Marketing Mix: Product and Pricing Decisions

In international marketing the generation of an optimal marketing mix (the 4Ps of marketing: product, pricing, promotion, and place) flows logically from the international segmentation and positioning strategies decided upon by the management of the MNE. In developing of the appropriate marketing mix most companies follow standard procedures, but decisions relevant to each particular factor taken separately are the subject to local adaptation.

Product decisions represent the most complex decisions in the marketing mix as they involve several activities including design, standardization, or adaptation to local markets, the development of a line of related products, and management of the product through its life cycle.

It is generally recognized that products follow a life cycle: introduction, growth, maturity, and decline. Thus sales and, consequently profits, are the lowest when the products are in the introductory stage and the highest when they reach the stage of maturity. In the international context it is common for a product to be in the mature stage of the life cycle in one country and in the introductory stage in another.

The speed at which products are introduced in different country markets has considerably grown recently. At one time products were first introduced in high-income markets such as the United States, Europe and Japan, and only later introduced in middle- and low-income countries. The reduction of tariff and non-tariff barriers to trade, rapidly rising income in lower income countries, and the formation of free-trade zones have condensed the product life cycle. Since the early 1980s the launch of many new products has been occurring almost simultaneously around the world.

In this new environment international marketers should develop a careful coordinated marketing program, starting small entry with a single offering to a chosen market segment and then gradually spreading to additional market segments through product-line additions. This strategy is known as "product-line stretching".

The second of the 4Ps of the marketing mix is pricing. There are several common pricing strategies and issues relevant to international marketers in making pricing decisions.

Pricing is known for its complicated legal aspects. In most countries there is antitrust legislation to protect competition. However, such phenomena as price cartels and dumping effectively diminish price as a competitive instrument.

To avoid dumping and make price cost-justified a pricing system based on cost allocations has been developed - a so-called cost-plus pricing. The MNE sets a

price at a level where costs are covered. It also allows a certain added figure (a plus) for reasonable profit margins.

When products are exported, costs tend to increase. The reality of greater transport distances, tariff charges, customs duties, and the necessary product adaptation makes it natural that a price escalation occurs. From the competitive viewpoint this is price disadvantage, since the MNE's products become more expensive in the foreign markets. However, the MNE has sufficient firm-specific advantages to offset this price disadvantage.

Experience-curve pricing is based on the fact that a fall in unit cost occurs as output increases. This pricing strategy is adopted by the companies entering the foreign market in the maturity stage. The fact that the product is in the maturity stage means that the MNE has already developed skills in its manufacturing, has increased the output and thus has lowered unit costs for the product.

One standard pricing practice which emerges from the application of the product life cycle concept distinguishes between high "skimming" pricing and low "penetration" pricing. In the introductory stage of the product life cycle, customers often care little about price and are more concerned with other attributes of the product. Therefore, a high price can be used to skim the cream off the top of the market.

Alternatively, the introductory price might be set low and a larger number of potential customers are attracted. A low introductory offering generates high sales and market shares. By maintaining this low price, the market is penetrated more quickly and the growth stage of the product life cycle is reached earlier.