Managing the influence of internal and external
determinants on international industrial pricing strategies
Howard Forman, T, James M. Hunt

Regardless of product or industry, a well-established price enables the firm to
best capture the value embodied in a product and thereby establish a
competitively advantageous position in the market. Pricing decisions, however,
can be difficult, and often speculative, due to the uncertainties associated with
today’s dynamic environments (Kortge, Okonkwo, Burley, & Kortge 1994).

As with any strategic decision, pricing strategy can be influenced by two types of
factors, internal and external factors. One internal factor that exerts
considerable influence on pricing decisions is that of corporate cost (production
and/or marketing). Cost (Monroe, 1990) is frequently used by decision-makers
as a basis of pursuing objectives such as profit maximization or target return
(Forman, 1998).

That external market factors influence the determination of pricing strategies is
well established in the economic literature (Diamantopoulos, 1994; Sawyer,
1981). Market- related dimensions such as consumers’ sensitivity to price
(Montgomery & Rossi, 1999) and their switching costs (Coe, 1990) as well as
industry barriers to entry (Davies, 1991) and elements of distribution (Chhabra,
1996) all have an impact on the pricing strategy managers ultimately adopt.

Fig. 1 depicts the decision-making determinants are hypothesized to affect the
relative weight that managers place on various internal and external factors in
determining pricing strategy.
Internal decision-making factors
Factory capacity utilization
The internal focus of factory capacity utilization rates should have a direct effect on
pricing strategies employed in the international marketing arena. For instance,
organizations operating at full capacity are able to spread fixed costs over more units,
thereby achieving greater flexibility in developing pricing strategies. This route to
pricing flexibility is equally available to U.S. MNCs, even when their international pricing
decisions are decentralized. In the latter case, foreign divisions can utilize excess
capacity to increase production and lower prices in their respective markets (Cavusgil,
1996).
Internal cost structure
The fact that most firms use cost plus pricing strategies suggests that cost advantages
are translated into advantages in price levels (Govindarajan & Anthony, 1983; Monroe,
1990). For example, firms with production facilities in countries with a relative
abundance of labor will have cost advantages over firms in countries with no excess
labor. Technological change can also effect short term cost advantages. For instance,
firms often exploit technological advantages gained from adopting innovation in
production processes. As a result, they experience cost advantages, which in turn,
impact pricing strategies.
Market contribution rate
The market contribution rate is defined as the percentage of total firm profits
represented by one particular product (Forman, 1998). A product accounting for a
significant profit contribution to a firm will garner more attention than a less lucrative
product, thus affecting the pricing strategy selected (Forman & Lancioni, 2002). T
External Decision making factors
Price sensitivity of customers
To avoid establishing non-optimal pricing strategies, managers must be cognizant of
their customers’ price sensitivity and what the competitors are charging for
substitutable products. According, pricing managers must scan the environment to
ensure they are establishing prices that are competitively advantageous. In the extreme,
mistaking elastic demands for inelastic markets may lead to pricing decisions that
produce revenue below optimality.
Switching costs
The level of switching costs will dictate the amount of flexibility associated with
selecting pricing strategies. Customers that currently own products with high switching
costs, in effect, are captive to the products. (Nagle & Holden, 1995). Thus, firms trying to
enter markets where the switching costs are high may have a difficult time (Han, Kim, &
Kim, 2001) One example comes from the entertainment industry, where technology has
frequently lowered switching costs. When the DVD player was introduced as a
replacement for the VCR, consumer-switching costs were relatively high. These costs,
however, dropped, as a result technological advances, which lowered the price of DVDs
and DVD players. As a consequence, pricing flexibility regarding DVDs was increased,
allowing managers to pursue optimal pricing strategies.
Barriers to entry
These include nontariff trade barriers, patents, or technological advantages. Firms in
industries where these barriers to entry are high, tend to be in a better position to retain
relatively high prices and profits without fear of competition.
Factor determinants
International experience
International decision-making experience has been found to affect global posture
(Carpenter & Fredrickson, 2001), investment strategies in emerging economies (Delios
& Henisz, 2000) and product and promotion strategy adaptation (Cavusgil & Zou, 1993).
The decision-making process is thought to involve an integration of rational with tacit
knowledge. Rational knowledge is the reliance on objective facts and data, whereas tacit
knowledge is practical knowledge acquired through (and that increases with)
experience Wagner & Sternberg, 1985).
Decision-makers realize the consequences of their decisions and behaviors; they rely
implicitly on their memory of those decisions and outcomes when making future
decisions (Gagne, 1965). Given that internal factors such as capacity, cost structures, and
contribution rates likely comprise key roles in decision makers’ experience, they should
take on greater accessibility in decision makers’ memory. As such, decision makers’
utilization of these factors in formulating pricing strategy should increase as experience
in international pricing increases.
Technological dimensions of products
With the current infusion of high-technology products, global competition has
intensified, product markets have become more turbulent, and product life cycles are
becoming shorter (Bahrami & Evans, 1995; Lee, 2002). Product life cycles take on
particular significance because marketing decision-makers are faced with strategy
changes over different stages of the life cycle.
Similarly, as technological breakthroughs continue, product obsolescence rates
accelerate. This increase in velocity forces pricing managers to become more attentive
