Various factors contributes to differential pricing in export. As conditions differ from one market to another, the price of the product cannot be the same in every market. The export price can be quite different from the price quoted in home market. The pricing policies in the home market and export market differ on account of varying market conditions, political
interference, Government regulations, economic and political risks and the philosophy of the management, etc.
Factors contributing to differential pricing in export
The main reasons for differential pricing include difference in expenses, difference in costs charged, level of competition, demand in international markets, and pricing strategy. These are discussed below:
Difference in expenses leads to differential pricing in export:
The difference in expenses encourages differential pricing. In addition to cost of production, a variety of expenses are involved in processing an export order. But these expenses are not incurred in domestic markets. Due to difference in expenses, the prices in domestic market and foreign market can never be compared.
Differences in costs to be covered leads to differential pricing:
The prices quoted in domestic market cover the full costs (fixed and variable). But the price charged in foreign markets, as a common practice, cover only variable costs. The direct costs of manufacturing the product represent the lower limit or floor price. But what the market can bear is the upper limit. Export pricing is somewhat between these two limits. Rarely fixed costs may be charged from foreign buyers.
Level of competition leads to differential pricing in export:
The competition that prevails in domestic market and foreign market differs. In International marketing, exporters compete not only with the domestic manufacturers but also with the foreign manufacturers. Differential pricing is charged in the overseas depending upon the intensity of competition prevailing in the overseas markets.
Demand in international markets leads to differential pricing:
In international market, the demand for the product is influenced by a number of factors that gives way for differential pricing. Tastes, customs and culture of foreign buyers differ from those of domestic buyers. So, product has to be adapted to the special requirements of overseas buyers. The product modification intended to suit the foreign market causes changes in costs.
Pricing strategy leads to differential pricing:
Pricing strategy of a manufacture may sometime lead to differential pricing in the market. When the production level of a manufacturer is below the break even point, he will have to close down the business. In order to sustain production as an alternative to closure of the business, the manufacturer may prefer to sell at a price even below the direct cost. Pricing below direct cost may also be used as a short term strategy to capture foreign market.