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Running head: INTERNATIONAL MARKETING

International Marketing Student’s Name Institutional Affiliation

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Price Escalation in International Marketing Price escalation refers to a disparity in pricing whereby products tend to have a higher price in overseas markets than in the country of origin. The disparity in price is usually caused by the costs incurred in the transporting and exporting procedures. Price escalation may also mean the total cost of factors incurred in the methods of distribution which results in higher pricing of the product in the overseas market (Batraga & Pūķe, 2014). An increase in the cost of the product is realized through the exportation costs such as distribution, customs duties and tariffs cost incurred when transporting it to the overseas market. In international marketing, pricing escalation has the same effects as inflation although price escalation is associated with the product instead of the entire market. It is important for businesses operating in the international market to account for cost escalation and also to adapt to the business policies of the foreign countries that they want to operate. Price escalation due to the cost of tariffs and customs duties is mostly felt in countries without harmonization of laws. For profit-making businesses, price escalation results to a decrease in the profit margin which makes it necessary to understand the operating environment. The business can take an initiative to study the competitors’ foreign methods to understand their position and actions in the global market. Since it is difficult to study the actions of the competitors, it is important to efficiently employ the price monitoring techniques at the business' disposal to ensure the automatic and frequent comparison between the business' products and those of the competitors. The information obtained from the price monitoring techniques will enable the business to establish a strategy basing on price knowledge. In essence, the price monitoring technique will allow the business to assess the final effects of price escalation on the purchase decisions that the consumer makes. In this way, the business

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can improve its performance within the global market and increase the total amount of global sales. One strategy that can be employed by businesses in overcoming price escalation is establishing their production plants within the target foreign country rather than exporting them from the country of origin. In this way, business is able to sell its products in an overseas market without the risk of reducing their profit margin. The process of manufacturing export products away from the country of origin reduces the cost of transportation and alleviates the costs incurred in paying for tariffs and customs duties (Charles & Anderson, 2016). It is a practice which can lessen the burden of cost escalation especially when the economies of the business can allow its establishment in a foreign country. Before establishing a business in a foreign country, it is important to consider the availability and cost of the raw materials required in the production of the product. A good example is the establishment of manufacturing plants by Coca Cola Company within the regional markets in foreign countries. The company uses its key ingredient to produce all their soft drinks in all its global market. The strategy is useful for businesses with large economies of scale and that has experience with factors and policies of the global market. The second strategy to overcome price escalation is the choice to produce and sell business products in a free-trade region. Free trade zones alleviate extra cost that accompanies production and selling of goods in an overseas market. The strategy involves carrying out a consultation with the legal department to understand the legal issues concerning trade in the foreign country that the business targets for its exports. It allows the business to save costs related to exports. Also, the country of origin is a trade free zone there are no exportation costs, customs and tariffs that the business is required to meet (Jayaswal, 2015). It is crucial to note that selling locally saves legal cost such as those incurred in hiring lawyers to address the

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complexities associated with global markets. The business will forego costs incurred in storing goods in foreign warehouses or the need to pay extra finance in taking the goods through custom checks. Through reduced costs, the business is able to increase its profit margin and hence achieve operational efficiency. Free trade zone strategy is the most effective for businesses without the benefits of economies of scale or those penetrating the global market for the first time. The third strategy of overcoming price escalation is reclassifying the business products into other classifications associated with cheap duties and tariffs within the export market. The classification of a country’s policies on duties and tariffs is based on the type of business and the kind of products that it is dealing with. The strategy entails researching the foreign country's policies regarding imports and the prevailing policies on trade (Al-Zarrad, Moynihan & Vereen, 2015). Additionally, factors such as politics in a foreign country, changing technology and other factors in the market can contribute to price escalation. Businesses can alleviate the payment of tariffs by having the product legally classified as a special product with lower duty. It can also reduce the administration cost as the business is relieved the need of having to deal with particular trade procedures. A good example of the reclassification of products is the interest of alcoholic manufacturing company called Cachaca which operates in the USA and Europe. The company has a distinct classification and tariff from other alcoholic companies. The strategy is efficient for businesses that are dominant in the global market and also those that are popular enough to engage in legal negotiations with the government of the foreign country in question. The strategy is, therefore, the least applied by businesses because of the complexities of legal considerations involved and hence it is not approved for most businesses.

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5 Conclusion

Price escalation is a major source of risk in international marketing and business must study the possibility of price escalation factors before making viable decisions on exports. It reduces the business' profit margin through increased costs related to the exportation process and hence reducing the general performance of the business. However, some strategies can be utilized to overcome price escalations as described in this paper. It is the work of the business to consider which strategy aligns with the nature of its business operations. Therefore, the first and most crucial step in conducting research and legal consultations before employing a strategy to overcome price escalations. It is also important for the business to establish the domestic rate of inflation as it contributes to price escalation apart for the impacts caused by the exportation process.

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6 References

Al-Zarrad, M. A., Moynihan, G. P., & Vereen, S. C. (2015). Guideline to apply hedging to mitigate the risk of construction materials price escalation. In 5th International/11th Construction Specialty Conference, Vancouver, British Columbia. Batraga, A., & Pūķe, I. (2014). Integrating Standardisation/Adaptation in International Marketing Strategies: Companies in Latvia. Economic Science for Rural Development, 27. Charles, G., & Anderson, W. (2016). International marketing: Theory and practice from developing countries. Cambridge Scholars Publishing. Jayaswal, P. (2015). International Marketing: Within and Beyond Visegrad Borders. Delhi Business Review, 16(2), 107.

Appendices Figure 1. Effects on tariffs on price of an export product

Figure 2. The effects of tariffs on some selected type of products

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