In a short essay, discuss the three basic pricing strategies: rigid cost-plus pricing, flexible cost-plus pricing, and incremental pricing. How do firms employ each strategy? What are any advantages or disadvantages to each strategy?

What will be an ideal response?

a. Rigid cost-plus pricing refers to setting a fixed price for all export markets. It is an approach favored by less experienced exporters. In most cases, management simply adds a flat percentage to the domestic price to compensate for the added costs of doing business abroad. The export customer's final price includes a mark-up to cover transporting and marketing the product, as well as profit margins for both intermediaries and the manufacturer. This method often fails to account for local market conditions, such as buyer demand, income level, and competition.
b. In flexible cost-plus pricing, management includes any added costs of doing business abroad in its final price. At the same time, management adjusts prices as needed to accommodate local market and competitive conditions, such as customer purchasing power, demand, competitor prices, and other external variables. This approach is more sophisticated than rigid cost-plus pricing because it accounts for specific circumstances in the target market.
c. In highly competitive markets, the firm may set prices to cover only its variable costs, not its fixed costs. This is known as incremental pricing. Here, management assumes that fixed costs are already paid from sales of the product in the firm's home country or other markets. The approach enables the firm to offer very competitive prices, but it may result in suboptimal profits.