Forman 2002 PrcgStrat IndustProd Intl

The Determinants of Pricing Strategiesfor Industrial Products

in International Markets

Howard Forman

Richard Lancioni

ABSTRACT. The global marketplace is becoming increasingly com-plex in which to conduct business. Firms marketing consumer goodshave a somewhat easier time than those selling industrial products, sincemore has been written about them and the international consumer goodshave been analyzed for a longer period of time. In addition, the interna-tional marketing literature, has looked more at the elements of product,promotion and place than price. This literature gap has created a void inthe understanding of marketers as to how to effectively price industrialproducts in international markets.

The paper identifies the important industrial pricing strategies in in-ternational marketing and examines the underlying determinants that af-fect their outcome. In addition, the specific causal relationships betweenthe determinants and pricing strategies are examined through a logisticregression analysis. [Article copies available for a fee from The HaworthDocument Delivery Service: 1-800-HAWORTH. E-mail address: Website: 2002 by TheHaworth Press, Inc. All rights reserved.]

KEYWORDS. Pricing, strategies, international

Howard Forman is affiliated with LeBow College of Business Administration,Drexel University, Philadelphia, PA 19104.

Richard Lancioni is Professor of Marketing and Chair of Marketing Department,The Fox School of Business and Management, Speakman Hall, Temple University,Philadelphia, PA 19122 (E-mail: [email protected]).

Journal of Business-to-Business Marketing, Vol. 9(2) 2002 2002 by The Haworth Press, Inc. All rights reserved. 29

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INTRODUCTION

From 1970 to 1992, total U.S. world exports rose at an annual rate of11.2%. This long sustained growth rate is higher than any single coun-try has been able to achieve (Dolan and Simon 1996). As internationalsales continue to rise and new markets open up for U.S. multinationalcorporations (MNCs), foreign consumer markets served are becomingmore competitive.

Just as the international consumer markets are becoming more im-portant, the significance of international industrial markets is alsochanging. In fact, U.S. exports of industrial goods alone amounted to$326 billion in 1994, compared to $117 billion in consumer goods(Terpstra and Sarathy 1997). The growing importance of internationalindustrial commerce warrants increased attention, especially in thepricing area. This is true since pricing managers find, that in addition tothe usual pricing challenges they face domestically, the internationalproscenium presents different and more complex problems not usuallyassociated with domestic commerce. The first of these is that unlessfirms are able to substantially differentiate their products from others ininternational markets, they will be faced with more price competitionrelative to domestic markets (Weekly 1992). Second, selling productsinternationally will involve costs that differ from those of domesticproducts. These include product modifications required by the laws ofimporters countries, tariffs, costs associated with special packaging,transportation costs (especially for exports), and additional paperwork(Gabor 1988).

In summary, pricing industrial products in international markets ismore difficult and highly speculative due to the uncertainties associatedwith the international business environment (Kortge, Okonkwo, Bruleyand Kortge 1994). There is an urgent need for managers of industrialproducts to have a better understanding of the factors that affect thepricing of their products. Having a better understanding of these factorsshould allow marketing managers to make better strategic pricing deci-sions. The need to understand more about international pricing issues,however, goes beyond the applied managerial implications.

In the existing international business literature, some attention hasbeen paid to three aspects of the marketing mix, while little attentionhas been paid to international pricing issues. In one study, (over a sevenyear period) Javalgi, Cutler, Rao and White (1997) found that, of themarketing mix elements studied internationally, most of the marketingmix research focused on promotion (15.87%), followed by product is-

30 JOURNAL OF BUSINESS-TO-BUSINESS MARKETING

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sues (6.04%), distribution issues (3.94%) while pricing issues laggedfar behind at (1.47%). Others, such as Douglas and Craig (1992) andFriedmann and Kim (1988), also noted the need for further research ininternational pricing.

This lack of research into pricing in international markets is surpris-ing since, price has been shown in previous research to be the one factorthat explains the most variance in purchasing behaviors of consumers(Winer 1985). Pricing is also the only marketing mix element that doesnot require a substantial investment (Rao 1984; Samiee 1987) and it ac-counts for a firms revenues (Diamantopoulos and Mathews 1995;Monroe and Della Bitta 1978). Marshall (1979) attributes the relativelevels of profitability of firms to price. Fitzpatrick (1964) indicated thatthe importance of prices is illustrated by the fact that prices determinewhat products will be produced and distributed. Diamantopoulos andMathews (1995) took this one step further, suggesting that prices are thekey factor in foreign economies in that they ultimately determine howresources will be allocated.

For the most part, international pricing research has been limited tostudying countertrade (Hennart 1990; Kindra, Stapenhurst and Strizzi1993; Lecraw 1989; Mirus and Yeung 1986; Okoroafo 1992), exportpricing (Bernard and Weiner 1996), dumping issues (Bernhofen 1995;Bughin 1996; Miranda 1996), exchange rate changes (Betts andDevereux 1996; Hung, Kim and Ohno 1993; Subramanian 1994), trans-fer pricing (Al-Eryani, Alam and Akhter 1990; Hansen, Crosser andLaufer 1992; Rahman and Scapens 1986; Stewart 1989) and compara-tive studies of pricing strategies (Samiee 1987). Noticeably absent fromthe literature is any rigorous research on the implementation of pricingstrategies by marketing managers (Douglas and Craig 1992).

