|Broadly speaking, a firm can choose between three alternative policies with regrad to pricing:|
1. A standard worldwide base price
2. A domestic price dan a standard export price
3. A market differentiated price
The standard worlwide pricing (followed by the Swiss maker of Swatch watches) allows the firm to present a global product and include all manufacturing, distribution, and overhead costs. Because cost structures vary form country to country as does economic conditions, the standard worldwide pricing may not allow the firm to be successful in all markets. Such a pricing strategy does not distinguish between the domestic and foreign markets, but considers both the same.
An export price separate from the domestic price can be justified on the grounds that the product is being sold to two different markets. The export price can be lower or higher than the domestic price. A lower price may occur if the exported good is of lower quality or where the research and development costs as well as most other overhead have been recouped from domestic sales. Another reason is to engage in the practise of dumping, which is defined as the sale of a product in an export market at a price lower than normally charged in domestic market. Dumping is a contentious issue in international trade, and many countries have law and policies that bar dumping. In the US, dumping is determined to have occurred whwn imports sold in the Us market are priced either that levels that represent less than the cost of production plus an 8% profit maargin or at levels below those prevailing in the producing country and, in addition, results in injury, destruction, or prevention of establishment of a US industry.
An export price reflects the fact that export operations are more risky, expensive, and time consuming than domestic sales. Often transportation, packaging, insurance, custom duties, and distribution costs add up to a substantial sum, which pushes up the final cost to foreign distributor or final customer. In setting the base price for goods and services to be exported, the key variables are obviously production costs including overhead and out of pocket expenses, these elasticity of demand, the nature and extent of competition, the prestige value of then brand name and product, and desired profit margin. The final cost will determined by the costs of transparation, packaging, custom duties, exchange rate fluctuations, profit margins of intermediaries, government price control regimes, government subsidies, behaviour of competitors, inflationary pressures in the export market, and market conditions. These factors, in turn, are influenced by the purpose of the exporter’s pricing strategy, which might include penetration of a new market, obtaining a satisfactory ore maximum return on invesment, maintaining market share, meeting a specified profit goal, securing the largest possible market share, meeting a specific sales goal, profit maximization, meeting competition, presenting a high-end exclusive image, or charging whatever the market will bear. Managers need to be familiar with the relationship between the volume of goods exported and the cost of the goods. Usually, unit costs decline as the size of output increases because of efficiences that accure through scale economies. Thus, while a firm may initially price a product low to enter foreign, increasing sales volume in turn reduces its costs and may indeed allow it to retain its low price advantages.
In setting transfer prices, the firm must consider the income tax rates, export or import tarrif rates, and rules on repatriating profits in the countries the firm does business in. Among the approaches to transfer pricing are, (I) transfer direct cost, (2) transfer at direct cost plus markup for profit and overhead, (3) transfer at market based price, and (4) transfer at “arms-length” price. No one method is perfect for all situations. Tranfer prices are set at headquarters where managers have the entire picture of the firm’s operations in their perespective. However transfer prices are set, they affect the prices of products and profitability margins.