Identifying Factors that Influence Price Adaptation Strategies
Carlos M. P. Sousa and Frank Bradley, University College Dublin
Abstract
Although the critical role of international pricing strategies has been increasingly recognized in
the international marketing literature, there is little research examining the factors that play an
important role in determining the degree of adaptation of international pricing strategy. The
results of this study show that the extent to which firms adapt their international marketing
strategies (i.e. price, product, promotion, and distribution) depends on the characteristics of the
foreign environment. The results further indicate that the degree to which firms adapt their
pricing strategy depends on the degree of standardization/adaptation of the remaining marketingmix elements (product, promotion, and distribution).
Introduction
The failure to understand the factors that affect global pricing exposes decision-makers and their
firms to unnecessary levels of risk. The development and implementation of marketing strategies,
particularly pricing strategies, are critical managerial decisions to succeed in foreign markets
(Raymond, Tanner Jr. and Kim, 2001). Unfortunately, there is little research to guide managers in
their international pricing efforts and with competitive pressures increasing strategies for
effective pricing in foreign markets remain elusive (Clark, Kotabe and Rajaratnam, 1999). The
few empirical studies, however, that have examined this issue have suggested that managers
consider international pricing to be among the most crucial decisions in their business practice
(Myers, 1997; Stöttinger, 2001). Of all the marketing decision variables, however, pricing has
been the most ignored by researchers (Myers, Cavusgil and Diamantopoulos, 2002). Most of the
studies have focused their attention on product and promotion strategies (Cavusgil, Zou and
Naidu, 1993; Francis and Collins-Dodd, 2004) and to lesser extent on distribution strategies
(Rosenbloom, Larsen and Mehta, 1997; Tesfom, Lutz and Ghauri, 2004).
The purpose of this study is, therefore, to identify the factors that influence price adaptation in
export markets. We consider export pricing strategy along the standardization-adaptation
continuum (Jain, 1989; Theodosiou and Katsikeas, 2001). Another distinguishing feature of this
paper is the focus on the individual export venture (i.e. a particular product exported to a specific
export market).
In the next section, a conceptual framework is presented, along with the development of specific
research hypotheses. This is followed by a description of the research methodology and test
results. A discussion of the results is considered in the final section.
Framework and Research Hypotheses
Pricing decisions in international markets are influenced by internal and external factors
(Cavusgil and Zou, 1994; Myers, Cavusgil and Diamantopoulos, 2002). At the external level we
consider foreign market characteristics, which include communication and marketing
infrastructure, technical requirements, market competitiveness, legal regulations, and economic
development. At the internal level we consider the three remaining elements of the marketing
mix: product adaptation, promotion adaptation, and distribution adaptation. Though past research
points to a link between product adaptation and price adaptation (Myers, Cavusgil and
Diamantopoulos, 2002) and between distribution adaptation and price adaptation (Theodosiou
and Katsikeas, 2001), empirical research that includes simultaneously the link between the three
elements of the marketing mix (product, promotion, and distribution adaptation) and price
adaptation is missing in the literature. This is a surprise, since the most critical and challenging
decisions managers face in an export setting are related to the selection of appropriate marketing
strategies.
Environmental Characteristics
Marketing standardization appears more likely where the foreign market is most similar to the
domestic market, while adaptation is preferred when markets are viewed as dissimilar (Cavusgil
and Zou, 1994; Shoham, 1999; Sousa and Bradley, 2005). An adaptation strategy is required
when substantial differences exist in government regulations, communications infrastructure,
market competitiveness, and technical requirements (Samli and Jacobs, 1993; Zou, Andrus and
Norvell, 1997). Thus, market similarity between the home and the foreign market drives firms to
standardization, whereas market diversity drives them to price adaptation.