Even with the existing research on international pricing and the vari-ous levels of rigor of the studies, there is little understanding of the pro-cess by which pricing strategies are selected and implemented. Theresult is an incomplete understanding of why certain pricing strategiesare utilized and, in particular, of the important factors affecting their se-lection. By identifying the important determinants that affect pricingstrategies, a more complete understanding of how (the process) strate-gies are formulated should emerge and provide us with a framework forfuture study. Further, a better understanding of the determinants of pric-ing strategies would enable marketing managers to make more in-formed judgements about this most important strategic variable.

Howard Forman and Richard Lancioni 31

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BACKGROUND

Industrial Products Pricing Issues

One of the shortcomings in the marketing literature on pricing is thatthe product focus is squarely on consumer products (Gijsbrechts 1993),with relatively little attention paid to industrial products. This omissionis surprising since industrial purchasing (and hence pricing) is vitallyimportant to organizations at all levels in international markets.

There are three main differences between the pricing process of con-sumer and industrial customers. First, the relationship between priceand quality may be more important for industrial products (Gabor 1988)than for consumer products. Marketing managers can then take advan-tage of this situation when pricing their products. Second, industrialbuyers are less price sensitive than final consumers. This relative priceinsensitivity is a contributing factor in the price-quality relationship.For example, industrial customers are reluctant to substitute an existingreliable supplier with another supplier, even for rather significant pricedifferentials (Gabor 1988).

The third difference between consumer and industrial pricing is therelative level of knowledge of the buyers. Overall, industrial customershave more expertise about the product and the market than do final cus-tomers. For example, industrial organizations frequently have a numberof individuals involved in the buying decision. Each of these individu-als has his/her area of expertise. In addition, industrial organizations usevarious analytical methods and sometimes sophisticated technologieswhen making a purchasing decision (Morris 1992) (i.e., vendor analy-sis). One of the implications of this knowledge is associated with thebuyers reference prices as they may play a more prominent role insome industrial pricing situations (i.e., in make or buy situations) whereindustrial buyers are more knowledgeable.

International Pricing Issues

Gaul and Lutz (1994) point out, research in international pricing wasnot conducted with any serious frequency until the 1970s when the ma-jor issue became intracorporate transfer pricing policies. Today, trans-fer pricing issues are still important, but they are more prevalent in theaccounting and finance literature than international marketing. Whilethe focus of international pricing research currently focuses less ontransfer pricing then on the increasing global nature of firms, transfer


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pricing still warrants serious consideration since it has important strate-gic implications that can directly impact overall corporate income.

The international pricing literature has since turned to other issues in-cluding export pricing (Cavusgil 1988; Koh 1991). Export pricing strat-egies are affected by various factors including the nature of the productindustry, location of production facilities, and U. S. governmental regu-lations (Cavusgil 1996).

Another issue in the literature is related to the various pricing factorsthat affect foreign market pricing for MNCs (Kublin 1992; Weekly1992; Leighton 1966). These include various limiting factors such asprice controls, competition, costs at various levels of output, anti-dump-ing laws and currency conditions. Managerial pricing solutions to vary-ing currency conditions are offered by Cavusgil (1996). Finally,strategic pricing issues associated with high-tech industries such asstandardization and adaptive strategies are identified by Davies andBrush (1997).

Taxonomy International Industrial Pricing Strategies

Tellis (1986) unifying taxonomy is a more recent and importantclassification of the pricing strategies described in the marketing litera-ture. Pricing strategies are unified in the sense that Tellis manages toidentify the various names for similar pricing strategies, present theprinciples, descriptions, and connotations underlying those pricingstrategies, to formulate his taxonomy. Managerial pricing approachesbased on objectives other than profit maximization are, however, ex-cluded from his study. In addition, his work is centered on pricing forconsumer products. Thus, the taxonomy he developed differs somewhatfrom a taxonomy for international industrial products.

Shapiro and Jackson (1978) describe industrial pricing as falling underone of three approaches, (1) cost oriented, (2) competition oriented and(3) customer oriented. Although there are many pricing strategies avail-able to international marketing managers, eight strategies are identifiedhere. These strategies represent those most frequently used by interna-tional pricing managers. The complexities of the issues surrounding in-ternational pricing accounts for the diverse types of strategies availableto firms which are not adequately covered by existing taxonomies.Thus, it would be helpful to develop a classification of the various strat-egies in order to better understand them and how they relate to eachother in terms of similarities and differences. These strategies may beclassified into four categories: (1) competition based strategies, (2) in-


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ternational based strategies, (3) cost based strategies, and (4) demandrelated strategies (Table 1). The first part of this section includes a briefexplanation of the above taxonomy. Next, the various pricing strategiesimportant to this study are defined in terms of the taxonomy.

Competitive Pricing Strategies

Parity Pricing Strategy

A firm adopts this strategy when it sets its prices in a range in whichmost of the buyers would find the prices acceptable and appropriate.Thus, parity pricing tends to be more middle of the road where theprices are neither significantly above or below the market price (Nagle1987). Firms adopting parity pricing want to be recognized as a fairdealer (Morris and Morris 1990). Parity pricing may also be viewed asstrategy where a firm matches the prices set by the price leader. In theabsence of a price leader, the firm will match the market prices. In theinternational business literature, this strategy is similar to a strategyknown as pricing to market. Parity pricing is used in markets where theparity pricer is usually a firm that does not have the significant marketshare (Rogers 1990).

