EXPORT PRICING OBJECTIVES AND FACTORS INFLUENCING THEM

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1 EXPORT PRICING OBJECTIVES AND FACTORS INFLUENCING THEM Gabrielė Snieškienė 1, Jūratė Pridotkienė 2 1 Kaunas University of Technology, Lithuania, gabriele.snieskiene@ktu.lt 2 Kaunas University of Technology, Lithuania, jurate.pridotkiene@ktu.lt Abstract Pricing is recognized as one of the most important tools to achieve a successful export operation. The starting point in every pricing effort is the process of creating pricing objectives. Pricing objectives are the strategic and economic goals desired by management in pricing the product. Pricing objectives constitute the basis on which pricing methods and policies are formulated. Therefore, a better understanding of the pricing objectives should direct the company s overall pricing process. Any pricing objective must be consistent with the overall organizational objectives, including both short term profits and long term strategic objectives. Export pricing objectives as an integral part of export pricing strategy are influenced by both internal and external environmental factors. Successful realization of export pricing strategy depends on explicit identification of influencing price factors and the congruence of pricing decisions and actions by the company. The article summarizes the fundamental pricing objectives that have been collected from the pricing literature. The most significant external environmental factors and internal organizational characteristics have been determined and their impact on the export pricing objectives has been discussed. Keywords: export pricing strategy, pricing objectives, external factors, internal factors. Introduction Market share occupied by a company, the income it receives, and its profits are determined by the creation of a flexible, constantly changing and adequate to market conditions strategy of export pricing, which also assists to purposefully increase the capability of a company to compete successfully on the international market. Perfecting of the formation of export pricing strategy in companies allows not only to augment the quality of the pricing decisions they make and, at the same time, the effectiveness of their activity in foreign markets, but also expands the possibilities of exporters of the country to increase their competitiveness on international markets, thus affecting the scope of the country s exports. Similarly, Sousa and Bradley (2009) state that the understanding of export pricing strategy is vital because it may have a powerful and immediate effect on a firm s performance. According to Raymond et al. (2001), appropriate pricing strategies are critical managerial decisions for success in foreign markets. Export pricing strategy reflects not only export market factors but also the short and/or long term pricing objectives, which themselves are an indispensable subset of strategic goals of the enterprise. The determination of export pricing objectives is the starting point of export pricing strategies. Pricing objectives are not constant but changing, according to the conditions both within and outside company s environment. Moreover, companies can have more than one pricing objective at a time. This fact suggests that there is not a single pricing objective that serves as a definite benchmark for all situations. Many researchers argue that pricing is a critically important management activity with major strategic and operational implications. Price is the most flexible element of the marketing mix, in that pricing decisions can be implemented relatively quickly and with a lower direct cost than other marketing decisions. No other marketing tool has such a powerful and immediate effect on a firm s sales and profitability record as pricing. The consequences of price changes are more direct and immediate than those of any other marketing mix instrument, as they result in subsequent customer and, in most cases, competitor reactions (Stöttinger, 2001). According Virvilaite et al. (2009), price is one of the most important factors of customers loyalty and satisfaction. Furthermore, many authors have identified the importance of pricing for every company s profitability, mainly because it is the only element of the marketing mix that generates revenues for a firm, while all other elements of the mix are associated with costs. Despite this fact, a wealth of factors influencing prices and the complexity of the price setting process may be reasons pricing attracts surprisingly little research interest. This becomes more apparent in the field of export pricing because additional context factors increase complexity (Myers et al., 2002; Saboniene, 2009; Snieska, 2008). Tzokas et al. (2000) state, that export pricing is an area that is both conceptually and empirically neglected. 248

