When the value of dollar is weak relative to the buyer’s currency ( i.e. Takes fewer units of the foreign currency to buy a dollar), companies generally employ cost plus pricing. To remain price competitive when the dollar is strong (i.e. When it takes more units of the foreign currency to buy a dollar), companies must find ways to offset the higher price caused by currency values. When the rupee in India depreciated significantly against the US dollar, PC manufacturers faced serious pricing problems. Because the manufacturers were dependent on imported components their options were to absorb the increased cost or raise the price of PCs. Exhibit focuses on the different price strategies a company might employ under a weak or strong domestic currency. US companies marketing in those countries with strong currencies have a choice between lowering prices even further and thereby expanding their market share, or maintaining prices and accumulating larger profits.
Currency exchange rate swings are considered by many global companies to be a major pricing problem. Because the benefit of a weaker dollar is generally transitory, firms need to take a proactive stance one way or the other. For a company with long range plans calling for continued operation in foreign markets yet wanting to remain price competitive, price strategies need to reflect variations in currency values.
Innumerable cost variables can be identified depending on the market, the product and the situation. The cost for example of reaching a market with relatively small potential may be high. High operating costs of small specialty stores like those in Mexico and Thailand lead to high retail prices. Intense competition in certain world markets raises the cost or lowers the margins available to world business. Even small things like payoffs to local officials can introduce unexpected costs to the unwary entrepreneur. Only experience in a given marketplace provides the basis for compensating for cost differences in different markets. With experience a firm that prices on a cost basis operates in a realm of reasonably measurable factors.
Middleman and transportation:
Channel length and marketing patterns vary widely, but in most countries, channels are longer and middleman margins higher than its customary in the United States. The diversity of channels used to reach markets and the lack of standardized middleman markups leave many producers unaware of the ultimate price of a product.
Besides channel diversity, the fully integrated marketer operating abroad faces various unanticipated costs because marketing and distribution channel Infrastructures are underdeveloped in many countries. The marketer can also incur added expenses for warehousing and handling of small shipments and may have to bear increased financing costs when dealing with under financed middlemen.
Because no convenient source of data on middleman costs is available the international marketers must rely on experience and marketing research to ascertain middleman costs, the Campbell Soup Company found its middleman and physical distribution costs in the United Kingdom to be 30 percent higher than in the United States. Extra costs were incurred because soup was purchased in small quantities, small English grocers typically purchase 24 can cases of assorted soups (each case being packed for shipment). In the United States typical purchase units are 48 can cases of the soup purchased by the dozens, hundreds or carloads. The purchase habits in Europe forced the company into an extra wholesale level in its channel to facilitate handling small orders.
Exporting also incurs increased transportation costs when moving goods from one country to another. If the goods go over water, insurance, packing and handling are an additional cost not generally added to locally produced goods. Such costs add yet another burden because import tariffs in many countries are based on the landed costs which include transportation, Insurance and shipping charges. These costs add to the inflation of the final price.
Source: International Marketing