Enhanced export pricing strategies: With the right approach, SMEs can enter new markets with confidence and relative ease. (Global View).

The international market differs in several respects from the domestic market. Export pricing is but one of the various factors that have to be considered before attempting to secure a new customer base overseas or in the U.S.

It's critical that your export approach include an effective pricing strategy that reflects the various aspects of your target market while enabling you to remain competitive in a foreign marketplace. Computing your export price, your cost mix (variable and fixed costs), and the competitive nature of your price are crucial to the development of a winning strategy.

One of the basic methods used to set an export price for a product or service is to identify markets that get you the best possible price. And there's always a market -- or a market segment -- where you can get a higher price. The trick is to find it and take advantage of it.

Identifying the most profitable market, of course, means performing market research on potential customers and distributors. To determine the most appropriate location -- city, region, country, continent -- for your market research, marketing specialist Pierre Trudel recommends examining secondary data collected worldwide -- and not necessarily focusing on criteria specific to your own product.

"Take the case of the 'Big Mac' index," says Trudel. "It shows the price of this particular hamburger everywhere on earth. What's more, it provides an insight into consumers' propensity to pay more for a product, valuable information for exporters in the food industry, for instance."

Thus, a variety of databases help you ascertain demand for certain product categories. Once an exporting firm has determined the most promising location to sell its product, it can then analyze market research to determine how -- and in what order -- customers in the target market view the product's various attributes. This also shows the exporting firm where its major advantages lie over their competitors in this market.

"The point is to understand the specific criteria that lead people to purchase a specific product," Trudel explains. "Size, colour, price, a celebrity spokesperson, model, useful life, etc., all provide benchmarks that allow you to set your price for this new market."

After having determined its most vital attributes, an exporting firm must then select the two or three most substantial advantages that it can offer. This will enable it to target a cost and value zone.

Figure 1 shows that, theoretically, increasing a product's performance entails increasing its cost. "But that's not all," adds Trudel. "Even where performance is enhanced, customers are not necessarily willing to pay extra." There is, however, a zone in which customers are willing to pay more for an attribute that doesn't add to the company's costs. This is the target zone. Using this knowledge, a company will find it easier to decide which market will bear the maximum price for its product.

Strategic considerations

Another major item to be considered in export pricing is production cost. According to Trudel, there are benefits to using only variable costs when setting a product's cost. "Many new expenses will appear during the product launch," he says. "Ultimately, if sales increase, fixed cost absorption should be more moderate."

Trudel recommends using variable (or marginal) costs, especially in the case of small- or medium-sized exporting enterprises. This approach not only gives the companies some leeway, but also covers the additional costs during the introductory phase and, ultimately, allows SMEs to capitalize their fixed costs when sales levels increase following the launch phase.

Cost should include the following items: variable costs (including raw materials, labour, energy, selling expenses including any agent's commission), marketing expenses (analysis, promotion and product management), finance charges, bank charges (currency operations, exchange rate risk, etc.), and export-related charges (translation, labelling, country-of-origin marking, export banding and packaging, containerization (if applicable), export-related documentation, forwarding fees, customs brokerage, etc.).

Marginal cost takes into account specific expenses for adapting, manufacturing and selling a product, as well as any export-related costs and a profit margin (not including fixed costs).

According to Trudel, this method is unsurpassed for determining costs to set the most profitable export price. An export pricing strategy will have no impact on a company's regular operations. Companies are often reluctant -- and rightly so -- to amend their price structure for a particular market segment or customer because, should they lower their prices, other customers may want to jump on the bandwagon.

"Where exports are involved, geographical sectors are usually far removed from each other," Trudel points Out. "So a company can set quite different prices."

There must also be a balance between the cost for a purchaser and the product's intrinsic value. This balance must be stuck between the value of the product or service -- personal value and image value -- and cost in cash, time, energy, labour and even opportunity for the purchaser.

To export your product, you must also make importers or consumers buy into various concepts that will make their purchase attractive. You can use a number of methods -- a lease, guaranteed sale, storage with the customer, product processing, and value added for the customer, etc. -- to present your price in the most favourable light. Very few companies will sell directly to the consumer in a new foreign market. The usual pathway is business-to-business (B2B) commerce.

Differentiation techniques

Three differentiation techniques allow you to alter your export pricing: differentiation by product offering, by proposed price structure and by customer segmentation based on willingness to pay.

"Customers must always be left with the feeling that they are getting their money's worth," says Trudel. Differentiation allows you to distinguish your product from similar offerings in your target market. For instance, differentiation by product involves changing your product's model, name, brand, packaging, colour, language, performance, quality, warranty, technology or market availability.

This isn't to say that your product absolutely has to be different from the offering in your domestic market; however, to optimize your chances for success, it's a good idea to tailor your product to your selected market. "If you're selling a product for $6 here and wish to sell it for $10 in Boston, you'd better change a few things," warns Trudel. Thus, optimizing attributes that are valuable for your target market and abandoning those that are less attractive will allow you to set the maximum price for your product.

Accordingly, Trudel recommends selling your product at a price that customers are willing to pay. Instead of selling a product at the same price as would be charged in Canada, Trudel recommends selling at the highest possible price, provided that this doesn't create a loss. To return to our example, if a product can be sold (profitably) for $6 Canadian in Boston, it's better to pore over research to determine how much higher the price can be set. A company won't necessarily sell more items at a lower price and won't automatically make more money.

"The objective is to take advantage of the market to increase the company's income," Trudel explains. Through differentiation, you can find the mix of factors that will make your price more appealing. This provides an opportunity to come up with a price that is attractive to both the purchaser and the exporter.

Differentiation by price structure occurs when you alter the number of elements you factor into the price: a delivered price that includes insurance, a cost based on use (consignment, for instance) or an all-inclusive cost unrelated to use. Because there are various ways to express your price, you have to determine how to go about it.

"While it doesn't necessarily influence your cost, it will definitely have a bearing on your profits," Trudel says. This method can also be used to change a customer's perception of price. In other words, once a company has set its price, it must then "sell" it.

Performance, design, safety, price and price deals are other factors that can increase foreign sales. Segmenting the price component and identifying its significance, positioning your product in relation to the competition, and identifying attractive markets based on relative forces are other approaches that must be tested on a market segment. Testing your approach will determine whether or not your company will be competitive in this market.

International marketing and export pricing can be done using various formulae, but Trudel claims that his advice to clients has stood the test of time. Although other models also generate excellent results, this approach has been particularly useful for SMEs. The point is to avoid plunging blindly ahead when the time comes to cross a new border.

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Julie Demers ([e-mail]) is associate French editor of CMA Management magazine.