Factors determining Price for Exports

For achieving the desired rate of growth in exports, effective pricing policy for exports constitutes an essential element. Export pricing assumes strategic significance specially because if the relatively lower technological base of the developing economies resulting in higher cost of production. Again, in international marketing, being marginal supplies, exports from the developing countries have practically no control over the price and have often to sell their products below cost. As products have to be competitively priced, formulation of appropriate strategy becomes a pre-condition for the success of export operation.

Pricing is like a tripod, there three legs being cost, demand and competition. It is more possible to say that one or another of these factors determines price than it is to assert that one leg rather either of the other two supports a tripod.

As regards demand in International markets, it is subject to a number of factors which are different from those operating in the domestic market. For example, tastes and customs of the foreign importers may differ widely from those of the domestic population. What is necessary, therefore, is that the product must be adapted to the special requirements of the foreign markets. Elasticity of demand for the products is an equally important factor. A reduction in price may not help an exporter sell more if the demand for the product is not price elastic. The demand for some products may be elastic in relation to income as, for example for technological products made in the USA and other industrially advanced countries.

The competition in foreign markets is much more severe than in the domestic market. In the domestic market, a manufacturer has to face competition only from domestic manufacturers but in foreign markets, exports have to compete with not only the domestic manufacturers but also with foreign manufacturers. As a result, the elasticity of demand for the exported products becomes higher than it is otherwise. There is much greater possibility of a developing country’s exports being substituted by products coming from the developed countries and vice versa if there is a price advantages. Thus pricing for foreign markets assumes crucial importance.

Role of costs:

As regards costs, it is popular fallacy to believe that price depends upon costs. But in actual practice, it is not always so. A rise in costs may justify an increase in process, yet it may not be possible to do so because of demand and market conditions. On the other hand, and increase in demand may lead to an increase in price without any increase in costs. While cost price relationship is important, it does not follow any increase in costs. While cost price relationship is important, it does not follow that costs determine process. Very often, it is the other way round. Price determines the cost that may be incurred. The product is tailored according to the requirements of the potential consumers and their capacity to pay for it. Given the price, we arrive at the cost working backwards from the price consumer can afford to pay. That also explains why declining costs often in better quality at the same price and rising costs lead to deterioration in quality. Over a period of time, cost and quality are adjusted to the given price.

There are marked differences in costs between one producer and another, yet the fact remains that the prices are close together for a somewhat similar product This is, if anything the very best evidence of the fact that costs are not the determining factor in pricing. Again, if costs were to determine prices, no firm would suffer a loss yet many firms fail because their costs are out of tune with the market price. Cost may not determine the price but whether the product in question can be profitably produced or not.

All this discussion does not purport to show that costs should be ignored altogether while setting prices. The point is that cost is not the only factor in selling prices. Cost must be regarded only as an indicator of the price which ought to be set after taking into account the demand and competitive situation. However, cost at any time does represent a resistance point to the lowering of price.

All these three demand competition and cost are applicable to export pricing as much as to pricing for domestic markets.