2 The lack of literature on pricing in export markets is ascribed by Raymond et al. (2001) to the reluctance of managers to discuss pricing issues, the complexity and uncertainty of pricing decisions, the lack of a formal export pricing theory, and/or the idea that the process used for setting domestic prices can simply be applied to setting international prices. But the pricing problems faced by exporters are distinct from those faced by purely domestic firms in that variables associated with both home and export markets must be integrated into managerial decision making. Cavusgil (1996) identifies the nature of product or industry, the location of production facility, the distribution system, the location and environment of the foreign market and foreign currency differentials as five the most important factors influencing pricing for international markets. The pricing of products in export markets is becoming increasingly difficult for managers due to heightened competition, gray market activities, counter trade requirements, additional cost considerations, longer distribution channels, regional trading blocks, the emergence of intra market segments and volatile exchange rates (Myers et al., 2002; Bernatonyte & Normantiene, 2009; Raymond et al., 2001). In addition to this, companies also have to overcome cultural, legal and institutional barriers to become successful (Alimiene & Kuvykaite, 2008; Kersiene & Savaneviciene, 2009; Grundey, 2008). Based on the above arguments, the present research paper tries to contribute to this neglected field by examining the interaction between the export pricing objectives and the external and internal environmental characteristics that influence these pricing decisions. The objective of the paper is to investigate the main pricing objectives that companies pursue in the export markets, and to examine the impact of both the external environmental factors and internal organizational characteristics on these objectives. The research methods used in the article are as follows: systemic, comparative and logical analysis of the scientific literature. Export pricing objectives Export pricing strategy reflects not only export market factors but also the short and/or long term pricing objectives, which themselves are an indispensable subset of strategic goals of the enterprise (Myers et al., 2002). Many researchers consider pricing objectives as establishing essential guidelines for pricing strategy. The determination of pricing objectives is the starting point of pricing strategies (Indounas & Avlonitis, 2009). According to Shipley and Jobber (2001) pricing objectives offer directions for general action. Export pricing objectives constitute the basis on which export pricing methods and policies are formulated (Tzokas et al., 2000). Therefore, a better understanding of the pricing objectives should direct the company s overall pricing process. Table 1 summarizes the fundamental pricing objectives that have been collected from the pricing literature. Table 1. Pricing objectives pursued by companies achievement of satisfactory profits profit maximization achievement of satisfactory sales sales maximization liquidity achievement and maintenance market share increase achievement of a satisfactory market share sales stability in the market market share leadership coverage of the existing capacity target rate of return on investment (ROI) discouragement of new entrants into the market price stability in the market price wars avoidance price similarity with competitors government investigation or intervention avoidance maintenance of the existing customers attraction of new customers creation of a prestige image for the company survival in the long run meet customers requirements cost coverage achievement of social goals determination of fair prices for customers price differentiation Firms may choose to use financial (e.g. return on investment, profit maximization) and no financial or competitive (e.g. matching competition, maintain/increase market share) goals to guide their strategic 249

3 decisions (Stöttinger, 2001). Samiee (1987), Myers et al. (2002) classify pricing objectives as profit and competitive positioning goals. Perreault et al. (2008) suggest to classify pricing objectives into three main groups: profit oriented objectives include pricing to realize a target return on investment or to maximize profits; sales oriented objectives aim to increase sales either in currency or unit terms or to penetrate markets and increase share; status quo pricing objectives include meeting competition or choosing to compete on a non price basis. In terms of their nature, pricing objectives can be divided into quantitative or qualitative. The quantitative objectives can be measured more directly and are related to profits, sales, cost coverage, market share, and production output. However, Avlonitis and Indounas (2004) point out that an excessive emphasis solely on quantitative objectives may even risk the long term position of a firm in the market. The qualitative objectives are hardly operational and describe the relationship with customers, competitors, distributors, the long term survival of the firm and the achievement of social goals. Although these two categories of pricing objectives might seem mutually exclusive, Avlonitis and Indounas (2004) have suggested that there is a hierarchy of pricing objectives where pursuing qualitative objectives (e.g. satisfaction of customers' needs) may further lead to the achievement of quantitative objectives (e.g. achievement of satisfactory profits) as well. Pricing objectives may be categorized into short term and long term too. The short term objectives seek to satisfy specific goals in a short time period (i.e. six months or one a year), whereas the impact of the long term objectives may be realized only after a long period of time. Kehagias et al. (2009) point out that although the various pricing objectives are discussed separately, in practice they are interwoven into a combination that reflects the equilibrium of short and long term objectives that drive a company to profitability and growth. Jobber s and Hooley s (1987) study has