International Pricing Strategies

Transfer Pricing Strategy

As discussed earlier, transfer pricing is a strategy where a multina-tional firm sells its products to another subsidiary or division in an-


TABLE 1. Taxonomy International Industrial Pricing Strategies

FIRM STRATEGIES

CompetitiveStrategies

InternationalStrategies

Cost BasedStrategies

Demand RelatedStrategies

Parity pricing Transfer pricing Cost-plus pricing Price skimming

Countertrade Premium pricing

Standardized

Adaptive

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other country. In essence, the price charged is transferred to thatforeign division. Transfer pricing strategies are used for a variety of rea-sons. The objective of transfer pricing is as follows: (1) coordination ofallocation decisions for products, (2) allocation of in-house profits,(3) relocation of profits for tax purposes and (4) relocation of profits forhidden self-financing, market penetration or repatriation of capital.Transfer prices between divisions will vary depending on variablessuch as the taxation rates (i.e., higher income tax rates in the parentshome country will lead to lower transfer prices) and the desire to mini-mize profitability of subsidiaries as a barrier to entry (Rahman andScapens 1986). Transfer pricing is used when the different subsidiariesor divisions are operating as profit centers.

Countertrade Pricing Strategy

This is a pricing strategy that is used with international transactionswith foreign countries which are either centrally planned or in lesser de-veloped countries (Hennart 1990; Rabino and Shah 1987; Mirus andYeung 1986). The relative impact of countertrade (positive or negative)has been discussed in the literature (Lecraw 1989). Lecraw (1989) andMirus and Yeung (1986) argue that countertrade is a viable manner forconducting and expanding international business.

Countertrade can be very complex and can result in increased trans-action costs (Forker 1997). Additionally, there are many different typesof countertrade. The commonality of the different types of countertradeis that these transactions involve payments (in whole or in part) of assetsother than cash. These assets might include promises of goods or ser-vices to the sellers from the buyers (Hennart 1990). Thus, it is useful incountries where exchanges in cash could be a problem (Kindra,Stapenhurst and Strizzi 1994) or where there are other types of marketimperfections (Amann and Marin 1994; Mirus and Yeung 1986).

The countertrade strategies discussed here will only be those that in-volve some cash in the exchange (i.e., involve monetary pricing of themanufacturing/selling firm). Each of these types of countertrade strate-gies is made up of two concurrent contracts. These contracts representreciprocal commitments of the parties to the contracts. For example, areciprocating agreement may consist of an exporting firm agreeing tomake a purchase from an importing firm.

Countertrade is an appropriate strategy for international industrialproducts. Firms engaged in countertrade tend to have some similar char-acteristics that include the trade of industrial products. Often, firms using


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countertrade as a strategy are in the chemical, transportation and manu-facturing industries (Huszagh and Barksdale 1986; Okoroafo 1992).

Standardized vs. Adaptive Pricing Strategy

One of the ongoing debates in the international marketing literatureconcerns the strategic decision to standardize marketing strategies oradapt them to each country. This is an important debate in both the aca-demic and managerial marketing literature as the strategic implicationsof the findings can be significant. Specifically regarding industrialproducts, it has been empirically shown that industrial products may bemore appropriate for a standardized marketing strategy than consumerproducts (Boddewyn et al. 1986; Rau and Preble 1987; Chhabra 1996).Although much of the debate historically focused on marketing mixvariables other than pricing, some generalizations related to this debateon pricing can be made.

Pricing may prove to be more difficult to standardize across coun-tries than other marketing mix variables. Variances in consumer habits,competitive positions and distribution channels across countries ac-count for the difficulties to standardize pricing strategies (Dolan and Si-mon 1996). Yet despite the differences across countries, most interna-tional organizations manage to have the locus of their pricing strategiesdecisions in a centralized location allowing firms to maintain or de-velop product images across different countries (Cavusgil 1996). Thisis especially true for international firms based in the United States(Samiee 1987).

Other characteristics associated with conducting business in the localcountry may be significant. For example, some specific costs such astransportation costs and value added taxes may contribute to the use ofdecentralized pricing decision-making. Local economic or financialconditions including interest rates or inflation rates may play an impor-tant role in the locus of the pricing decisions. One final factor that couldcontribute to the use of a decentralized strategy is factory capacity utili-zation. A local division with excess capacity may be in a position that itwould lower prices to expand demand (Cavusgil 1996).

Cost Based Strategies

Cost-Plus Pricing Strategy

A cost-plus pricing strategy is one where prices are determined by cal-culating all of the fixed, variable, direct and indirect costs associated with


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producing products. These costs are then converted to a per unit price anda mark-up or profit is added on to arrive at the customers price. Thismark-up can be a predetermined percentage in the case of the pursuit of atarget return or a varying percentage in the case of a profit maximizationobjective. This is the most widely used pricing strategy (Seymour 1989;Morris and Morris 1990; Rogers 1990; Diamantopoulos 1991).

Demand-Related Strategies

Price Skimming Strategy

This is a pricing strategy where the prices of products are initially sethigh, with the intention of discounting the price later on in the productlife cycle. When new products are introduced, there is a tendency for thedemand of these products to be somewhat inelastic relative to the de-mand for the same product at some later point. Exploiting the more in-elastic demand at the market introduction stage (Dean 1950;Diamantopoulos and Mathews 1995) of the product life cycle by charg-ing a higher price is the principle behind the skimming strategy. Priceskimming is also expected to be more effective when there is limitedcompetition (Oxenfeldt 1975), a limited threat of entry, and a relevantdifferentiation in the market between products (Nagle 1987).