•
Hypothesis 1: The greater the environmental differences between home and foreign markets
the greater is the degree of product adaptation
•
Hypothesis 2: The greater the environmental differences between home and foreign markets
the greater is the degree of promotion adaptation
•
Hypothesis 3: The greater the environmental differences between home and foreign markets
the greater is the degree of distribution adaptation
•
Hypothesis 4: The greater the environmental differences between home and foreign markets
the greater is the degree of price adaptation
Marketing Strategy
In relation to price strategies, reasons for following an adaptation strategy often arise because the
marketing strategy varies from market to market (Albaum, Duerr and Strandskov, 2005). After
all, it is difficult to imagine, when product and promotion strategies are adapted, how firms can
maintain standardized prices in export markets (Samli and Jacobs, 1994). Thus, export pricing is
influenced by the firm’s marketing strategies in foreign markets (Noonan, 1999).
A firm may decide to adapt its product strategy because foreign countries may have unique
requirements regarding product standards and features. Changes in product warranties, for
example, may have an effect on pricing decisions (Cavusgil, 1996). An increase in product
quality may also lead to an increase in price (Tellis and Wernerfelt, 1987). Similarly, a firm by
adapting its promotion strategies can have an affect on pricing. The use of different sales
promotion tools could, for instance, have an impact on a firm’s cost structure and thereby on
pricing decisions. The size of the advertising and promotion budget could also influence pricing
decisions. The same reasoning applies to distribution strategies. The channels of distribution a
firm uses dictate much in international pricing, particularly export pricing (Cavusgil, 1996).
Distribution costs constitute a significant proportion of the total cost of exporting. The costs and
margins of a given channel, however, vary from country to country. This suggests that the more
the firm needs to adapt its distribution channel in the foreign market the greater will be the
changes in price. Accordingly, the following hypotheses are suggested:
•
Hypothesis 5: The degree of product adaptation is positively associated with the degree of
price adaptation
•
Hypothesis 6: The degree of promotion adaptation is positively associated with the degree of
price adaptation
•
Hypothesis 7: The degree of distribution adaptation is positively associated with the degree of
price adaptation
Research Methodology
The study was conducted using a sample of manufacturing firms in Portugal. Portugal is
particularly interesting to study as it is part of the European Union and has long depended on
international trade because of the small size of the domestic market leading to a strong export
orientation among Portuguese firms. The questionnaires were then sent with an international
postage-paid business reply envelopes to the export managers of 473 industrial firms. These were
followed by reminder letters that included reply envelopes. The effective response rate after two
mail-waves was 29.6% (140 usable questionnaires). This result constitutes a high response rate,
considering that the average top management survey response rates are in the range of 15 to 20
percent (Menon, Bharadwaj and Howell, 1996).
Assessment of Non-response bias
The high response rate obtained provides confidence that non-response is not an issue (Weiss and
Heide, 1993). To further explore the issue of non-response bias we also tested for differences
between early and late respondents (Armstrong and Overton, 1977). Using a t-test, early and late
respondents were compared on all the variables and on several key firm characteristics (size of
the firm, number of foreign markets to which the firm exports, year of first export, and year of
establishment). No significant differences were found (at the conventional .05 level). Based on
these results and considering that the response rate was relatively high, it was concluded that nonresponse bias did not appear to be a significant problem in this study.
Measures
The items used to operationalize each construct were developed on the basis of existing literature.
Environmental characteristics were measured by the degree of similarity in communication and
marketing infrastructure, technical requirements, market competitiveness, legal regulations, and
economic development between export markets and the home market (Shoham, 1999;
Theodosiou and Katsikeas, 2001). The measures developed by Sousa and Bradley (2005) were
used to assess the degree of promotion, product and distribution adaptation. Promotion strategy
was measured by the level of adaptation in promotion, budget size, promotion content,
advertising media strategy, sales promotion tools, and advertising themes and messages. Product
strategy was measured by the extent of adaptation of product quality, product design, product
warranties, product labelling, and brand name. The channels of distribution, budget for
distribution, transportation and control over distribution channels were used to assess the degree
of distribution adaptation. The price strategy measure was adapted from Lages and Montgomery
(2004) and Shoham (1999) and was assessed by asking respondents to indicate their price
discount policy, margins, credit concession, and determination of pricing strategy. All items were
assessed on Likert-type scales with five points from 1 (very similar) to 5 (very different).
