs upon entering a new market, they may be inclined to implement a static pricing strategy, or one single price throughout a market, due to its ability to reduce administrative and operating costs. However, this can be a risky strategy due to competitors’ ability to easily identify and beat your pricing – in an industry with low switching costs, this could prove detrimental to your ability to establish significant market share.
- Price Skimming: This strategy is optimal for a business introducing a good or service that has incurred high costs and has intentions of efficiently and effectively gaining a return on investment. A high price is charged initially, but is likely not sustainable in the long-term as competitors begin to understand and replicate similar offerings at lower prices. This practice is common in high-tech industries where extensive and costly research is conducted during the inception of a new product.
- Example: Apple charges high prices for new iPhone models in each market they enter, until competing brands introduce comparable technologies and prices are eventually driven down.