INTRODUCTION 

Pricing plays a crucial role in international marketing, significantly impacting a firm’s total export revenue and profitability. There isn’t a one-size-fits-all formula for correctly pricing export products. Instead, three fundamental factors shape a firm’s pricing decisions: production costs, consumer purchasing power, and supply-demand dynamics. Production costs set the minimum price for which exporters are willing to sell their products, while consumer purchasing power defines the upper pricing limit. In practice, market supply and demand forces primarily determine prices, with other variables like taxes and duties imposed by different countries also playing a role. These two factors rarely solely dictate prices.

Pricing can be likened to a tripod, with costs, demand, and competition being the three legs. It’s impossible to assert that one of these factors alone determines price, as they are interdependent. The significance of these factors in pricing can be explained as follows:

Role of Costs:

Contrary to popular belief, prices do not always depend solely on costs. While increased costs might justify price hikes, market demand and conditions can restrict such increases. Conversely, surges in demand may lead to higher prices even without cost increases. While cost-price relationships matter, prices often determine the costs that businesses can incur. Businesses tailor products to meet consumer demands and their ability to pay, adjusting cost and quality accordingly. While it’s important not to ignore costs, they serve as only one indicator of the price; it’s essential to consider demand and competition.

Demand:

Demand is another critical factor in international pricing. Product demand hinges on how well it’s received by consumers.

Competition:

Competing in foreign markets is equally significant. Intense competition may compel exporters to follow market leaders.

Non-price Factors in Export Pricing Decisions:

Importers consider various non-price factors, including:

1. Confidence
2. Brand image
3. Frequency of purchase
4. Association of price and quality
5. Comprehensive product knowledge
6. Before and after-sales service
7. Continuity of supply
8. Prompt deliveries
9. Settlement of claims
10. Supply of a complete product range
11. Terms of credit
12. These non-price factors vary depending on the product and market, but they often play a more significant role in pricing than price factors.

Marginal Cost in Export Pricing

Export pricing based on marginal costs ensures that at the very least, direct costs are covered. Costs can be broadly categorized into fixed costs and variable costs. Fixed costs remain constant up to a certain output level, while variable costs vary with production volume. In marginal cost pricing for exports, the focus is on direct or variable costs. This approach is advocated because if manufacturers can recover their direct costs, including those related to export operations, they can export without negatively impacting overall profitability. Profitability in export operations should be assessed concerning marginal/direct costs, not average costs. Export pricing should ideally contribute towards covering fixed costs. Several reasons support the use of marginal cost pricing in exports:

1. Export sales are additional and should not carry overhead costs recovered from the domestic market.
2. Products from developing countries may be less known in foreign markets, necessitating competitive pricing for market acceptance.
3. Low prices can expand markets in countries with low national income, where price often outweighs quality.
4. However, using direct costs for export pricing may lead to different prices for domestic and foreign buyers. To recover fixed or overhead costs, exporters can do so either from the domestic market or by adding extra costs to products that can bear them.

Feasibility:

The feasibility of adopting marginal cost pricing depends on factors such as a sizable domestic market, mass production techniques reducing the gap between full and marginal costs, and the market’s capacity to accept higher prices. It also assumes that increasing export production does not significantly raise overhead costs.

Limitations:

There are limitations to marginal cost pricing:

• Exporters may struggle to raise prices if importers are used to low prices.
• It may not apply to industries heavily reliant on export markets with minimal overhead costs.
• Marginal Cost Sets the Lower Limit: While marginal cost is used as the basis for export pricing, it doesn’t mean that only direct costs should be charged. Marginal cost establishes the minimum price without jeopardizing overall profitability. The long-term goal should be to recover both direct and fixed costs, requiring firms to have accurate information on foreign market prices.

Disadvantages:

Disadvantages of marginal cost pricing include the perception of developing countries dumping goods in foreign markets, inter-exporter competition leading to undercutting, and the risk of losing markets if prices rise after consistent low pricing.

Elements of Costs for Export Pricing Quotations

A thorough cost analysis is necessary to determine export prices. You must consider export-specific costs such as special packaging, handling, credit, collection costs, and documentation costs. However, costs primarily incurred for the domestic market should not burden importers. The following outline various cost elements for export pricing based on marginal costs and full costs:

I. Export Pricing Based on Marginal Costs

1. Direct Costs

       a) Variable Costs

• Direct material
• Direct labor
• Variable production overheads (e.g., special dies and jigs)
• Variable administration overheads (e.g., export clerk’s salary)

1. b) Other Direct Export-Related Costs

• Selling costs (advertising support to foreign importers)
• Special packing, labeling, etc.
• Commission to overseas agents
• Export credit insurance
• Bank charges
• Inland freight
• Forwarding charges
• Port charges
• Export duties (if applicable)
• Warehousing at port (if applicable)
• Documentation and incidents
• Interest on funds involved/cost of deferred costs
• After-sales service, including free parts supply
• Consular fees
• Pre-shipment inspection and loss on rejects
• After-sales service

II. Export Pricig Based on Full Costs

1. Direct Costs as listed in Section I
2. Freight
3. Volume or weight (whichever is higher)
4. Insurance
5. Fixed Costs/Common Costs

• Production overheads
• Administration overheads
• Publicity and advertising (general)

This breakdown shows that under marginal cost pricing, the export price sets the lower limit, considering all costs directly related to exports. If we grant export incentives, the incentive amount decreases the lower limit

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