How to set your prices for foreign markets

When approached by potential foreign partners, it's tempting for entrepreneurs to just give them a slightly revised version of their local price structure. But to avoid “paying” to sell their products abroad, new exporters should have a separate international pricing strategy.

The key? Taking your time

Before you begin a cost analysis, ask yourself the following strategic and tactical questions:

• How do you want to position yourself on price vs. the competition?
• What are your best options for reducing and increasing costs (supplier flexibility, etc.)?
• What is your potential sales capacity in the market?
• Can the product or service be modified to raise or lower its price?
• Are there a lot of potential intermediaries in the target market?
• What main variables determine price on the target market? Is there heightened price sensitivity on the target market?
• What are the economic, exchange rate and trade liberalization trends? Learn more about foreign exchange transactions and services.

Each of these factors will affect the price of your product or service on the target market.

Pricing factors

After you examine those basic pricing considerations, create a table to identify every factor that could affect your prices. There are a number of internal and external pricing factors you need to research thoroughly.

• Standard internal factors
  • Raw material costs
  • Labour costs
  • Fixed costs
  • Administrative costs
• Internal factors related to the export market
  • Development costs
  • Translation and adaptation costs
  • Patent costs and legal fees
  • Business development costs
  • Advertising and marketing costs
  • Selling expenses
  • Packaging expenses
  • Brokerage fees
  • Transportation costs
  • Communication costs
  • Insurance and warranty costs
  • Financing costs
  • Storage costs
  • Desired profit margin
• External factors
  • Net disposable income
  • Competition
  • Regulations
  • Economic climate
  • Political climate
  • Initial product life cycle
  • Expected sales cycle
  • Intermediaries and value chain
  • Market segment perception of the new product or service
  • Foreign perception of the product or service
  • Intellectual property, trademark and patent compliance
  • Barriers to entry
  • Market maturity
  • Communication infrastructure

Main pricing approaches

Pricing approaches vary by organizational culture, product maturity and target market:

Cost plus approach

This is by far the most common approach. It consists of analyzing your fixed and variable costs and adding your direct export costs (packaging, transportation) and selling costs. It's simple, but it does not always ensure that the business will make money on the target market. It is generally considered the first step in the international pricing process.

Price matching

Another popular approach whereby you basically copy your main competition and match prevailing market prices.

Price testing

After carefully analyzing all internal export costs, the business sets a price based on executives' perception of the product and the competition on the new market and tests out the strategy. This is feasible when it is relatively easy for the business to make price adjustments (custom manufacturing, competitive bidding, etc.).

Uniform pricing

With this approach, you have a relatively standard price in all territories, regardless of the impact on the local market. Businesses in the service sector, software industry and online sales often have to use this approach.

Integrated pricing method

Depending on which pricing approach you choose and what pricing factors are at play, you may have to consider the following:

• Before you can run an accurate costs analysis, you must have effective management and control systems in place so you can collect reliable data. There are simple, inexpensive accounting tools available that can help you gather the information you need.
• You must determine the cost of the export product and get information about the market. Once you know the target market and have management tools, you will have the strategic information you need to determine exact internal export costs by accounting for external factors.
• Based on this analysis, you can then make informed strategic decisions, and the price structure (pricing strategy) will fit right into the business's marketing mix for the target market.

Deciding whether to adapt your uniform price stricture

Few businesses starting out in the export market think about this fundamental issue. Should we have the same price structure across all markets? The answer to this strategic pricing question is very complicated and may be more of a strategic choice than an economic imperative. Here are the main advantages of a uniform price structure and a variable price structure.

Advantages of a uniform price structure:

• Better control over grey markets, i.e., the sale of products through channels not authorized by the exporter.
• Better pricing strategy coordination vis-à-vis the competition in the same markets.
• Easier sales forecasting and operational planning.

Advantages of a local, variable price structure:

• Ability to respond quickly to price fluctuations and competitor attacks.
• Partners have some leeway to take the lead in their markets.
• Accounts for local consumers' ability to pay and allows for timely price optimization.
• Better attuned to local economic conditions.

How often to make price adjustments

Once you've set your prices, how often should you revise them? This is something you need to consider carefully in order to strike the perfect balance between price and the demand generated. A number of factors may influence how often you change your prices:

• Competition
• Season
• Economic climate (fundamentals)
• Exchange rate fluctuations
• Life cycle phase
• Updates and innovations
• New features
• Promotional campaigns
• Cross-selling opportunities

Controlling the final international price

This is key, especially if you use a third party to develop a market. Whether you work with an agent, a rep or a distributor, you can always suggest the resale price.

Desjardins can help you do business internationally, maintain good relations with your foreign customers and suppliers and manage your business risks. Contact Desjardins International Services