Matthew B Myers, S Tamer Cavusgil, Adamantios Diamantopoulos. European Journal of Marketing. Bradford: 2002. Vol. 36, Iss. 1/2; pg. 159, 30 pgs
Abstract (Summary)
The export-pricing literature is characterized by a distinct lack of sound theoretical and empirical works. Of the marketing decision variables, pricing has received the least attention in research despite the continued identification of this issue as an important problem area for firms engaged in export marketing. Businesses competing internationally must develop an effective pricing strategy, as this is a critical factor in their operation. Globalization also requires that management coordinate prices across multiple export markets. Research is thus needed on the empirical relationship between an export-pricing strategy (EPS) and the factors that influence this strategy, as well as the relationship between EPS and the performance of the export venture. A multidimensional conceptualization of export-pricing strategy is proposed in order to integrate the various components of an EPS and link it with its antecedents.
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Full Text(12297 words)Copyright MCB UP Limited (MCB) 2002
[Headnote]Keywords Pricing, Export, International business, Marketing, Management
[Headnote]
Abstract The export-pricing literature is characterized by a distinct lack of sound theoretical and empirical works. Of the marketing decision variables, pricing has received the least attention in research despite the continued identification of this issue as an important problem area for firms engaged in export marketing. Businesses competing internationally must develop an effective pricing strategy, as this is a critical factor in their operation. Globalization also requires that management coordinate prices across multiple export markets. Research is thus needed on the empirical relationship between an export-pricing strategy (EPS) and the factors that influence this strategy, as well as the relationship between EPS and the performance of the export venture. A multidimensional conceptualization of export-pricing strategy is proposed in order to integrate the various components of an EPS and link it with its antecedents. Theoretical insights and empirical findings from the general pricing literature, as well as executive insights from qualitative interviews, are connected with the conventional export-pricing and strategy literature into an integrated model, and specific research propositions are offered for future cross-industry empirical studies.
Introduction
The pricing of products in international markets is becoming increasingly difficult for managers due to heightened competition (Cavusgil, 1996), gray market activities (Myers, 1999; Assmus and Wiese, 1995), counter-trade requirements (Cavusgil and Sikora, 1988), regional trading blocs (Weekly, 1992), the emergence of intra-market segments (Dana, 1998), and volatile exchange rates (Knetter, 1994). As global economic foundations continue to shift, long-proven pricing structures are collapsing (Simon, 1995). As competitive pressures increase, strategies for effective pricing of products for sale in foreign markets remain elusive (Samli and Jacobs, 1993).
Unfortunately, there is little research to guide managers in their international pricing efforts (Clark et al., 1999). Typically, they rely on intuitive measures and give more strategic focus to other marketing decision variables (Cavusgil, 1996). This often leads to unsuccessful market ventures, since businesses operating in a global environment must have a systematic pricing procedure (Samiee, 1987). Although Ricks et aL (1992) found that it was the number-two problem for international managers, pricing has perhaps been the most ignored marketing decision variable within the research (Li and Cavusgil, 1991; Gronhaug and Graham, 1987; Cavusgil and Nevin, 1981). Most efforts to understand the effects of pricing strategies on firm performance have been undertaken within a purely domestic or single market context with little consideration for the increasingly international configuration and organizational goals of the firm (Myers, 1997).
Several types of international pricing are done by firms, and each demands a different approach. Transfer pricing concerns the sale of products within the corporate family. Foreign-market pricing is done by a firm with production facilities within an overseas market (completed products do not cross borders to reach the customer). Export pricing refers to products made in one country and sold to customers outside the corporate family in another country (i.e. independent distributors). In this article, we concentrate solely on export pricing, which is a frequent and formidable challenge for most exporters (Walters, 1989). In addition, we focus on direct, rather than indirect, exporters, since indirect exporters are often restricted in their pricing choices by export agents, and rarely deal with the international issues which make direct exporting so complex (Nagle and Ndyajunwoha, 1988). In this context, while there is evidence to suggest that pricing is a key variable affecting export performance (e.g. Bilkey, 1982; Koh and Robicheaux, 1988; Kirpalani and Macintosh, 1980), most pricing research emphasizes the domestic market, (addressing such issues as price promotions, consumers' reaction to price, and price-quality relationships), rather than export customers. Given that: few studies have examined export pricing as opposed to other aspects of pricing strategy; what little research that does exist lacks strong conceptual foundations; and insights from the general pricing literature have not been applied to an export context to any appreciable extent, the present article seeks to provide a conceptual framework for pricing in an export context and link it to export performance. Specifically, the purpose of the study is threefold. First, we identify key organizational and environmental factors specific to an export setting that act as antecedents of export pricing strategies. Second, drawing upon the pricing and exporting literatures as well as from exploratory interviews with export managers, we develop a series of research propositions designed to link pricing strategies, contextual variables, and export performance. Finally, we make several suggestions regarding future research in this area and provide guidance in operationalizing key constructs.
