Determinants of Export Price Decision
Essay by Atiqah Nasimuddin • April 18, 2018 • Essay • 1,226 Words (5 Pages) • 814 Views
Page 1 of 5
- To discuss the effect of Five (5) determinants of export price decision
- The exporter has to evaluate all these factors: cost, market conditions and customer behavior, competition, legal and political issues and general company policies. Below are the main five determinants of export price decision briefly explained.
- Firstly, cost is one of the major factors when it comes to determining the price of the goods. There are both direct and indirect costs when it comes to the export pricing of the products. Added costs in exporting includes additional paperwork, legal requirements, transportation and investement. Direct cost can be traced to specific cost objects such as direct labor, piece rate wages and raw materials. However, when it comes to indirect costs examples these would include the cost of quality control, supervision salaries and insurance. These factors are considered as the organization’s production overhead however it can’t be accurately attributed to specific costs that occur even though a particular activity or product is not created and due to this, it is too complicated to come up with a cost-effective methodology. It is helpful for the exporter to be able to estimate the cost and predict how the other competitiors will react to the set price. With this knowledge in hand setting a price that would discourage or keep-out new competitors from entering the industry however now e-trade tends to lower cost differentials between markets
- Secondly, market conditions and customer behavior. The upper limit for prices is determined by the nature of the market. The purchasers, based on the value placed on the products, set the price ceiling. When it comes to setting the price for the product it is also attempting to establish upcoming demand. The value should be translated into monetary terms correlating to the product utility. A market can be stratified when it comes to estimating the demand. This works by approximating the amount of customers that would purchase the product when the price is set on different rates. Selecting the right strata to set the pricing according to the utility of the product will depend on the exporter. Having test market pricing, asking people, statistical analysis of past prices, and different types of barter experiment or comparison to substitute products may determine the value. The factors such as economic consideration, tradition and customs and demographic determines how the foreign market evaluates the product.
- Thirdly, the competition when it comes to a foreign market it is much more harder to predict as to compare to domestic market. With competitive conditions, this will help determine what the actual price should be set at, as for how cost and demand conditions has made the price floor and ceiling for the product. Sales volume attainable by an exporter will be affected by the prices of other competitors’ prices. The options to go with pricing it at a lower, same or higher rate as to compare to the competitors. An exporter can ‘shelter’ itself from competition by having a brand prominence with high brand equity, product distinctiveness and many more. The pricing freedom will depend on the how significant the barriers are. The conditions of oligopoly is when the product is not differently sufficient to give the exporter the monopoly position in the market and therefore has to evaluate the most appropriate price between the price floor and the ceiling. When it comes to pure competition the exporter has to set the price as it just enough to cover the cost to make sure marginal producers can still run their business. This is known as the price is set by the market place. This is different when it comes to a monopolistic competition, the exporter will be able to have control on the pricing of the product, as there isn’t any similar competitors or substitute products in the market. Overall, the more significant the barriers, the more pricing freedom.
- Fourthly, when it comes to legal and political regulation they do differ from each country and with that, consequently affecting the prices able to charge for the product. These regulations are made to avoid a company to setting their prices strictly based on the economic and needing to consider the legal and political factors in the foreign country. In some cases, the government does monitor and is concerned between the social benefits of the purchase and the amount paid. If the government sees the product as non-essential imports then the government may reject the grant adequate foreign exchange even though the customers are willing to pay a high price. In addition to that, pricing guidelines as a point of reference for granting foreign exchange to the buyer of foreign merchandise for some foreign officials.
- Lastly, general company policies and marketing mix do affect the export pricing based on the current and past corporate organization, managerial policies and philosophy. Both short-sun or long-run decisions should be seen as interdependent and interrelated, however when it comes to certain decisions it is practical to make the decision first as it may be a fundamental factor when it comes to making upcoming decisions. Product considerations and pricing cant be uncorrelated. A product’s characteristic when it comes to price and quality has to taken in consideration by the management, as for how the customers evaluates and view the products. The design, package, nature of product, varieties and quality will not only influence how much the customers are willing to pay but also the cost of making the products.
- To identify and justify the particular export price strategies that were implemented in the game simulation
- The first method we used was penetration pricing. Setting the price sufficiently low to target a wider and mass market. As for how a large volume is the target and this will lower the costs, as due to the mass market production yield and this will make up the profit. The assumption that price is the basis of all sales and that causes the demand for the product to increase and be able to target the mass market.
- After getting our product in the market we used the sliding down the demand curve was strategy, by reducing the prices fast and further than what the company is meant to when potential competition is in view. This wouldn't give other groups to get their products the opportunity to get established as this strategy’s aim is to known as an efficient producer at optimum volume. Companies establishing product innovation usually uses this method as the pricing is emphasis of the market value then moving at a measured pace towards cost pricing. It has to be fast enough to discourage competitors and also slow to gain all the profit. Establishing an entity in the market and recover development costs are the main objectives on this strategy
- Later on towards the end of the game, we used skimming the market. This is done by making the largest profit possible for a short-run then retires from business. This strategy is usually chosen when the business has no permanent place in the market or future. In this method it is usually done by setting the highest possible price for the products during that time of period and not for the long-run position in the foreign market. With using all these strategies our group won the game.
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