demonstrated that concern for profit is a prime motivator for the majority of firms when setting prices. Similarly, Shipley (1981) studied the use of pricing objectives in practice and found that the vast majority of firms pursued profit objectives. Profit objectives typically reflect short term concerns as measured by margins, target returns, and various financial ratios (Shipley & Jobber, 2001). Samiee (1987) found that U.S. and foreign firms ranked satisfactory return on investment, maintenance of market share, specified profit goals, largest market share, and profit maximization as the five most important pricing objectives. Furthermore, findings of Jobber s and Hooley s (1987) study demonstrate that companies who place profit maximization and market share attainment/maximization as prime objectives appear to perform better than their close competitors in these terms than companies who employ other prime pricing objectives. Hornby and Macleod (1996) found that the most profitable firms emphasize market share and profit in their objectives, while less profitable firms regard cash flow objectives as more important. Anyway, all of the types of pricing objectives are related to profit requirements, either directly or indirectly. For example, survival is not possible without short term and long term profits, and all of the other objectives noticed in this article are connected to the generation of either short term or long term profits. Avlonitis and Indounas (2005) found out that the pricing objectives are associated with the pricing methods. Competition related objectives have a bearing on competition based pricing methods such as pricing according to the dominant price in the market and pricing below competitors. Financial objectives, meanwhile, have a bearing on cost based pricing methods such as target return pricing, where the price is determined at the point that yields the firm s target rate of return on investment. It should be noted that firms can have more than one pricing objective at a time. Pricing objectives can be conflicting as well as complementary (increased market share brings increased profits, yet to increase market share the firm may have to experience losses in the short term by undercutting competitive price offers), as well as subject to hierarchical considerations regarding level of importance (Myers et al., 2002). In addition, pricing objectives are not constant. The relative importance attached to some pricing objectives is not invariant over time and priorities may change based on market pressures or organizational 250

4 conditions (Indounas & Avlonitis, 2009). This fact suggests that there is not a single pricing objective that serves as a definite benchmark for all situations. Environment of export pricing strategy Export pricing decisions differ from those made in the home country since each country has a unique environment. Although the exporter will encounter the same types of market forces in the international arena as at home, in each foreign market these forces may have a different impact and a different constellation of components. For example, customers price sensitivity may vary according to time, country, product stage or price range. The environment of export pricing strategy we could define as a uniform entirety of forces affecting the decisions on price, where the effects of factors producing direct and indirect influence intertwine. Export pricing decisions are influenced by both internal (cost reduction, ROI levels, and sales volume requirements) organizational characteristics and external (customers, competition, government regulations) environmental factors. Solberg et al. (2006) state that pricing decisions in the international environment tend to be a function of the interplay between the external, market related complexities that shape firm operations and the capabilities of the firm to respond effectively to these contingencies. Successful implementation of export pricing strategy depends on rigorous identification of influencing price factors and the congruence of pricing decisions and actions by the firm. Marsh (2000) suggests to classify the external environment into macro environment (incorporates elements such as government restrictions, business cycle stage, exchange rate and cultural factors) and micro environment. Cavusgil (1996) summarizes organizational and environmentally specific factors influencing export pricing into five groups of variables: nature of product or industry, location of production facility, distribution system, location and environment of the foreign market and foreign currency differentials. A comprehensive review of the export pricing literature (Marsh, 2000; Stöttinger, 2001; Cavusgil, 1996; Tzokas et al., 2000; Theodosiou & Katsikeas, 2001; Myers et al., 2002; Forman & Hunt, 2005) allows us to categorize all factors influencing export price setting into five distinct groupings, incorporating a number of specific variables each: macroeconomic factors, which include government regulation, exchange rate fluctuations, inflation rate volatility; export market characteristics, such as competitive intensity, market demand, channel length, level of prices in the markets, customer sophistication, negotiating power of suppliers; product characteristics, which include the degree of uniqueness of the product, the degree of a product differentiation, the nature of a product, the stage of a product life cycle (PLC), conditions and patterns of product use, product familiarity of