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!