Premium Pricing

Premium pricing involves setting prices high to reflect value. This ispossible because the products are viewed by the customers as heteroge-neous in nature. Also, the customers for premium products are price in-sensitive (Tellis 1986). Small high technology firms may also chargepremium prices if they can develop unique products or technologies un-available elsewhere (Tellis 1986; Pierson 1989).

Determinants

In order to understand the relationship between pricing determinantsand international pricing strategies, the determinants need to be clearlydefined. They may be classified into four categories-environmental,marketing mix, company, and market related determinants. Table 2 rep-resents the taxonomy and the individual determinants under each cate-gory.


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Environmental Determinants

The following section provides a brief description of those determi-nants pertinent to this study. The first category is environmental deter-minants. Environmental determinants include those factors that are partof the macro operating environment of the firm. These are generally as-sociated with governmental and economic milieu. The second categoryof determinants is related to company factors. These factors are charac-teristic of variables more closely associated with the organizational andcost structures of firms. The third category is related to the particularmarketing mix variables of individual firms that are associated withspecific products. These include those factors closely associated witheach marketing mix element. The last category refers to market-relatedfactors. These factors refer to the specific markets related to the prod-ucts in which the firms sell their products.

Government Intervention

One of the greatest risks associated with international business isgovernment intervention or the potential of such interference. For thepurposes of this study, the determinant of government intervention isreferred to as the real or potential impediments that originate in the hostor foreign governments. This determinant includes the non-monetarygovernmental maneuvers that inhibit foreign access to its home marketsuch as price controls, antitrust legislation, non-tariff trade barriers orfinancial reporting requirements. Other types of environmental factorsinclude antitrust legislation in host and foreign countries that may beenacted to create non-tariff trade barriers to reduce competition fromforeign countries (Al-Eryani, Alam and Akhter 1990) by preventing in-ternational firms from dumping their products in the local market.


TABLE 2. Taxonomy of International Pricing Strategy Determinants

EnvironmentalDeterminants

CompanyDeterminants

Marketing MixDeterminants

Market-relatedDeterminants

Governmentintervention

Firm size Country of origin ofmanufacture

Market structure

Exchange rates Stage of product life cycle Market contribution

Level of Price Sensitivity

Product Differentiation

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Exchange Rates

One of the obvious problems faced by international marketers is re-lated to pricing products in the face of fluctuating exchange rates. Evenvery profitable firms can be dealt severe losses associated with volatileexchange rates. As a result, international marketers need to developstrategies to effectively deal with the uncertainties associated with fluc-tuating exchange rates (Cavusgil 1988).

Company Determinants

Firm Size

The size of a firm has many strategic implications. Pricing strategiesare no exception. Small firms price their products differently from largecompanies. For example, small firm pricing strategies tend to be moreor less a function of the founders gut feelings based on an estimationof internal costs and the competition (Pierson 1989). However, as firmsgrow, so do the costs and the complexities of assigning costs (i.e., over-head, additional personnel, etc.). These changes make the foundersability to manage costs and pricing impossible, rendering the old meth-ods of developing prices obsolete.

Additionally, large companies have different cost structures and ac-cess to greater amounts of capital than smaller firms. Thus, larger orga-nizations have the ability to pursue certain pricing strategies where thegoal is to gain substantial market share.

Marketing Mix Determinants

Country of Origin of Manufacture Determinant

A great deal of research has been conducted on the effects of countryof origin of products on consumers. Stereotypes specific to certaincountries exist in the minds of customers. These stereotypes are usuallybased on the perceived level of economic development, political and so-cial influences of foreign countries. These country specific stereotypesare transferred to the products originating from those countries by theconsumers evaluating the products. Industrial buyers tend to be morerational in their purchasing behavior; however, country-of-origin ofmanufacture plays a significant role in their decision-making (Samiee1994). However, assuming industrial buyers have expertise with regard


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to the products they are purchasing, their use of country-of-origin ofmanufacture may be limited to those products where the informationabout the items is ambiguous. If product information is unambiguous,country-of-origin of manufacture is not as important as the strength ofthe products attributes (Maheswaran 1994).

Stage of Product Life Cycle Determinant

Another relevant influence on pricing strategies is the product lifecycle. After firms introduce products into markets, they are continuallyfaced with changes that affect the overall marketing mix for the productand in particular, pricing. As products move from one stage to the next,the relevant costs, buyers sensitivity and competition change (Nagle1987) and so would appropriate pricing strategies.

Level of Price Elasticity Determinant

The level of price elasticity is very important in developing pricingstrategies. If customers are highly sensitive to price, they tend to viewcompeting products as mere substitutes of each other. The implicationsfor pricing are significant in that the relative level of the price elasticityof customers will exclude the successful implementation of some pric-ing strategies. For example, the implementation of premium pricing orprice skimming strategies will not be viable options for particular cus-tomers. These strategies are not viable since price sensitive customersplace an increased importance on price in the purchase decision pro-cess. Price skimming, however could be used in a relatively price sensi-tive market, if a segment of the market is less sensitive. Thus, it allows afirm to realize higher revenues from the higher prices charged to the lessprice sensitive customers, and, still retain the price sensitive customersby the subsequently lowered prices.

