International Pricing Strategies

Transfer pricing strategy
Transfer pricing is a strategy used when MNCs sell products to their divisions in other countries. Transfer prices between divisions will vary depending on variables such as the taxation rates (i.e., higher income tax rates in the parent’s home country will lead to lower transfer prices emanating from the home country to foreign divisions) and the desire to minimize profitability of subsidiaries as a barrier to entry. Market prices are charged when tax rates are less favorable in the receiving divisions.

Cost-plus pricing strategy
This is the most widely used pricing strategy. Cost-plus pricing plays an important role in export pricing of industrial products, especially when firms begin to export to guard against market related uncertainty. Thus, when entering countries for the first time, it is easiest to develop a price based on the most accurate available information, internal cost figures.

Parity pricing strategy
A firm adopts this strategy when it sets its prices in a range where most buyers would find the prices acceptable and appropriate. Parity pricing is used by firms with lower industry control and market share. Firms adopting this strategy do so in lieu of charging a higher price for fear that competition could gain a significant advantage due to volume sales and experience cost savings.

Second market pricing strategy
Second market pricing is a strategy where different prices are charged based on distinct international markets. This strategy is viable when the price differential between markets does not exceed the transaction costs associated with arbitraging a product from one market to the next. Accordingly, this strategy must be employed with caution. If price differences between markets are too great, parallel markets may develop, thus reducing overall profitability. Second market pricing is a particularly important international pricing strategy in the industrial products sector. In fact, the use of this strategy is pervasive in the industrial sector as most of the dumping (an extreme form of second market pricing) complaints filed with the International Trade Commission are for goods such as chemicals and machine parts.

Low price supplier strategy
Firms using this strategy tend to adopt one of Porter’s (1980) three generic strategies, low cost provider. Three conditions must be in place in order for this pricing strategy to be effective. The first is that the low cost suppliers need to be in a market in which their price changes are not easily detected by competitors. Second, these suppliers be in a market position in which competitors cannot effectively retaliate against them. For example, the ability of a competitor to retaliate would be limited if it is already producing at full capacity and cannot increase output. The third condition favorable to a low price strategy is that competitors’ willingness to retaliate should be low, or unthreatened. If larger competitors were to retaliate in the case of a restricted market, the price reduction might undermine overall sales and profits in the larger related markets. In some cases this type of retaliation may be restricted by governmental regulations that prevent larger firms from engaging in price retaliation.

Complementary product pricing
This pricing strategy is usually more appropriate with products with high switching costs. The motivation of firms to use this strategy is to enhance customers’ involvement with the original product to the degree that they are likely to purchase increased amounts of ancillary products or supplies. In effect, this scenario renders customers captive to the original product. As a result, higher profits are frequently realized by the supplier. Thus, the advantage-accorded firms using complementary products is that by charging a lower price for the primary product, they realize the benefits of higher profits through the sale of the complementary products or supplies. Firms that compete on price with their primary products are pressured to recoup their costs on these products, while no such pressure exists for producers of complementary products