international pricing 15-2 learning objectives explain how internal and external variables...

International Pricing

15-2

Learning objectives Explain how internal and external

variables influence international pricing decisions.

Under the application of Pricing in the international marketing perspective.

Thinkbox

Indian IT firms provide world class services at one tenth the cost of what the same services would cost in the USA.

An MBA degree costs about $8000 in India. In the US an MBA degree costs around US$ 120,000.

Developing a new automobile model in the US costs about US$ 1 billion. Indica and Scorpio have been designed, developed and produced in India totally. They have been acclaimed abroad. Cost of design is half what the design would costs in USA.

Arvind netralaya performs a cataract operation including the cost of the lens for US$12 while that very operation costs about US $ 1500 in US.

PRACTICAL INSIGHT 1

Dip Trix, a successful US brand was launched by General Mills in 2005 in the Indian market.

Targeted at 4 -12 years of children. Packaged in a twin tray. Children can eat the cookies in their own way

either dipping the cookies in cream, licking the cream with fingers or making a cookie and cream sandwitch.

Dip Trix has gone for a penetration pricing strategy by offering the product at reasonable price of Rs. 5.

The Harley Davidson (HD) corporation has been dominating the motorcycle industry for many decades.

HD still has a 30% price premium. In 2006, HD decided to enter the Indian market

through the sourcing route i.e. not to produce the bike but to import it.

Given the high import duty of 60% for imported bikes the price of HD in India was estimated to be between Rs. 4 – 14 Lakh.

PRACTICAL INSIGHT 2

In 2007, HD decided to suspend plans to enter the market but again import duties continued to be 60%. While this time the company succeeded in gaining permission to enter the market because of European emission standards that are accepted in India.

In early 2008, negotiations at the India –US trade forum inform the co. that they could import and sell the bikes in the country through dealer networks and not directly to the customers but no change in the import duties.

With an already high end price tag which will be doubled with import duties and taxes the bike can only target a niche market of affluent customers?

Does the image justify the price level?

In the battle to out blade the competition Gillette launched a five bladed razor called Fusion.

Fusion is the first entirely new men’s razor system launched by Gillette since Mach3.

Is it possible for Gillette to standarize pricing across borders for its new five blade fusion.

PRACTICAL INSIGHT 3

15-9

Gillette relies on product line pricing

www.gillette.com/

15-10

Pricing

Only area of global marketing mix where policy can be changed rapidly without large direct cost implications

Decisions in global markets are affected by complexity of influential factors

15-11

Internal factors affecting international pricing decisions

Firm-level factors Corporate and

marketing objectives Competitive strategy Firm positioning Product development Production location Market entry modes

Product factors Stage in PLC Place in product line Most important

product features Product positioning Product cost structure

15-12

External factors affecting international pricing decisions

Environmental factors

Government influences and constraints

Inflation Currency fluctuations Business cycle stage

Market factorsCustomers’

perceptionsCustomers’ ability to

payNature of competitionCompetitors’

objectives, strategies, strengths and weaknesses

Grey market appeal

15-13

What is this?

What price-related phenomenon is caused by the summation of all cost factors in the distribution channel including ex-works price, shipping costs, tariffs, and distributor mark-up?

Price escalation

15-14

Tactics for countering price escalation

Rationalizing the distribution processLowering the export price from the

factoryEstablishing local production of the

productPressurizing channel members to

accept lower profit margins

15-15

Factors influencing customer sensitivity to price (1)

More distinctive productGreater perceived quality of productsConsumers less aware of substitutes

in the marketDifficulty in making comparisonsProportion price represents of total

expenditure of the customer

15-16

Factors influencing customer sensitivity to price (2)

Perceived benefit for customer increases

Product is used in association with a product bought previously, such that components and replacements are highly priced

Costs are shared with other partiesProduct or service cannot be stored

15-17

Basic approaches to pricing across countries

Price standardization

Price differentiation

15-18

Figure - Structural factors of standardized

versus differentiated pricing

Source: Reprinted from European Management Journal, Vol. 12, No. 2, Diller. H. and Bukhari, I. (1994) ‘Pricing conditions in the European Common Market’, p. 168, Copyright 1994, with permission from Elsevier.

15-19

What is this?

When a customer requires one global price per product from the supplier for all its foreign SBUs and subsidiaries, a _____ has been requested.

Global pricing contract

15-20

What is this?

What term is used to describe the prices charged for intracompany movement of goods and services?

Transfer pricing

Distribution Decisions in the International Marketing

16-22

Learning objectives (1)Explore the determinants of

Distribution decisions.Discuss the key points in putting

together and managing International marketing channels

Discuss the factors influencing channel width

Explain what is meant by integration of the marketing channel

Think box

The Distribution network in Japan has more wholesalers and retailers per capita than any other industrial nation.