At the same time, if customers are not very price sensitive, customersassign less weight to the price component of products. In such in-stances, products are viewed by customers as being heterogeneous ordifferentiated from each other. Customers may also be less price sensi-tive in situations where there are no substitutes in the market.

Product Differentiation

Customers tend to become more sensitive to price the more compet-ing products are perceived (in their minds) to be homogeneous. In thesemarkets the price of products is the most important attribute relative to


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the differences between the physical attributes of products. Therefore, aprobable pricing strategy for relatively undifferentiated products mightbe a low-price supplier.

Conversely, customers tend to be more price insensitive the morehighly differentiated products are in a market. Thus, attributes otherthan price become more important to customers. Industrial firms usingthis strategy in a differentiated market might do so to lock out the ex-isting or potential competition (Nagle 1987).

Market-Related Determinants

Market Structure Determinant

The economics literature acknowledges that the pricing behavior offirms will differ as market structures change. For example, the demandfor products in an oligopolistic market is rather inelastic. The market isalso characterized by a relatively small number of firms, each with asignificant market share. As a result, these firms have more direct con-trol over their pricing strategies. Often none of the firms in anoligopolistic market controls the others. The companies are, however,in a position to exert influence over the others. Consequently, firms inoligopolies make pricing decisions with a regard to the anticipated reac-tions of the competition (Dorward 1987).

Market Contribution Determinant

The market share of a firm is important, however, consideration alsoneeds to be made regarding the market contribution of a particular prod-uct to the overall firms sales or profits. Market contribution, for the pur-poses of this study is defined as the percentage of the overall sales of afirm that is represented by one particular product. For example, a productmay have a significant share of a market, but it may provide only a smallcontribution to the firm. This phenomenon is usually associated withlarger firms. The result is that the company may not pay as much atten-tion to the product as a smaller firm might. The level of attention paid toproducts will affect the pricing strategies of the company.

Environmental Determinants Hypotheses

The first of the determinants categories is environmental determi-nants (see Table 3 for overview). Non-monetary government interven-


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tion is a constant threat to MNCs. As such, marketing mix variables aresubject to changes depending on these threats.

Institutional theory suggests that there are factors or institutions otherthan competition that affect the activities of firms. One such institutionis governmental intervention. This influence can, for example, be in theform of governmental regulatory systems (Scott 1995). Governmentalregulatory systems are in place for a variety of reasons including pro-tecting domestic industries from international competition by devisingways of making the foreign companies less competitive.

One of the governmental intervention mechanisms is price controls.Since price controls directly affect pricing strategies, firms will look formeans to circumvent the imposed price controls. One way of doing sowould be the use of transfer pricing strategies.

In addition to price controls, host countries also attempt to place legalrestrictions other than price controls on foreign firms selling products.These might include, anti-dumping and anti-trust legislation. Whenfaced with such legal restraints, firms are also likely to use transfer pric-ing strategies (and in particular, market-based strategies) to reduce legaldifficulties associated with accusations of transfer pricing manipulation


TABLE 3. Hypothesized Relationships Between Determinants and Strategies

Determinants

Strategies

Govern

ment

Inte

rvention

Pro

duct

Diffe

rentiation

Exchange

Rate

s

Firm

Siz

e

Countr

yof

Origin

of

Manufa

ctu

re/

Qualit

y

Sta

ge

of

Pro

duct

Life

Cycle

/S

ensitiv

ity

Mark

et

Str

uctu

re

Mark

et

Contr

ibution

Transfer x

Parity x purecomp.

Standardized small

Adaptive large

Countertrade large

Premium x x

Skimming intro

Cost Plus intro low

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from foreign governments (Al-Eryani, Alam and Akhter 1990). There-fore, the following hypotheses regarding the use of transfer pricing are:

H1a: Firms faced with significant government intervention aremore likely to use transfer prices as a pricing strategy to cir-cumvent such intervention than other pricing strategies.

The second environmental determinant is the exchange rate. In par-ticular, the volatility of its fluctuations is important. A prima facie con-clusion that can be made regarding exchange rates would be thatexchange rate volatility provides a major challenge to marketing man-agers. However this may not necessarily be the case. For example, in in-ternational consumer markets, Betts and Devereux (1996) develop amodel to explain the phenomenon that the exchange rates do little to af-fect nominal prices to consumers.

Similarly, in international industrial markets, Tange (1997) finds thatfluctuating exchange rates do not significantly affect nominal pricescharged to customers. In Tanges (1997) study, it was found that Japa-nese manufacturers incompletely pass-through exchange rate changes.With the depreciation of the yen, Japanese manufacturers tended to dif-ferentiate between domestic and foreign market prices, charging lowerprices in the latter markets. This practice, called pricing-to-markets(Krugman 1987) enables firms to maintain relatively stable prices. Inorder to remain competitive (especially in homogeneous product mar-kets), firms will attempt to keep prices competitive. Therefore, the fulleffect of the fluctuating exchange rates is not manifested in exaggeratedpricing strategies leading to the following hypothesis:

H1b: Firms faced with significantly fluctuating exchange rates aremore likely to pursue parity pricing strategies than other pric-ing strategies in an effort to keep the prices relatively stable.

