What factors should be considered when an entrepreneur sets his or her price for a product or service in a foreign market?
What will be an ideal response?
Although it may appear easier initially, an entrepreneur should be hesitant to institute a policy of flat-rate pricing across all of their foreign markets. In setting a price for a foreign market they should consider the cost of doing business there, the prices that competitors have set, the price sensitivity of the consumer, the structure of the market, and the overall conditions in that country. The entrepreneur does not want to price themselves out of a market, yet they should not price so low that they are not able to qualify their investment in the long run.
With the globalization taking place, it is much easier for consumers to compare prices among different markets, so a business needs to be careful not to price their good at one level in one market and at a greatly different level in another that would allow for cross-border pricing arbitrage.
A final point that must be considered is the effect of foreign exchange on prices. Fluctuations in exchange rates can have a very dramatic impact on pricing and profitability and must be considered. Depending on the venture’s place in the market, the entrepreneur may be able to pass through some of these currency fluctuations in the price, but in a more competitive market they probably will not. This means that they might have to absorb smaller margins or potential losses if the rate moves against them. This is when it can be useful to use foreign exchange hedges (futures and options) to protect from such fluctuations.
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