A consequence of the more complex Japanese distribution system is the considerable price escalations.

This distribution serves social and economic purposes. Channel members are like family.

Relationships to each other are tightly interlocked by emotion and tradition.

Inefficient channel members are retained.

Figure - Japanese car parts distribution channels

Sources: Cateora (1993); Onkvisit and Shaw (1993); Pirog and Lancioni (1997).

Figure - US car parts distribution channels

Sources: Cateora (1993); Onkvisit and Shaw (1993); Pirog and Lancioni (1997).

Figure - A hypothetical channel sequence in the Japanese consumer market

Source: Pirog and Lancioni, 1997, p. 57. Adapted with kind permission from International Journal of Physical Distribution and Logistics Management, Emerald Group Publishing Ltd.

Practical Insight 1

Wal Mart has set up Wal Mart Global Procurement company in Bangalore to expand business in India.

Wal – Mart has a dedicated factory certification department that inspects supplier’s facilities four times a year.

Wal Mart engage audit firms PWC and Dun & Bradstreet to check quality and audit accounts.

Wal Mart is particular about work conditions at sourcing bases which means no child labour, clean bathrooms and fire fighting equipment at every floor.

Link Pen and Plastics Limited supplied 30 million pens to Wal Mart. The firm tied up with Mitsubishi Pencil Company of Japan to have access to latest technology.

Welspun and Trident are other examples with whom Wal Mart is doing business in India.

Practical Insight 2

Bata operates almost 4700 stores around the world with an objective to consistently be the most satisfying store to shop for well priced and fashionable footwear.

City Store - The Bata City Store gives you unique shopping experience as it showcases the latest collections for footwear of local and international brands. The store ambience is designed to create a lifestyle store

Family store : Bata is the world's leading family chain thanks to the wide assortment of every fashion footwear available in our stores. The products are primarily the Bata brand

Superstore : Bata Superstore offers a wide assortment of fashion, casual and athletic for the entire family. Located primarily in urban and suburban shopping centre, these spacious stores offer the best value by providing good quality shoes at great prices

Factory store : Factory stores are the largest and the most value-oriented stores of our retail chain. They are ideally located in power centers, commercial parks and outlet centers with easy parking facilities.Thus a firm operating in International markets may evolve its own system of retail stores so as to project a uniform market image globally.

Practical Insight 3

ITC E-Choupal offers five distinct servicesa. Information: Daily weather forecasts, pricingb. Knowledge: farming methodsc. Purchase: seeds, fertilizers and pesticides.d. Sales: Sale of cropse. Development Work: Cattle breed improvement,

water harvesting techniques.

Practical Insight 4

Since the late 1800s the south african MNC De Beers has regulated both the Industrial and gemstone diamond markets.

Mark up on DiamondsStage of Distribution

Mark Up (%) Average Value of 0.5 Carat Gem ($/carat)

Cost of Mining - 100Mine Sales 67 167Dealers of rough gems

20 200

Cutting units 200 400Wholesaler units 15 460Retail 100 920

In 2001 De Beers made a joint venture with Louis Vuitton.

As part of the agreement De Beers SA has transferred to De Beers LV the worldwide rights to use the De Beers Brand name and it will be sold exclusively through De Beers Stores.

External factors affecting channel decisions

Customer characteristics

Nature of product

Nature of demand

Competition

Legal regulations/ local business practices

Internal decisions concerning channel structure

Types of intermediaries Coverage Length (number of levels) Control resources Degree of integration

Internal decisions concerning management and control of channel

Screening and selecting intermediaries Contracting Motivating Controlling Termination

Internal decisions concerning management of channel logistics

Physical movement of goods through channel system Order handling Transportation Inventory Storage/warehousing

Market coverage

Coverage can refer to geographical areas of a country or the number of retail outlets (as a percentage of all retail outlets).

Approaches to market coverage

Intensive

Selective

Exclusive

Figure -Intensive distribution

M = ManufacturerW= WholesalerR = Retailer

Figure - Selective distribution

M = ManufacturerW= WholesalerR = Retailer

Figure - Exclusive distribution

M = ManufacturerW= WholesalerR = Retailer

Entry Strategy for International Markets

Going Global - Decisions

Should I Go Abroad?

How Should I Market My Product?

Which Markets

Should I Enter?

How Should I Enter Them?

Learning Objectives:

To understand the determinants on which entry

mode depends.

To explain various entry modes for international

markets

To explain different theories of

internationalization.