of, and responsive to, market trends such as changing customer needs and competitor
offerings when making strategic pricing decisions (Fisher, 1997; Karakaya & Kobu,
1994)
Degree of internationalization
A firm can reduce uncertainty and, thus risk, by accounting for and/or controlling either
its internal or environmental factors (Cyert & March, 1963). One way a global company
can take action to reduce risk is to integrate its efforts internationally. For instance, a
greater degree of internationalization allows subsidiaries across various countries to
flexibly shift resources from one country to another in response to new information and
/or changes in relative prices (Ghoshal, 1987; Rangan, 1998).
Market share
From a strategic pricing perspective, larger firms must necessarily focus on external
factors if they are to minimize the effects of competition. The implementation of
strategies such as limit pricing is an example of managerial intent to maintain barriers
to entry (Nagle & Holden, 1995). At the same time, maintaining large volume sales to
continue to take advantage of economies of scale are also critically important to these
firms.
Environmental determinants
According to the framework offered here, environmental factors are exogenous in that
they operate outside of pricing managers’ control.
The most important of these are
(1) The effects of exchange rate fluctuations:
Successful firms may experience losses due to volatile exchange rates (Terpstra &
Sarathy, 1997). As Cavusgil (1988) notes, MNCs need to develop strategies to effectively
counter exchange rate fluctuations. Current strategies tend to focus on market price
stabilization (Tange, 1997).
(2) Tariffs and inflation rates
Tariffs are used by countries for two basic reasons, first, as sources of revenue for the
importing countries’ governments and second, to protect domestic industries (Cateora,
1996). The effects of tariffs artificially create market inefficiencies. These inefficiencies
result in welfare losses borne by the customers of protected products in the form of
higher prices
(3) The extent of foreign intervention
The most immediate effect of inflation on pricing is the cost of providing product to
customers (Dolan, 1981) as costs may rise faster than prices (Terpstra & Sarathy, 1997).
Therefore, the cost of providing products in inflationary economies will be higher and
more unpredictable than in other more stable economies. This is especially true for
industrial products, which are typically sold under long-term contracts (Dolan, 1981).
Accordingly, industrial firms frequently develop pricing strategies that hedge against
such inflationary trends.
(4) Government intervention (Forman, 1998).
Government intervention refers to the real or potential impediments that originate in
the host governments. This includes nonmonetary intervention such as price controls,
antitrust legislation, or other financial reporting requirements as non-tariff trade
barriers. Thus MNCs need to continually scan governmental activities to account for
changes, which may impact strategic pricing decisions.
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 originating from the home country to foreign divisions) and the
desire to minimize profitability of subsidiaries as a barrier to entry (Rahman & Scapens,
1986).
Cost-plus pricing strategy
Cost-plus pricing, the most widely used strategy, 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 (Noble, 1995).
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 (Morris & Morris, 1990). Parity pricing is
used by firms with lower industry control and market share (Rogers, 1990). Firms
adopting this strategy do so instead of charging a higher price for fear that competition
could gain a significant advantage due to volume sales and experience cost savings
(Nagle, 1987).
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 (Tellis, 1989). Accordingly, this strategy must be employed
with caution. If price differences between markets are too great, parallel markets may
develop, thus reducing overall profitability (Gabor, 1998).
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.
1) The low cost suppliers need to be in a market in which their price changes are
not easily detected by competitors (Nagle & Holden, 1995; Rogers, 1990).
2) These suppliers are in a market position in which competitors cannot effectively
retaliate against them (Nagle, 1987). For example, the ability of a competitor to
retaliate would be limited if it is already producing at full capacity and cannot
increase output.
3) 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.
Complementary product pricing
This pricing strategy is usually more appropriate with products with high switching
costs (Tellis, 1986). 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.
The advantage-accorded firm 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 (Kotler, 1997).
(NOTE: There was a research conducted quantitative results similar to what we
did last year in QQM2 but I did not find it relevant to include here but if you
wanted to read it, its from P 7 – 10)
Discussion and managerial implications
As suggested by Kortge et al. (1994), pricing decisions in the international arena are
decisions replete with uncertainty.
Specifically, results indicate that international experience, product technology, degree of
exogenous environmental factors, internationalization, and market share can influence
the weight given to internal and external factors when making international pricing
decisions. Furthermore, these decision-making factors directly affect which specific
pricing strategies managers employ.
An examination of the determinants of these decision-making factors suggests that
organizations need to have a good and accurate understanding of these determinants
and how they relate to both internal and external decision-making factors. This will
include developing processes to improve information gathering about important
environmental factors and market share. Inaccuracies in data collection may lead to
pricing strategies that do not meet organizations’ goals and objectives.
Please note that this study focused on the underpinnings of the pricing decision process
and the factors that influence that process rather than on the outcome of the process.
Similarly, this study did not examine performance implications of the pricing strategy
decisions, an issue of substantial practical interest for both general and marketing
managers of international firms.
While it appears that managers actually select appropriate pricing strategies, it is still
not known how well these strategies meet overall corporate goals.