Lesson 29. PRODUCT AND PRICE ELEMENTS
PRODUCT AND PRICE ELEMENTS
For the international marketer, it is necessary to decide whether a single standardized product is to be produced or different customized products are to be produced for different markets. It is necessary to conduct preliminary screening for identification of markets and products through market research process. A poorly conceived product will lead to market failures. Different approaches are adopted by international marketers for developing products. Ethnocentric approach assumes that consumer needs and market conditions are almost same in different markets and thus firm sells the products made for home market with minor modifications. This approach helps to gain rapid entry into international market but fail to achieve maximum market share and profit. In polycentric approach, firm produces separate products for home market with minor modifications. This approach helps to gain rapid entry into international market but fails to achieve maximum market share and profit. In polycentric approach, firm produces separate products for each different market. In region-centric approach, once the firm consolidates its entry in different market, it tries to achieve product similarity within market clusters. In geocentric approach, instead of selling products made for home market in international market, the company tries to find similarities exhibited by consumers in their purchase behavior that can be satisfied by a standard product for all markets of the world.
As different approaches are available, it is difficult to decide whether a single standard product or different customized products for different markets should be produced. Thus it has been observed that majority of companies, attempt to project a uniform product image in all the markets but often customize the perceived value of the product to suit customers in the target market. The companies try to customize the product components such as features, packaging and labeling and retains brand name.
Standardization of product aims at offering a product in foreign markets with minor changes like packaging and labeling. This helps to meet the needs of global customers and also provides cost saving due to economies of sale in production. High technology content products like computers are sold as standard products through the world. Making changes in the product ranging from major modifications in the product to changes in its package, logo or even brand name to meet the needs of target market is called product adaptation. Government regulations, differences in operation system of electronic goods, differences in measurement systems, differences in electric current used in a country, and packaging and labeling requirement are some of the major reasons for product adaptation. Certain voluntary factors like consumer demographics, culture, local customs and traditions, conditions of use, price etc also influence the product adaptation process.
Following two strategies are available to companies to launch their products:
29.1.1 Waterfall strategy
This is a strategy in which a firm enters into international market in a phased manner. Here company enters one foreign market at a time. After consolidating its position in that country, it then enters in to another foreign market. This strategy is helpful for firms with limited resources.
29.1.2 Sprinkler strategy
This strategy is preferred when life cycle of the product is relatively less, its market has high potential (market size, fast growth rate, less cost of entry) and the company has enough resources to enter more than one foreign market at a time. In this strategy a company enters more than one foreign market at a time.
The companies’ international competitive posture matrix can be analyzed by following model of Gogel and Larreche (1989).
Fig. 29.1 Companies international competitive posture matrix
For an effective global strategy, Kings are occupying the best position due to strong product portfolio and wide geographic coverage. Barons refer to those companies who operate in less number of countries. As they have high product strength, it is possible to have increase in their geographical coverage. They increase their coverage by taking over weak product portfolio firms in overseas market. Crusader refers to those companies which have weak product base but they expand globally. The companies which have low product strength and limited geographical coverage fall in the category of commoners. They survive the competitive situation due to government safeguards.
The various pricing strategies adopted by international marketers are as follows.
29.2.1 Cost based pricing
This is a simple method used by new exporters, wherein the price of the final product is decided by adding a certain amount (profit and other expenses) to the ex-work price level. As it is not only the cost which determines the price of product but other factors such as demand, competition etc also influences it. So it is necessary to adopt market base pricing method instead of only cost based method.
29.2.2 Full cost method
This is the most common method used by exporters in the early phase of their internationalization. Under this method a markup is added to the total manufacturing cost to arrive at price. The method is very simple but does not consider the prevailing price in international market.
29.2.3 Marginal cost pricing
Marginal cost is the cost of producing and selling one more unit of product. Under this method the firm sets the price in such a way that it obtains fixed cost of production from domestic sale and obtains variable cost from foreign sale. As products from developing countries seldom compete on the basis of brand image or unique value, the marginal cost pricing method is used to penetrate the foreign markets. Pricing based on marginal cost may be changed, as dumping in overseas markets is prone to action based upon investigation.
29.2.4 Market based pricing
Developing countries are marginal suppliers of goods in majority of markets. They generally possess less market share. They cannot influence prices in foreign markets. So exporters in developing countries are price followers. Price followers assess the prevailing prices in the foreign markets and then set the price based upon market situation.