The Price Impacts of International Trade (3)

A superior strategy involves using local know-how to determine the per-item price that the target customer is prepared to pay, and then back-configuring the supply chain – all the way back to the design process if necessary – in order to supply that product on a reasonable profit margin. In the event of non-fit between price expectation and cost, the local price may be obtained by cross-region subsidised loss-leading, for example: by transferring capital from higher profiting markets/regions. Alternatively, there may be logistical measures that can be taken to achieve the target price: use of regional hubs as consolidation points feeding various national markets with standardised product may capture extreme economies of scale and reduce transportation costs. Better still, products can be manufactured within the national borders of the target market so that import taxes, customs complications, and distance to market can be reduced.

In light of the foregoing, product pricing, which is generally indicative of the appetite and purchasing power of the target market, can be instrumentalized, i.e. used to determine reconfiguration of logistics and supply chain strategy in order to capture sales and wring out economies.

In basic, practical terms, product pricing is influenced by the nature of products (since this determines modality) and distance to market. High bulk, non-urgent, non-perishable, low value commodities for which demand is predictable, and whose point of consumption is distant from the point of extraction can be supplied by rail or rail/sea, which is comparatively cheap. In such a case, the transportation and storage costs will constitute a small proportion of the cost/price. Some higher-value consumer products – when shipped in high quantities – can also fit this category, so pricing can be kept competitive. By contrast, perishable goods may be less bulky but high value, so will have to be transported more rapidly (e.g. cut flowers to supermarkets). To achieve transport economies in this case, consolidation with higher value, low bulk products will be necessary. Pricing of goods for sale in international markets necessarily implies higher cost of sales, due to movement of the product over distance and other import-/export-related transaction costs. Also to be considered is the degree and nature of handling that is necessitated by movement and storage. Unusual or sensitive items will incur higher costs. Dangerous goods, for example, represent physical and bureaucratic difficulty. They will almost certainly require handling by trained personnel and transportation in specialist vehicles. Extremely high-value goods will require security, which also comes at cost. Controlled substances and fragile, storage-sensitive items will necessitate special handling and processing. Full consideration of these cost- incurring factors will have to be incorporated into the pricing schedule.