foreign customers, availability of substitutes, qualitative parameters of the product; company variables, such as sales extent, number of employees, experience in exporting, countries exported to, chosen system of distribution, information available, firm s objectives, policies and orientations, production cost, R&D costs, production technology, export marketing costs; management characteristics which include an importance of exporting to the overall company strategy, overall price position of the firm, commitment to the venture. The analysis of influencing factors may provide normative guidelines of the issues that exporters should take into account when setting the export price. It should be noted that in this paper we address only those variables that have been frequently identified in literature to affect the export pricing objectives formulation. The details of these factors and their proposed relationships with export pricing objectives are discussed below. Factors influencing export pricing objectives There are a number of factors which have an impact on export pricing objectives. The pricing objectives of the firm will change within the export market, such factors as competitive intensity, market evolution, and product age change (Myers et al., 2002; Indounas & Avlonitis, 2009; Tzokas et al., 2000; Jobber & Hooley, 1987). One of the most important factors influencing the formulating export pricing objectives is the competitive intensity. 251

5 Export markets are experiencing rapid rates of change, as technology, governmental regulations, and economic foundations shift. Often this increases the differentiation across markets. Myers et al. (2002) emphasize that the exporter may meet with difficulties, which arise if local competitors (i.e. those from the export market) remain unaffected by economic or regulatory shifts within that market, shifts which affect the exporter s price and not the local competition s. This is considerably different from domestic competitive environments where each competitor is affected by the same economic changes, as is the buyer. As competitive levels within the export market increase, the company must price its product at or near that of the competition in order to survive. If companies attempt to maximize ROI or profit growth in competitively intense environments, then competitive price margins will detrimentally affect the attainment of these goals, so the company must choose a price at or near that of competitors (Myers et al., 2002). Similarly, Indounas and Avlonitis (2009) state that a strong competitive environment will lead many companies to adopt the existing market pricing. Hornby and Macleod (1996) analyzed the relationship between prime pricing objectives and the nature of competition and found that profit maximization was regarded as being the most important in both non and highly competitive markets. Shipley (1981), and Jobber and Hooley (1987) found a relationship between pricing objectives and firm size (i.e. number of employees, sales volume, financial resources). Shipley s (1981) findings that target profit and market share objectives were practiced more by larger firms were confirmed by Jobber s and Hooley s (1987) study. Moreover, Jobber and Hooley (1987) found that profit maximization was the single most important objective for all sizes of firm and at all stages of market evolution. However, this pricing objective was used by a higher proportion of small and medium sized firms than larger ones, who tended to be more market share oriented. Their study have also demonstrated that other objectives, notably market share objectives for large firms and cash flow objectives for small firms, have an important role to play in explaining pricing behavior. Another important factor influencing the export pricing objectives formulation is the stage of market evolution. Jobber and Hooley (1987) found that revenue acquisition is a more prevalent objective guiding pricing decisions in new emerging markets and declining markets than in growing and mature markets. Conversely, profit orientation is a more widespread guide to pricing decisions in growing and mature markets than new emerging and declining markets. Pricing objectives will also change, as the product develops from its introductory stage through growth and maturity, with profit oriented pricing being standard for new products and more competitive pricing being standard for mature products. Moreover, exporters are often faced with different product life cycle (PLC) scenarios in various export markets with the same product. Since we talk about export pricing, we have to pay attention to international economic factors affecting pricing objectives, such as inflation and exchange rate fluctuations. The relationship between the export market currency and the exporter home currency will affect not only the affordability of the exported product but also the exporter s ability to raise prices and still reach sales targets. Cavusgil (1996) established that when the exporter s currency is weak, it will be able to stress price benefits, shift sourcing manufacturing to domestic market or speed repatriation of foreign earned income. Conversely, when the exporter s domestic currency is strong, it may resort to competitive pricing and/or engage in non price competition by improving quality and customer service. The high inflation rates in the export market will limit the exporter s ability to pursue profit oriented pricing objectives, since the purchasing power of the