In the next section, we highlight the distinct nature of export pricing decisions and provide a brief review of past literature. This is followed by a presentation of the proposed conceptual framework and associated research propositions. The paper concludes with identification of future research directions.
The distinct nature of export pricing
Global marketing decisions about product; price and distribution differ from those made in a domestic context, in that environments within which those decisions are made are unique to each country Gain, 1989), and the pricing problems faced by exporters are distinct from those faced by purely domestic firms in that variables associated with both home and export markets must be integrated into managerial decision making (Diller and Bukhari, 1994). Distinct issues include increased competitive levels, gray market activities, counter-trade requirements, regional trading blocs, standardization versus localization issues, the emergence of intra-market segments, and exchange rate volatility (Cavusgil, 1996; Cavusgil and Zou, 1994; Paun and Albaum, 1993; Samli and Jacobs, 1994; Samiee, 1987). The methods which management utilize to address these environmental issues must be synthesized with organizational concerns such as objectives of the venture (Cavusgil, 1988) and market-related concerns such as market volatility and disparate customer needs (Cavusgil and Zou, 1994), which can greatly narrow the domain of the firm's foreign market activities.
Pricing strategies are often based on the premise that the most effective strategies are not apparent until certain shared economies or cross-subsidies are evident. In his taxonomy of pricing strategies, Tellis (1986, p. 147) states that:
... in a shared economy, one consumer segment ... bears more of the average costs than another, but the average price still reflects cost plus acceptable profit. The use of such economies may be triggered by heterogeneity among consumers.
In business-to-business exchange, the consumer is the firm, and the heterogeneity across these firms is a product of economic conditions within the market as well as different utility among buyers (see Moriarty (1983)). However, buyer heterogeneity in business-to-business exchange will be reduced relative to that of consumers for a number of reasons. Organizational buyer behavior theorists (e.g. Moriarty, 1983; Heide and John, 1990) posit that organizational buying is distinct from consumer buying behavior in that:
(1) organizational purchases are made in group form, typically by a decision-making unit;
(2) an organizational decision to purchase must satisfy differing needs and objectives of a variety of participants;
(3) certain types of organizational buyer information, including proposals, price quotes, and purchase contracts, add to the organizational purchase a formal dimension not found in consumer buying; and
(4) the personal and organizational risk of a company's purchasing decision is generally greater than that of individual consumers (see Moriarty, 1983).
Given these parameters, organizational buying is seen as more rational in nature than consumer purchasing, and as a result more homogeneous. When the purchasing entities are importers, however, heterogeneity in the pricing decision model is enhanced by diverse economic conditions across markets (cf. Bello and Gilliland, 1997). In these exchange relationships, information deficiency still exists, yet this deficiency enhances problems beyond what is experienced in domestic exchange. For instance, the search costs of importers compared with domestic buyers will be considerably higher (Anderson and Gatignon, 1986). Furthermore, transaction costs associated with travel, commercial risk and capital significantly exceed that of domestic exchange (Aulakh and Kotabe, 1997). The lack of incorporating the dyadic diseconomies, or the differences in market environments between the buyer and seller which are present in import-export exchange, and the omission of market-related variables, is largely responsible for our inability to rely on traditional theory to explain export pricing strategies.
