The exporter’s primary aim in the target market is to offer his products at a price level which does not exceed that of his competitors. The importer will be the first one to tell him that.
1. The exporter’s primary aim in the target market is to offer his products at a price level which does not exceed that of his competitors. The importer will be the first one to tell him that.
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Actually, one should try to price slightly lower, particularly when entering the market. This is called Penetration Pricing trying to gain the customer’s preference, because the price is irresistibly low compared to the product quality.
The reverse policy is called Skimming, but that will not only be used when offering a unique product with obvious customer benefits and unfortunately only few exporters can offer that.
Image Source: tepco.co.jp
2. An exporter will probably try to apply the Penetration Pricing method. Be careful: do not price it too low, as not to create suspicion in the minds of the prospective buyers.
The Japanese car manufacturers successfully used Penetration Pricing when entering Western Markets in the early sixties. Now, their prices are virtually at their competitors’ level.
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In another case, a Hong Kong watch manufacturer entered the market offering his Rolex-look-alike products at 150% of current prices. He failed. The consumers reasoned: That watch is priced so low, it cannot be good quality.” Try to find a balance between the quality and the price of the product.
In fact an exporter should try to price it at the “perceived value level.” Market research will tell us how consumers perceive that level to be. A penetration price will probably lie somewhere between 5 and 20% below the current price.
3. Having bagged a certain foothold in the target market, the exporter may gradually want to increase his profit – by increasing the price. That is logical, as long as the customer accepts it. That goes for the trading partner too. He has a vital task in the price-setting policy.
How does one know if the customer will accept that price increase? That depends upon the price elasticity of the demand. Essentially, price elasticity describes how much the price can be changed before the customers begin to react: i.e. by buying less when the price is increased, by buying more if the price is decreased.
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Convenience goods (like many packaged foodstuffs) do not meet much reaction when prices increase moderately. Consumers will buy anyway.
Shopping goods (more expensive consumer items) receive a stronger reaction, because the buyers start comparing with other brands or substitutes to satisfy their needs. Industrial goods meet even fewer reactions, unless the buyers can choose from a multitude of suppliers.