buyers will be reduced. According to Myers et al. (2002), management is more likely to pursue competitive pricing objectives when the competitive intensity of the export market is high; the product is mature in the export market; foreign currency volatility is high; and the inflation rate in the export market is high. Export experience (i.e. the degree to which the exporting company has operated in foreign markets and the level of management s international experience in particular foreign market) also has an impact on the nature of goals a company pursues internationally. Stöttinger (2001) found that inexperienced in exporting companies (export sales ratio <20%) mostly set no financial performance goals. These firms seek new opportunities abroad because sales growth in the home market is limited. Therefore, it is more advisable to pursue international market coverage rather than immediate financial performance. More experienced companies (20% 80% export sales) commonly pursue financial goals and expect profits to the same extent as in the home market. This decision is reversed under specific market conditions, 252

6 such as market saturation or a fierce price war. The more globally active a company becomes (>80% export sales), the more likely it is to go back to no financial goals. Being world market leaders or close to it, these companies want to remain in this position. Another important variable is a company s international distribution system. According to Stöttinger (2001), companies that employ their own personnel in international distribution use no financial goals to monitor performance. In contrast, companies that rely on independent distributors apply financial goals. It might be argued that financial goals are easier to establish and evaluate, they give more governance. Summarizing, pricing objectives provide directions for actions. Pricing objectives are an integral part of export pricing strategy. Successful realization of export pricing strategy depends on explicit identification of influencing price factors and the congruence of pricing decisions and actions by the company. Conclusions Export pricing objectives are an integral part of export pricing strategy. Pricing objectives constitute the basis on which pricing methods and policies are formulated. Therefore, a better understanding of the export pricing objectives should direct the company s overall export pricing process. Pricing objectives can be conflicting as well as complementary. Any pricing objective must be consistent with the overall organizational objectives, including both short term profits and long term strategic objectives. Pricing objectives are flexible and change over time due to external environmental and/or internal organizational characteristics. Formulating a particular pricing objective requires a thorough examination of certain organizational and environmental dimensions. The analysis of scientific literature has demonstrated that the orientation of export pricing objectives towards profits, the scope of sales, costs, or competition by the most part depends on the intensity of competition, stage of market evolution, fluctuation of currency rates, inflation, stage of product life cycle, company s size, export experience, and international distribution system. References 1. Alimiene, M., & Kuvykaite, R. (2008). Standardization/adaptation of marketing solutions in companies operating in foreign markets: An integrated approach. Inzinerine Ekonomika-Engineering Economics(1), Avlonitis, G.J., & Indounas, K. (2004). The impact of market structure on pricing objectives of service firms. Journal of Product & Brand Management, 13 (5), Avlonitis, G.J., & Indounas, K.A. (2005). Pricing objectives and pricing methods in the services sector. Journal of Services Marketing, 19 (1), Bernatonyte, D., & Normantiene, A. (2009). Estimation of Trade Specialization: the Case of the Baltic States. Inzinerine Ekonomika-Engineering Economics(2), Cavusgil, S.T. (1996). Pricing for global markets. Columbia Journal of World Business, 31 (4), Forman, H., & Hunt, J.M. (2005). Managing the influence of internal and external determinants on international industrial pricing strategies. Industrial Marketing Management, 34 (2), Grundey, D. (2008). Internationalisation and cross-cultural business environment: Modelling the training process of expatriates. Transformations in Business & Economics, 7(2), Hornby, W.B., & Macleod, M. (1996). Pricing behavior in the Scottish computer industry. Management Decision, 34 (6), Indounas, K., & Avlonitis, G.J. (2009). Pricing objectives and their antecedents in the services sector. Journal of Service Management, 20 (3), Jobber, D., & Hooley, G. (1987). Pricing behaviour in UK manufacturing and service industries. Managerial and Decision Economics, 8, Kehagias J., & Skourtis E., & Vassilikopoulou, A. (2009). Plaiting pricing into product categories and corporate objectives. Journal of Product & Brand Management, 18 (1), Kersiene, K., & Savaneviciene, A. (2009). The Formation and Management of Organizational Competence Based on Cross-Cultural Perspective. Inzinerine Ekonomika-Engineering Economics(5), Marsh, G. (2000). International pricing a market perspective. Marketing Intelligence & Planning, 18 (4), Myers, M.B., & Cavusgil, S.T., & Diamantopoulos, A. (2002). Antecedents and actions of export pricing strategy: a conceptual framework and research propositions. European Journal of Marketing, 36 (1/2),

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