International Purchasing

In the time of globalisation, the companies have businesses in many countries. The
multinational companies (MNCs) have business transactions in many countries. The MNC’s
acquire valuable resources like man, material, machine, money from all over the world from
where they are cheaper. In this scenario, the purchasing or procurement from international
market takes important role. In today’s global economy, the company can get advantage when
the supply base is competitive on a worldwide basis. Successful companies do not limit their
sourcing horizons to national boundaries but seek to find, establish and develop sound working
relationships with the best suppliers/contractors/bidders all over the world. International
purchasing can be a good strategy to beat the competition as the companies are able to procure
the raw materials, parts, goods, services at lower cost from markets abroad. It will lowers down
the cost of production ultimately. International purchasing cannot be considered a stand-alone
process. It must be integrated with the overall purchasing strategies of the company. The
purchasing from international market must be aligned with the corporate policy.

“Global sourcing, which differs from international buying in scope and complexity, involves
proactively integrating and coordinating common items and materials, processes, designs,
technologies, and suppliers across worldwide purchasing, engineering, and operating
locations.” (Trent & Monczka, 2003)

Reason behind Purchasing Internationally

Increasing global Practices Globalisation is the main reason because of which the business
environment is changing in a very fast way. Now, the organisations can buy and sell anywhere
in the world. The whole world is like a village. Moreover, all the restrictions, duties of trade
are very relaxed for the members of the World Trade Organisation (WTO) and the trade among
the countries is free and fair. So, in such scenario the importance of purchasing internationally
has become very high.

Emergence of Internal/IT/Social Media The evolution of internet has contributed in

international purchasing. Now, the tenders can be floated and invited globally through online.

Accessibility of Natural Resources Some countries are rich in natural resources and they are
providing natural resources of better quality with better deliveries at lower prices. The
companies are ready and cashing this phenomenon.
Domestic Production and Supply Insufficient domestic capacity is also the reason for
purchasing internationally.

Introduction for price determination

The word ‘price’ is derived from a Latin word ‘pretium’. Price is the amount of money
paid by the customer or buyer for acquiring a product or service. It refers to a physical product
or service for which a buyer is ready to pay. It is the result of a complex set of calculations.
Generally, the manufacturer or supplier produces and sells product or service in the market
place. The buyer pays money to the seller or supplier in exchange of goods or services. The
amount of money which a buyer pays for one unit of a good or service to the seller is called the
price of the good or service. Pricing is a method adopted by a firm to set its selling price. It
usually depends on the firm’s average costs, and on the customer’s perceived value of the
product in comparison to his or her perceived value of the competing products.

Pricing is the process whereby an organisation sets the price at which it will sell its
products and services. In setting prices, the organisation will take into account the price to
acquire raw materials, parts, the production cost, the competitors’ costs, brand value etc. It is
targeted for the defined customers. Generally, the pricing considers the factors like fixed and
variable costs, competition, company objectives, target customers and the capacity to pay by
customers etc. Pricing is a strategic decision making. No matter what type of product or service
you sell, the price you charge from your customers or clients will have a direct effect on the
success of your business.

Objectives of Pricing

Pricing objectives are overall goals that describe what the organisation wants to achieve
through its pricing efforts. It is very important for an organization to determine the pricing
objectives that the organization wishes to achieve. The pricing objectives or goals give
direction to the whole pricing process. Later on, the pricing strategies are framed to fulfil these
pricing objectives. The pricing objectives must be consistent with the overall organizational
objectives. Some of the common pricing objectives are as follows:

 For small scale organisation or new venture, the pricing objective can be the survival
in the medium to long term or to generate cash flow/liquidity so that the organization
can be in a position to stay in business
  For old organisations, the pricing objective can be to maximize the long-run profit or
short-run profit on a year-by-year basis
 For the large scale or big organisations, the pricing objective can be to maximize the
market share or increase sales volume or to achieve a specified level of return on
investment (ROI).
 The organisations can have pricing objectives like creating illusions of high product
quality or to enhance the image of brand/company/product. They can use price to make
the product visible or socially acceptable.

