4 factors that Affect Global Pricing

Although there are many factors that affect global pricing, there are four factors that stand out as most important. First, the nature of the product or industry gives the power in flexibility based on the product. Price flexibility is essential in competing with rivals in a foreign industry. Flexibility stems from a product that is specialized or that gives a technological edge. When the global market has few threats, little price adjustment is needed. As competition and threats increase, the ability to raise and lower prices is essential to competition. #skimming #predatory pricing

Second, the location of the production facility affects the global pricing of a company. When a company exports to their foreign market, the ability to have price flexibility is low. This is not the case when companies manufacture in the global market they are penetrating due to the ability to absorb currency rate fluctuations. An example of this is Mazda in the 1990’s. The refused to open a manufacturing plant outside of Japan. As Japan’s currency appreciated against the currency of the import countries, the company began to lose profits.

Third, the distribution system is very important in global pricing. This is especially true when the company is exporting to the global market they are penetrating. A company that distributes its products through its own overseas subsidiaries is able to control the final price of the product much more. This allows them to be able to adjust prices quickly in response to increased competition.

Fourth, foreign currency differentials plays a large factor in the setting of global pricing. Inflation, exchange rate fluctuations,  and price controls play a large role in hindering the entry to a market. Because the currency of a company appreciates and depreciates, a company should be able to have a flexible strategy in pricing as sometimes their currency may switch from being undervalued to being overvalued, or visa versa.

-Dan

The Importance of Having a Viable Global Pricing Strategy

We have discussed what a global pricing strategy is and the difficulties that are inherent with a global pricing strategy. This post will discuss the importance of having a viable global pricing strategy. Most importantly it is essential for a firm to have a viable global pricing strategy because it directly affects their bottom line. Firms have to take into consideration all of the difficulties and costs associated with operating internationally. There are many global pricing strategies to choose from, so firms need to choose one that is aligned with their mission, goals, and objectives. No matter which strategy a firm chooses their overall costs will be higher.

If a firm enters into a domestic market with a price penetration strategy than they will have to keep costs minimized in order to make a profit. That should not be too difficult because they can use economies of scale and efficient distribution channels to do so. However, if a firm enters into a foreign market with a global price penetration strategy they will have to keep costs even lower if they want to make a profit. This is because of the additional costs that a company incurs when exporting their goods to a foreign market. In addition to the exporting and transportation costs the firm will have to price their good lower than any other good in their market if they want to gain a lot of market share. They are at a distinctive disadvantage to the domestic producers because their costs are higher and prices lower thus making their margin smaller. It is important for a firm to know exactly how they want to price their goods or services compared to their competition to know what strategy they should pursue.

That was just a general example of what it would look like for a firm to choose penetration pricing as their global pricing strategy. As you can see, their margins were squeezed because of the higher costs and lower prices of their products. However, it is possible for a firm to combat these higher costs by producing their products in the foreign country. They could set up their own manufacturing plant or buy a company that already exists in the foreign market. After doing a PESTLE analysis of the foreign country they would be able to know if moving production there would even be a good idea. If in fact it is a viable marketplace to manufacture their goods then they should do it. This would allow them to have better competing prices, directly affect their global pricing strategy, and most importantly improve their bottom line.

There are many factors that go into having a good global pricing strategy, and there is no one right answer for the best one. In fact, firms need to have different global pricing strategies for different foreign markets because of all the political, economic, technological, cultural, and legal differences between countries. Remember, the bottom line will be directly affected depending on the global pricing strategy used so do the research and due diligence necessary before implementing a new strategy!

Stay tuned for our next blog!

-J-Man

Global Pricing Difficulties

When creating a global pricing strategy, there are many difficulties that occur that do not occur with domestic pricing. In this week’s blog we will overview a few of the difficulties as well as their effect on the global company due to global pricing.

First, a global pricing strategy may have difficulties when there is fluctuation of the international currency of the country that they operate in. The appreciation or depreciation of domestic currency due to exchange rates in the foreign market make the financial forecasts of the company much more difficult to predict as well as increase the associated risk of the venture as a whole. The exchange rates may also inhibit exports to the countries with a poor exchange rate due to the immediate decrease in value for the good. This affects overall revenue, as pricing is less fixed globally than it is domestically.

Second, the company may have to increase their prices due to the tariffs associated with their export good. This added costs, the tariff, forces the company to have a reduction in profit for the good if there is not an increase in the price. The company is forced to increase the price to make up the difference in the loss from the tax and try to recover lost revenue.

Third, the access to credit, although decreasing, is still a problem. Companies are having a difficult time gaining credit in foreign companies to invest further capital into their companies. This is especially true in the BRIC companies as they are less developed than other countries. Companies, in turn, have to increase prices to be able to invest into the company.

Fourth, regulation and compliance with the international laws create difficulties for the company to establish prices. A company penetrating a foreign market needs to ensure that they are meeting the local regulations in pricing as well as ensure that they are knowledgeable in the local laws in pricing. An example of this would be the anti-dumping laws that many countries employ. Many countries do not allow such aggressive pricing strategies.

Lastly, there seems to be a lot of pressure in developing the pricing strategy based on slow economic growth, recessions, public pressure, and political pressure. With all these factors combined, the ability to successfully meet the requirements and needs of all parties involved while also setting the price at a point that makes a profit is very difficult. The slow economy and maturing markets in many international countries create an added importance on pricing in the market as demand is either slowing or declining. To make a profit, the company needs to ensure that they are setting the price low enough that it avoids disruption in the target market.

While these are not all of the difficulties in the global market based on pricing, these are some of the most important. Domestically, there are fewer barriers to setting prices. For a company that is expanding globally, many more things have to be taken into consideration when given the task of setting a price.

-Dan