Company Determinants Hypotheses

The size of the firm can have a significant effect on how it operates.For example, larger firms may be able to devote in-house staff with spe-cialized expertise to carry out complex transactions. This suggests thatlarger firms may be more likely to use adaptive pricing strategies whennecessary relative to smaller firms. Smaller firms, therefore, might notbe in the same situation regarding available resources and thus mighthave to resort to different pricing strategies. Using standardized pricing


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strategies requires a firm to develop one generic pricing strategy anduse it across countries. Hence, it is expected that:

H2a: Smaller firms will use standardized pricing strategies in lieuof adaptive pricing strategies.

H2b: Larger firms are more likely to use adaptive pricing strategiesrelative to smaller firms.

Another pricing strategy associated with large firms is countertrade.Engaging in countertrade pricing strategies can become very complexin nature. Large firms are in a better position to cope with these com-plexities (Forker 1997) as they will be more likely to have the necessaryresources (i.e., personnel, expertise, money, etc.) required to carry outthese transactions thus:

H2c: Large firms are more likely to use countertrade pricing strate-gies than small firms.

Marketing Mix Determinants Hypotheses

The marketing mix determinant is related to the country-of-origin ofmanufacture of the product. This is a product related element since cus-tomers tend to attach country stereotypes to products. An important im-plication can be drawn from the country-of-origin issues. Specifically,todays rapid technological changes may imply that there are a number ofoccasions where new products are introduced into markets on a regularbasis. This provides firms opportunities to differentiate their products. Atthe same time, industrial buyers may not be as familiar with new productscompared to existing products. Therefore, the information these buyersreceive about the products (especially when first introduced to them) maybe somewhat uncertain thus emphasizing the importance of coun-try-of-origin (Ahmed, dAstous and El Andraoui 1994). Thus, there willbe a certain increased value associated with the country-of-origin of man-ufacture of the product as that may affect the perceived quality of theproduct in the minds of the customers. Therefore, the following implica-tion of country-of-origin of manufacture is as follows:

H3a: Firms selling products internationally where the coun-try-of-origin of the product is significant and perceived qual-ity of the product is high are more likely to use premiumpricing strategies in lieu of other pricing strategies.


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The next significant element of the marketing mix determinant is theproduct life cycle. As products move through the stages of the productlife cycle, they tend to face different competitive issues and differentdemand elasticities. It will be useful to discuss the product life cycle interms of the individual stages (Nagle 1987).

In the market introduction stage, there are many dynamics poten-tially affecting pricing strategies. There are two dynamics of particularinterest in this study. The first is demand elasticity, which tends to differbetween product markets. For example in the beginning of market intro-duction stage, demand for products may be more inelastic as Innovatorsare willing to pay more for new products since they are less price sensi-tive (Nagle 1987). Pricing strategies may be used here to segment themarket effectively by charging higher prices to those that are less pricesensitive, hence:

H3b: Firms whose products are in the market introduction stage,when the customers are perceived to be less price sensitive,are more likely to use price skimming pricing strategies tosegment the market in lieu of other strategies.

Lastly, products in the market introduction stage are new, not only tothe prospective customers, but possibly to the firms manufacturingthem. As such, these firms might tend to be more cautious in selling thenew products in existing markets or especially when selling to foreignmarkets for the first time (Guiltinan 1976; Nagle 1987). Their unfamil-iarity with new products and especially the new markets increases risksassociated with marketing products. Thus, marketing firms are likely tobe rather risk averse in these situations. Managers who are unwilling totake risks, will adopt pricing strategies that are the least risky (Guiltinan1976). Kahneman and Tversky (1979) suggest that individuals will un-derweight probable outcomes (and hence, overweight certain out-comes). The interesting phenomenon here is that the function for lossesis steeper than for gains which explains the risk averse tendencies of in-dividuals. Therefore, it is predicted that pricing managers will utilizepricing strategies for new products or new (and/or unfamiliar) productmarkets that are least likely to result in an adverse outcome (i.e., nega-tive returns as a result of pricing strategies). Of the pricing strategiesavailable, cost-plus pricing strategies are the least risky (Guiltinan1976), hence:


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H3c: Firms selling products in the market introduction stage aremore likely to use cost-plus pricing strategies in lieu of otherpricing strategies when they are not familiar with the marketswith which they sell their products.

As discussed above, products that are highly differentiated from thecompetitors products will have less emphasis placed on price by theircustomers compared to those firms selling in less differentiated productmarkets. Thus, there are different pricing strategies that are appropriatefor these two types of markets. This leads to the following hypothesis:

H3d: Firms in highly differentiated product markets are more likelyto use premium pricing strategies than those firms in less dif-ferentiated product markets.

Market-Related Determinants Hypotheses

The final set of hypotheses relates to the market-related determi-nants. The first of these is market structure. Market structure is impor-tant in that the number of valid pricing strategies available to firms islimited by the structure of the market. Purely competitive markets orthose closely resembling pure competition will face highly competitivemarkets where the firms in the industry are selling relatively homoge-neous products and do not have significant market share. Thus, they arenot able, by themselves, to influence the price of the products. This im-plies that they will be pricing their products according to the marketconditions, hence:

H4a: Firms in markets that resemble pure competition are morelikely to use parity pricing strategies in lieu of other pricingstrategies.

The next determinant is the market contribution element associatedwith the products relationship with the overall profitability of the firm.Since every product has a different contribution to the firm, some prod-ucts (usually those with the highest contribution) will garner more ofthe firms attention. It follows then that the attention to the pricing strat-egies of products will also vary from one product to the next (Noble1995). For example, those products that receive the least attention willbe priced via pricing strategies that do not require much time and effortsuch as cost-plus strategies, hence:


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H4b: Firms selling products with low contribution rates are morelikely to use cost-plus pricing strategies in lieu of other pric-ing strategies.