Factors Influencing Pricing

There are a number of factors that might affect pricing decisions. The factors
influencing pricing are market demand, cost of raw materials and part, production cost,
competition, branding strategy, economic conditions, government, prices fixed by competitors
etc. Various factors influencing pricing are as follows:

Market Demand: The market demand for a product or service obviously has a big impact on
pricing. When there is high demand of product or service, then the price is high. It means
market is ready to pay high for the product or service. But if the demand is very low, then the
price will be low.

Cost of the Raw Materials and Parts: The price of a product or service depends upon the
cost of raw materials and parts used in the manufacturing of the products. If the raw material
is cheap and locally available then the product cost will be low. But if the raw material cost is
high or it is imported then the chances of price high are more.

Competition: The competitive conditions affect the pricing decisions. The high competition
means more number of companies in an industry. A company can fix the price equal to or lower
than the competitors. If the quality of the product or service is very high, the premium prices
are charged from the customers.

Branding Strategy: The companies having high brand image and high brand value charge
high prices from the customers.

Economic Conditions: The economic conditions of the country influence pricing of the
product or service. If there is a recession in the economy, the prices are generally found low
and vice-versa.
Government and Regulators: Government’s decisions affect the prices of products and
services through enactment of legislation. Generally government controls excise duty, custom
duty, subsidy, export-import duty, bank rates etc. In some cases the prices cannot be fixed
higher, as the government keeps control and close watch on the prices.

Cost of Production: A seller fixes the market price of his commodity which is more than the
per unit cost of production of commodity. The cost of production depends on various factors
like technology used (first hand or second hand), machinery (latest technology or old
technology), manpower (skilled, experienced or semi-skilled), overhauling & regular repair of
machinery, wastage produced by machinery, environment (temperature, 6 humidity) etc.
Generally, the difference between the per unit price and per unit cost of production of the
product or service is profit per unit. Thus, higher the difference between price and per unit cost
of production greater will be the margin of profit. So, if the competition is very high, the price
is difficult to be raised high. The cost cutting tool left is to lower down the production cost to
remain competitive in the market. We can say that per unit cost of production is of great
importance in fixing the price of the product or service by a manufacturer or supplier

Price fixed by Competitors: While fixing the price of goods or services, the manufacturer or
supplier also considers the price of goods or services fixed by the other manufacturers or
suppliers. If he fixes the price of his products or services which is much higher than the price
fixed by other sellers of similar products or services, he may not be able to sell more quantity
of the goods or services. So, in order to be competitive in the market he has to decrease the
price of his products or services. He can fix high price if he is delivering more values through
products or services.

Product Life-cycle: The product life-cycle consists of mainly four stages namely introduction,
growth, maturity and decline. The organisations generally choose skimming pricing strategy at
the introduction stage for new products. The price is fixed high at this stage to recover some
costs spent on research and development of the product. The basic intention of fixing high
pricing is to cover initial cost in a short time period. In growth stage, pricing remains generally
stable as the demand continues with minimal competition. In the maturity stage, the sale of
products or services or the demand starts to decline. The competitors start selling similar
products in the market and the prices have to be kept low to attract more customers. In this
stage, the price is reduced in order to compete in the market. In decline stage, prices are reduced
further.
Types of Pricing Strategies

An organisation can adopt a number of pricing strategies. Setting pricing strategy is a

strategic issue. The pricing strategy is usually based on corporate objectives. Though pricing
strategies are complex, the basic rule of pricing is basic, clear-cut, simple and straightforward
that it must cover costs and profit. The pricing strategies have to be reviewed constantly in
order to tune with the changes in costs, market demand, response to the competition, business
environment and profit objectives. Various types of pricing strategies like Skimming Pricing,
Penetration Pricing, Bundle Pricing, Product line Pricing, Mark up Pricing, Psychological
Pricing, Marginal Cost Pricing, Charging What the Traffic Will Bear Pricing are as follows:

Skimming Pricing: One of the most commonly used strategies is the skimming strategy. The
organisation fixes an initial high price and then slowly lowers the price to make the product
available to a wider market. This means that at high price high profits in the introduction stage
of the product. This method is especially useful in the pricing of new innovated products. The
objective of this pricing is to skim the profits of the market layer by layer. It also helps the firm
to get the feel of the demand of the product and then make appropriate changes in the pricing
strategy.