Examples of these dyadic diseconomies are easily made. For instance, market volatility, particularly in the form of foreign currency volatility and inflation rates, are characteristics of economic fluctuations, which result in risk and uncertainty in overseas markets (Aulakh and Kotabe, 1997). Frequent volatility of currency rates suggests that exporters may find themselves benefiting from a weak currency one month and struggling with an over-- valued currency the next. These exporters must be vigilant in their pricing by concentrating on the market's ability to purchase during exchange rate fluctuations. Import policies and trade barriers in import markets have a significant effect on export pricing decisions as well (Cavusgil, 1988, 1996). Price escalation due to import barriers may eat away at profit margins. Price-- quality relationships in overseas markets may also vary significantly, since all imported products may suffer from price escalation (Johannson and Erickson, 1985). The strategy options open to firms may be limited in order to maintain affordable products for the buyer. With the increased tension between nations over trading policies, such issues as intellectual property rights (Maggs and Rockwell, 1993), non-tariff barriers (Frank, 1984), and anti-dumping legislation have assumed considerable importance and have an obvious connection to export pricing (Joelson and Wilson, 1992). Export markets with strict price-- window regulations often restrict the ability of firms to price at competitive levels (Myers, 1997) and often firms must satisfy local conditions by concentrating on non-price aspects of exchange, such as the use of local or third country currencies of offering volume discounts (Weekly, 1992).
The degree of customer sophistication can also vary widely across markets (see Morris and Morris (1990)) and, in many developing economies, customers are less technologically proficient or knowledgeable regarding potential suppliers (Kotabe and Helsen, 2001). More sophisticated customers will often accept high search costs in efforts to locate the best price (Tellis, 1986), and are familiar with the pricing schedules of suppliers and will time their purchases accordingly to lock-in lower prices. Also, more sophisticated customers understand the cost structures of particular products better and, therefore, have a reference for fair price" (Nagle, 1987). Upper and lower thresholds for acceptable prices are thus more firmly established.
Given the critical nature of pricing decisions and the large number of firms that employ export marketing as an internationalization strategy, one would expect a wide range of studies concerning company practices in export pricing. As noted, however, relatively few have been conducted. According to Walters (1989), much of the work in international pricing concerns transfer pricing in multinational corporations (e.g. Al-Eryani et al., 1990; Arpan, 1973). Some important studies exist, however, on the effect of an overseas market environment on pricing, on pricing in developing countries and in specific markets, and on price controls overseas (Walters, 1989). Several pricing-- decision models have resulted from research on fluctuating exchange rates, including work by Clague and Grossfield (1974) and Choi (1986), and the literature also includes several qualitative models and approaches in overseas pricing situations (e.g. Farley et at, 1980; Rao, 1984; Walters, 1989).
The research that does exist, however, (e.g. Clark et at, 1999; Samli and Jacobs, 1993, 1994; Diller and Bukhari, 1994), supports our argument that a wide variety of organizational and environmentally specific factors influence export pricing. Cavusgil (1988) summarizes these factors into six groups of variables:
(1) nature of the product or industry;
(2) location of the production facility;
(3) system of distribution;
(4) location and environment of the foreign market;
(5) regulatory framework; and
(6) management attitudes.
In a similar vein, Lancioni (1988) states that price setting in international markets should be approached at two different levels - the external (customers, competition, government regulations) and the internal (cost reduction, ROI levels, and sales volume requirements) - and that both must be taken into account. This is plausible, since export pricing is an integral part of overall export strategy; indeed, exporting itself can be conceived as a strategic response by management to both internal and external forces (Cavusgil and Zou, 1994). The former relate to such organizational characteristics as corporate goals, desire for control over prices, and degree of company internationalization, while the latter include competitive pressures, demand levels, legal and governmental regulations, and exchange rates. The degree of alignment of these forces with the marketing strategy of the firm determines its performance (Aldrich, 1979; Porter, 1980). This principle suggests that pricing can be used as a distinct proactive strategy within the overall export marketing strategy of the firm. In this context, both the exporting literature (e.g. Walters, 1989) and the general pricing literature (e.g. Diamantopoulos and Mathews, 1995) suggest that successful price decision making is highly dependent on the situational variables that characterize dynamic, turbulent environments.