METHODOLOGY

Product

International industrial products were chosen for this study for a vari-ety of reasons. Industrial products represent a significant amount of to-tal global sales. A study identifying the determinants of internationalpricing strategies of these products will therefore be significant. This iscoupled with the fact that the research into international industrial prod-ucts is incomplete at best, leaving an important gap in the literature thatneeds to be filled.

Statistical Methodology

Thus the intent is to predict the pricing strategies selected by pricingmanagers based on the determinants faced by these managers. Logisticregression is the statistical methodology selected for this study sincethis statistical method measures the probability or the likelihood that aspecific event (i.e., the selection of a specific pricing strategy) will takeplace (Hair et al. 1992; Hamilton 1992). In particular, a binary logisticregression analysis was used in this study where one independent vari-able was regressed against each of the dependent variables.

Measurement Instrument

Based on the amount of information and the number of cases neededfor this study, a mailed questionnaire was deemed the most appropriatemeasurement tool. The final questionnaire was administered to 1044firms immediately following a pre-test survey. Results from the pre-testrevealed the questionnaire was logical, easy to follow and understand.Preliminary results suggested the respondents understood the meaningsof the questions and are consistent with the findings of the currentstudy.

Key informants of industrial firms were solicited for this study. Theywere singled out since they should be knowledgeable regarding the is-sues under study and understand the research issues (Phillips 1981).


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The questionnaires were directed to high ranking corporate officials in-cluding president or chief executive officer for smaller firms and seniorvice presidents of marketing or related areas in larger firms. The namesand addresses of these individuals were gleaned from the disk versionof the Million Dollar Directory. Furthermore, the questions and result-ing analysis should be relevant to the key informants.

RESEARCH RESULTS

Response Rate

The surveys were mailed out to U.S. firms selling industrial productsinternationally. Firms falling under the four digit 35 S.I.C. code (3511,3523, 3531-36, 3541, 3561, 3569 and 3585) were selected since theseproducts are strictly industrial in nature and cannot be confused withsome consumer products. Of the 1044 surveys sent out, thirty-eightwere returned due to bad addresses, yielding a net total of 1006 sent toand received by industrial firms. A total of 190 responses were receivedfrom these firms. Included in these responses were five from firms thatdid not or could not participate in the survey. This left 185 completedsurveys returned. Sixteen of these responses were deficient in that theywere not completely filled out and/or left significant data unanswered,erroneously filled the survey out, or did not follow the instructions.Thus there were 169 net useable responses for the research, whichyielded a response rate for this mailed survey of 16.8%. Due to the sen-sitive nature of the data, this response rate was deemed acceptable.However, in order to ensure against non-response bias, an evaluation ofthe non-respondents was conducted. Firm size, as measured by the totalannual revenue of those firms not responding was selected. This vari-able was selected because the surveys were sent out randomly to firmswithin the specified S.I.C. code to further reduce the possibility of biasin the survey results. Using the scale provided in the questionnaire, itwas found that the mean of the respondents was 3.48 (corresponding tothe $26-50 million range) and the mean of the non-respondents was3.53 (corresponding to the same range). A t-test was conducted on themeans and it was found that there was not a significant difference be-tween the distribution of the means of the respondents versus thenon-respondents. A comparison of the respondents and the non-respon-dents can be found on Table 4.


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Description of Sample

This section describes some of the important characteristics of thefirms responding to the survey. This will include firm size, product de-scriptions including the price of the products and the nature of the prod-uct (whether the product is considered a high or low technologyproduct), the number of countries where firms sell their products, theamount of foreign revenue generated by the sale of products in foreignmarkets, the foreign revenue generated by the sale of the products inquestion, and the number of years that the key informant was in the in-dustry (selling the product internationally).

Firm Size

A detailed breakdown of the respondents according to firm size (asmeasured by total annual revenue) can be found on Table 5. Smallerfirms with revenues from $1 million to $25 million accounted for 60.2%of the respondents. Mid-sized firms with annual revenues ranging from$26 million to $100 million accounted for 26.1%. The remaining 13.7%was comprised of large firms with over $100 million in annual reve-nues. The average size (in terms of revenues) of the respondents was inthe $26-50 million in revenues per annum. This suggests that the sampleconsists of a significant number of firms of consequential size and thatthe results of the survey will be meaningful and generalizable.

Key Informants

The key informants had significant experience with a mean of 16.23personal years international pricing experience. In addition, the mean


TABLE 4. Firm Size Means: Respondents versus Non-Respondents

Total Revenue (Respondents) Total Revenue (Non-Respondents)

Mean 3.48 3.53

Variance 3.48 2.87

Observations 169 875

t Stat0.317

t Critical 1.651

P-value 0.375

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of the key informants responsibility for developing the pricing strate-gies is 57%. These measures suggest that the selling of products inter-nationally is not a new phenomenon to these companies and the keyinformants had a bulk of the responsibility for making the pricing de-cisions.

Determinants

The respondents were asked to rank the importance of the effect ofthe determinants at the time of their pricing decisions. The responseswere recorded on a scale of one to seven. A summary of these resultscan be found on Tables 6 and 7.