Penetration Pricing: As opposed to the skimming strategy, the prime objectives of penetration
price strategy are to gain share and increase sales in highly competitive market. In this pricing
strategy, the organisation fixes a low price initially. Once the market share is captured, the
prices are increased layer by layer. Penetration pricing in such cases will help the organisation
to have a good share of the market.

Bundle Pricing: The organisations sell multiple products/bundle of products for a lower rate
than consumers would pay if they buy each item individually. In fact, they bundle a group of
products at a reduced price. This strategy is very common in FMCG (Fast Moving Consumer
Goods) companies. The common method can be buy one and get one free promotions or buy
two get one free. Bundling can be of different products. This strategy can be effective way of
selling the slow moving or unsold products. This strategy increases the value perception of the
consumers as they are getting something free or more products at less price.

Product Line Pricing: It is the pricing of different products within the same product range.
As for example HUL is selling Lifebuoy, Lux, Breeze, Rexona, Hamam, Moti and Dove soaps
under Product Line Soap. All the soaps have different pricing according to its target,
positioning, contents, brands, packing etc. Product line pricing is very complex. “As the price
of one product may impact on others supplied by the organization, either through interrelated
demand, such as hardware and software, or interrelated costs. For example, oil and petrol are
created from the same process. Thus the various printed and electronic products generated from
a database, such as the INSPEC database share costs, and 9 prices of some products may be
determined by the opportunity to recoup costs on other products.” (Rowley, 1997)

Mark-up Pricing (Cost Plus Pricing): In mark-up pricing the selling price of the product is
fixed by adding a particular margin or mark up to its cost. Under this strategy, the organisation
add together the direct material cost, direct labour cost, overhead cost etc. and add to it a
percentage to create a profit margin in order to fix the price of the product or service.

Psychological Pricing: Psychological Pricing strategy is commonly used by the marketers.

The seller here considers the psychology of buyers while fixing price and the positioning of
price within the market p lace. Generally, the price tags Rs. 99 or 4999 instead of Rs. 100 and
5000. The reason of fixing this type of pricing is the psychology of the buyers. The buyer still
says that he purchased the product under Rs. 100 or 5000 even though it is Rs. 1 away. Here
the customers respond on emotional levels rather than logical ones. The target of this pricing
strategy is to increase demand by creating a psychological illusion of low price tag in the
consumers’ mind.

Marginal Cost Pricing: “Marginal cost pricing targets at maximising the contribution towards
fixed costs. Marginal costs include all the direct variable costs of the product. In marginal cost
pricing, these costs are fully realised and also a portion of fixed cost is also realised. Under
competitive market conditions, marginal cost pricing is more useful. The disadvantage of the
marginal costing makes certain assumptions regarding cost and 10 revenue behaviour, that can
be turn out to be incorrect in few cases. Marginal costing ignores a third class of costs i.e. the
semi –fixed, semi-variable costs, or mixed costs.” (Priti & kumar, 2014)

Charging What the Traffic Will Bear “It points out demand price. As there are two principles
in pricing, one is called cost of service principle and other is termed as value of service
principle. The second term is charging what the traffic can bear. Professionals like doctors,
lawyers, chartered accountants etc., adopt this principle. They charge their fees on the basis of
ability to pay and the cost factor comes secondary in their charges. A monopolist can afford to
adopt this principle to maximise his profits. This pricing strategy is also adopted by railways
in India.” (Singh, 2013)
Forward buying
Forward buying is a process related to retail inventories, financial instruments, assets
etc, wherein they are purchased in quantity excess to demand to counter future price
rise. This is practised by retailer when they find manufacturers selling the product at a
discounted price and purchase the items bulk. Now when the price of the product is set
to original price by the manufacturer, retailer can make profit by selling the item
purchased at low price earlier.
This is used when manufactures are overstocked and they want to clear the inventory.
They give the discounts to the retailer and retailer also get benefited by getting better
profit margins.