The role of Price

Price is an integral part of a product – a product cannot exist without a price. It is difficult to think or talk about a product without considering its price. Price is important because it affects demand, and an inverse relationship between the two usually prevails. Price also affects the larger economy because inflation is caused by rapid price increases. Yet among the marketing decision variables, price has received the least attention.“The export-pricing literature is characterized by a distinct lack of sound theoretical and empirical works.” Price, however, is no more important than the other three Ps. One should not forget that price should never be isolated from the other parts of the marketing mix. Price should never be treated as an isolated factor.

Price is often misunderstood, especially by many executives. Consumers do not object to price.What they object to is the lack of a relationship between the perceived value of the product and the price being charged. They want a fair price, and a fair price can be either high or low as long as it reflects the perceived value of the product in question.Too high a price causes consumers to resist making a purchase because the value is not there. Price can be absolutely high from a cost standpoint yet relatively low from a demand standpoint, in relation to its value and other features.Therefore, price must be lower than the perceived value or exactly reflect the perceived value. For example, a markdown may be needed for damaged or obsolete goods, but a “high” price may appear to be quite reasonable when extra value is added to a product. Consumers around the world do not mind a high price if they indeed “get what they pay for.” However, this is often not the case.

Pricing Decisions

Pricing is one area of marketing that has been largely overlooked. Of the four Ps of marketing, pricing is probably the one that receives the least attention, especially in an international context. One problem with an investigation of pricing decisions is that theories are few and vague. Most of the theories that do exist reduce the large number of pricing variables to a discussion of demand and supply. Because the few theories are inadequate, many pricing decisions are based on intuition, trial and error, or routine procedures (e.g., cost-plus or imitative pricing).

When pricing a product, a company must consider a number of factors. The factors of cost and supply are always relevant – domestically and internationally. Other factors such as exchange rate, tariffs, and culture are more applicable in the case of international marketing.

1) Supply and demand

The law of supply and demand is a sound starting point in explaining companies’ price behavior. A common practice is to reduce the large number of pricing factors to two basic variables: demand and supply. In an efficient, market-oriented economy, demand is affected by competitive activity, and consumers are able to make informed decisions. Price, as a measure of product benefit, acts as the equilibrator of supply and demand. On the supply side, suppliers compete for consumers’ limited funds by constantly cutting costs and enhancing product value. On the demand side, any increase in demand is followed by a higher price, and the higher price should in turn moderate demand. The higher price, however, usually induces manufacturers to increase the supply, and more supply should lead to a reduction in price which will then stimulate demand once again

The demand–supply model of pricing seems to work best with commodities under a monopoly situation. OPEC, an oil cartel, once controlled the supply of oil so tightly that the cartel was able to push oil prices up sharply. The demand remained high for a period of time because consumers were unable to adjust their driving habits immediately. In the long run, however, high prices curbed excessive demand, and oil prices tumbled during the mid- 1980s. The law of supply and demand, in this circumstance, operated in the predicted manner. The moral could be that even a monopolist cannot keep on increasing prices without eventually reducing demand. Unfortunately, consumers have also adjusted their behavior when prices improve by embracing SUVs and fuel-inefficient vehicles, thus allowing OPEC’s control on supply to boost price in the early part of the twenty-first century.

However, this pricing model based strictly on demand and supply is oversimplified. The straightforward relationship between supply and price can be affected by several factors. Numerous products have been so differentiated that supply alone as a factor is essentially irrelevant. If a product has a distinct, prestigious image, price may become secondary in importance to image. For such a product, supply can be reduced and price increased without curtailing demand. Waterford Glass became the bestselling fine crystal in the USA by carefully nurturing its “posh image” as well as by controlling the supply.Waterford held down volume while maintaining premium prices. According to the company, there is no advantage in owning a product that anyone can buy.

Because demand-and-supply analysis can only broadly explain companies’ price behavior, it is necessary to consider other relevant factors that affect demand or supply or both, and that ultimately influence pricing decisions.

2) Cost

In pricing a product, it is inevitable that cost must be taken into account. British Airways at one time blindly matched the competition’s prices without carefully considering its cost structure. By instituting carefully considered restrictions on discount seats, the company was able to increase its yield significantly. 

The essential question is not whether cost is considered but rather what kind of cost is considered and to what extent.The typical costs associated with international marketing include: market research; credit checks; business travel; international postage, cable, and telephone rates; translation costs; commissions, training charges, and other costs involving foreign representatives; consultants and freight forwarders; product modification; and special packaging. 

For one school of thought, the thinking is that export price should be lower than home price because the home market actually gains in its overhead expenses by spreading these costs over an expanded production volume. Furthermore, a low price may be necessary, at least at the beginning, to penetrate a foreign market.

The second school of thought, however, argues that the cost-plus method (i.e., full cost) should be used in pricing a product for the overseas market. All costs – including domestic marketing costs (e.g., sales and advertising expenses, marketing research costs) and fixed costs (e.g., research, development, and engineering) – must be paid for by all other countries. As such, the company begins with a domestic price and then adds to its various overseas costs (e.g., freight, packing, insurance, customs duties). This pricing practice, with its high degree of centralization, is also ethnocentric. In effect, with an allowance for transportation costs and tariffs, the same price prevails everywhere in the world. Although the method is simple and straightforward, it is far from being ideal, because it is easy for the price to end up being too high.

Traditionally, Mercedes-Benz used the cost-plus method when pricing its cars, making engineers insensitive to costs.The company found that its costs were 30 percent above Lexus.Now the company has shifted toward setting prices according to the competition. Engineers and plant managers are required to meet the market-driven target price.

A number of international marketers use marginal- cost pricing, which is more polycentric and decentralized.This pricing method is oriented more toward incremental costs. An implicit assumption is that some of the product costs, such as administration costs and advertising at home, are irrelevant overseas. In addition, it is likely that researchand- development costs and engineering costs have already been accounted for in the home market and thus should not be factored in again by extending them to other countries.The actual production costs plus foreign marketing costs are therefore used as the floor price below which prices cannot be set without incurring a loss. Japanese companies often rely on this type of pricing strategy to penetrate foreign markets, as well as to maintain market share. For the Japanese, breaking even is regarded as a success. The Japanese are thus willing to sacrifice profit in order to keep their factories going.

The incremental cost method has the advantage of being sensitive to local conditions. Subsidiary or affiliate companies are allowed to set their own prices.A potential shortcoming in using this method is that, because research-and-development costs and the costs of running the headquarters’ operation must be borne solely by the home-country market, full cost may not be adequately taken into account by overseas subsidiaries.

In the long run, it is dangerous to be price competitive without being cost competitive. Grundig, for example, tried to gain market share in the VCR market by lowering its higher priced product model, only to realize that it was losing $40 for every unit sold. There is, however, a possible solution for firms with high costs resulting from high tariffs, transportation costs, and high manufacturing costs at home.They have a choice of either producing their products in the overseas market or granting licenses to local producing firms there.

If a company is unable to control costs or to price its product sufficiently high to cover costs, sooner or later the company will be forced to leave the market.