Validity of Pricing Strategies

In an effort to check the validity of the strategies the respondents in-dicated they used, it was necessary to run an analysis of the expected di-rections of the prices relative to the other pricing strategies. The meansof each of the determinants from those firms that adopt the strategy ver-sus those that do not adopt the strategy are compared individually usinga t-test. Levenes test for equality of variances was used to determinewhether or not the variances between the two groups are equal. Thesummary of these results can be found on Table 8. It was found that therespondents adequately understood the definitions of the pricing strate-


TABLE 5. Distribution of Sample (Annual Revenue)

Total Revenue Frequency Percent Valid Percent CumulativePercent

$1-5 Million 16 9.5 9.6 9.6

$6-10 Million 29 17.2 17.5 27.1

$11-25 Million 55 32.5 33.1 60.2

$26-50 Million 29 17.2 17.5 77.7

$51-100 Million 14 8.3 8.4 86.1

$101-249 Million 8 4.7 4.8 91.0

$250-499 Million 8 4.7 4.8 95.8

$500-999 Million 4 2.4 2.4 98.2

$1-2 Billion 2 1.2 1.2 99.4

$2 + Billion 1 .6 .6 100.0

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TABLE 6. Summary of Determinants

Determinant Mean Standard Deviation Standard Error

Intervention 2.85 1.71 .133

Foreign Exchange 3.05 1.92 .148

Product Differentiation 4.44 1.48 .115

Annual Revenue* 3.54 1.82 .142

Country of Origin 4.60 1.28 .099

Market Structure** 2.30 .931 .072

Market Contribution 4.36 1.75 .135

* This determinant is on a scale of 1-10.** This determinant is categorical.

TABLE 7. Summary of Product Life Cycle Determinant (Frequencies)

Determinant Market Intro Market Growth Market Maturity Sales Decline

Product Life Cycle 48 31 86 5

TABLE 8. Frequencies and Comparison Relative Prices of Pricing Strategies

ExpectedPriceLevel

PricingStrategy

Frequency Mean ofCentralStrategy

MeanOther

Strategies

MeanDifference

LevenesTest

T-Score Sig.

Low CountertradePricing

5 2.80 3.36.56 .019 2.51 .04

ParityPricing

29 3.37 3.34 .03 .001 .14 .88

TransferPricing

17 3.50 3.33 .17 .539 .44 .37

Cost PlusPricing

54 3.49 3.27 .22 .122 1.02 .21

SkimmingPricing

32 3.70 3.31 .44 .547 1.09 .07

High PremiumPricing

36 3.95 3.16 .79 .699 3.37 .00

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gies in the questionnaire, confirming the validity of those pricing strate-gies included in the study.

Hypothesis 1a

The results of the logistic regression found that the probability of us-ing transfer pricing under these conditions was supported and was sig-nificant (p < .01). This is because the importance of governmentintervention was not significant (mean = 2.66) with firms not usingtransfer pricing whereas government intervention was significant forthose firms that used transfer pricing (mean = 5.0) suggesting this is abetter predictor of this type of strategy.

Hypothesis 1b

The results of the logistic regression found that the probability of usingtransfer pricing under these conditions was supported and it was significant(p < .05). By pursuing a parity pricing strategy, firms are able to stabilizetheir pricing in their markets. Even if the fluctuations in the exchange rateare unfavorable, firms may be willing to settle for a lower profit margin forfear of losing market share because of uncompetitive prices.

Hypothesis 2a

The results of the logistic regression found that the probability of us-ing standardized pricing under these conditions was supported and wassignificant (p < .05). This was due to the fact that these smaller firmsgenerally did not have the resources or expertise required to engage inadaptive strategies.

Hypothesis 2b

The results of the logistic regression found that the probability of us-ing adaptive pricing under these conditions was supported and was sig-nificant (p < .05). Unlike smaller firms, larger firms have the resourcesand may be more likely to have or be in a position to obtain the expertiseto engage in adaptive pricing strategies than smaller firms.

Hypothesis 2c

The results of the Chi Square analysis found that the probability ofusing transfer pricing under these conditions was supported and wassignificant (p < .01). This is not surprising since entering into and nego-


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tiating countertrade agreements can be very complex and require a sig-nificant amount of resources thus making larger firms more suitable forthis strategy than smaller firms.

Hypothesis 3a

The results of the logistic regression found that the probability of us-ing premium pricing under these conditions was supported and was sig-nificant (p < .01). It is interesting to note that there was no significantrelationship between premium pricing strategies and country-of-originof manufacture alone or perceived quality alone.

Hypothesis 3b

The results of the logistic regression found that the probability of us-ing skimming strategies under these conditions was not supported. Thisfinding is interesting in that the lack of support may be due to differ-ences between domestic and international product life cycles. Also,some new products represent minor improvements to existing products.In this case, demand may not be inelastic.

Hypothesis 3c

The results of the logistic regression found that the probability of us-ing cost-plus pricing strategies under these conditions was supportedand significant (p < .1). Indeed, when product life cycle alone is re-gressed against cost-plus pricing strategies, there is no significant rela-tionship (which is consistent with most of the other findings related tothe product life cycle). It is only when the product life cycle is combinedwith the familiarity of the marketing managers to the market is there asignificant negative relationship to the number of personal years in in-ternational product pricing.

Hypothesis 3d

This hypothesis stated that industrial firms in highly differentiatedproduct markets are more likely to use premium pricing strategies thanthose firms in less differentiated products. As expected, the results ofthe logistic regression found that the probability of using premium pric-ing strategies under these conditions was supported and significant (p

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