Results
Content validity was established through a literature review and by consulting experienced
researchers and managers. On the basis of these procedures, it was concluded that the measures
have content validity. Discriminant validity, convergent validity and scale reliability were
assessed by confirmatory factor analysis in line with the paradigm advocated by Gerbing and
Anderson (1988). The results confirmed that the items employed to measure the constructs were
both valid (convergent validity and discriminant validity) and reliable (composite reliability,
variance extracted, and internal reliability).
Because of the complexity of the model and the need to test the relationships between the
constructs simultaneously, structural equations were used by applying the maximum likelihood
(ML) method (Amos version 4.0). The overall chi-square for the model exhibited in Figure 1 was
significant (chi-square = 586.284, df = 245, p < 0.001), as might be expected given the size of the
sample. We, therefore, considered other structural diagnostics for relative global fit suggested by
Byrne (2001). Other measures of model fit were: comparative fit index (CFI=0.955), TuckerLewis fit index (TLI=0.944), and incremental fit index (IFI=0.955). Given that all the fit indexes
were inside conventional cut-off values, the model was deemed acceptable. The relationships
proposed in the model are examined next (Figure 1).
Figure 1: Final Model
0.418
3.346
Environment
0.593
3.859
Product
adaptation
0.255
3.194
Promotion
adaptation
0.175
2.482
Price
adaptation
R²=0.51
0.368
2.940
Distribution
adaptation
0.343
2.821
0.341
3.859
Note: t-values below the lines
Consistent with hypotheses H1-H4, the results indicate that the greater the difference between
home and foreign markets, the higher is the degree of adaptation of international marketing
strategy. Similarly, as predicted by H5, the degree of product adaptation has a significant positive
impact on price adaptation (0.255; p<0.01). The data also supported H6 and H7. Price adaptation
was found to be positively associated with promotion adaptation (0.175; p<0.01) and distribution
adaptation (0.341; p<0.01). In relation to the proportion of variance of price adaptation that was
explained by the determinants, an R² value of 0.51 was reported. In sum, the results indicate that
all seven hypotheses are supported. Furthermore, the proportion of variance of price adaptation
that is explained by the four factors is quite satisfactory.
Discussion
Despite calls for research on the standardization or adaptation of pricing in export markets little
headway has been made in our understanding of the issue. The objective of this research was to
identify the factors that play an important role in determining the degree of price adaptation in
international markets. The results strongly support hypotheses H1-H4 that the degree of
marketing program adaptation is prompted by differences that exist between the home and the
foreign market, in terms of communication infrastructure, market competitiveness, laws,
regulations, and economic development. The finding, that the extent of similarity or difference
between the home and foreign country decisively affects the degree of adaptation or
standardization, confirms the results of earlier research (Theodosiou and Katsikeas, 2001; Sousa
and Bradley, 2005).
While previous research indicates that price strategies are affected by promotion, product and
distribution (Tellis and Fornell, 1988; Tellis, 1989), the possible link, however, between the
degree of adaptation of these three elements of the marketing mix and price adaptation, has been
neglected. The results reported here suggest that the degree of price adaptation is strongly
influenced and conditioned by the degree of product, promotion, and distribution adaptation, thus
providing support for H5 - H7. This finding, however, is contrary to the results reported by
Theodosiou and Katsikeas (2001), in which the level of similarity in the distribution
infrastructure between the home and the export market was found not to play an important role in
determining the degree of price adaptation. As such, this study demonstrates that strategies
followed by managers in terms of product, promotion, and distribution adaptation are key
determinants in explaining the firms’ price adaptation in foreign markets.
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