To evaluate selection criteria for entry mode

decisions

Determinants of International Entry Modes

Industry-specific factors• Industry´s degree of internationalisation• Choice of entry mode by key competitors

Entry Mode

Home-country factors

•Policies on investment abroad• Bilateral agreements• Domestic market size and competition

Target Market Factors• Government policies•Availability of local distributors• Local infrastructure

Firm-Specific factors• Firm´s degree of internationalisation• Marketing objectives• Nature of product• Availability of resources

Many Unknown; task is not only to maximize return but also to minimize risk

Different modes of entry possible

Export mode

• Indirect

• Direct

↓Low risk,

Low control,High flexibility

Intermediate mode Contractual

• Licensing• Franchising• Strategic Alliances• Joint Ventures

↓Shared risk,

Shared control,Split Ownership

Investment

• Acquisition• Create new subsidiary

↓High risk,

High control,

Low flexibility

The Choice of Entry Modes: A Hierarchical Model

Source: Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business Studies, 31: 535–554.

Strategic Decisions On

Risk vs. Control

Strategic Decisions On

Risk vs. Control

Definition: a mode of entry involving production of a productin one country and shipping it to another country for sale.

Risk

High

Low HighControl

Exporting

Exporting

Degree of Export

Involvement

Degree of Export

Involvement

Direct

Exporting

Direct

Exporting

Indirect

Exporting

Indirect

Exporting

ContractualIntermediate Modes of Entry

ContractualIntermediate Modes of Entry

Definition: an agreement in which an organization grants anotherorganization the right to use a trademark, a patented product or a process.

Definition: an agreement in which an organization grants anotherorganization the right to use a trademark, a patented product or a process.

Risk

High

Low HighControl

Exporting

Licensing

Licensing

Licensing (Contd.)

Examples of licensing abound in drugs

Playboy used to take licensed material

from Lui

Advantages of Licensing

Financing international expansion

Reducing expansion risks

Minimizing the black market

Upgrading production technologies

Transportation cost is high

Disadvantages of Licensing

Restricting future activities

Reducing quality and consistency

Hindering marketing efforts

Assisting competitors

NEED CAREFUL NEGOTIATION

FranchisingFranchising

Franchising

Franchising

Low-cost, low-risk mode of entry

Rapid expansion

Knowledge of local managers

Low-cost, low-risk mode of entry

Rapid expansion

Knowledge of local managers

AdvantagesAdvantages DisadvantagesDisadvantages

• Hard to manage a

large number of

franchises

• Loss of flexibility in

franchising

• Hard to manage a

large number of

franchises

• Loss of flexibility in

franchising

Turnkey Projects

Advantages Disadvantages

FutureCompetition

Politics overKnow-How

Obtain Designsfor Infrastructure

Focus onCore Competencies

Strategic AlliancesStrategic Alliances

Strategic Alliances

Reduce Risk Exposure

Gain Access toDistribution

Channels

Advantages ofStrategic Alliances

Tap Into aCompetitor’s

Strengths

ShareInvestment Cost

FutureCompetition

Conflict with Partners

Disadvantages of Strategic Alliances

Definition: a business agreement in which two or more organizationsshare management of an enterprise.

Risk

High

Low HighControl

Exporting

Licensing

Joint Ventures

Joint Ventures

Joint VenturesTechnology supplier company get foothold

Option when indianisation or mexicanisation is in force

DefensiveReasons

InternationalDistribution

Network

Reduce RiskPenetrate

InternationalMarkets

Advantages of Joint Ventures

Local every where

Loss of

Control

Conflict

with Partners

Disadvantages of Joint Ventures

InvestmentModes of Entry

InvestmentModes of Entry

definition: A mode of entry involving an organization setting new facilities or acquiring a foreign firm in the same line of business.

definition: A mode of entry involving an organization setting new facilities or acquiring a foreign firm in the same line of business.

Risk

High

Low HighControl

Exporting

Licensing

Joint Ventures

Direct Ownership

Direct Ownership

Direct Ownership

Wholly Owned Subsidiaries

Compatible withGlobal Strategies

Complete Managerial Control

High Risk Exposure

Expensive toStart and Maintain

Advantages Disadvantages

Entry mode and Means of Organising Marketing

Mode of Entry Independent

agent

Joint with alliance

partners

Own sales Subsidiary

Exporting Absolut Vodka with Seagram in US

EMI with Toshiba in Japan

Volvo in US

Licensing Disney in Japan with Japanese licensee

Microsoft with ASCII in Japan Initially

Nike in Asia.

FDI LG in USA with Sears private lebel

Mitsubishi manufacture car at Illinois with Chrysler

P&G manufacture and sale through own subsidiary in Europe

Alternate ways of marketing

Local marketing effort can be exercised irrespective of entry mode

Which mode of entry should be chosen?

Strategy &

Market situation Emerging High Growth Mature

Incremental Posture

( Few resources , tentative, wants to be flexible )

Protected Posture (protected trade secret, patentable know-how, potentiality abroad is clear,self imposed limit)

Control Posture (has FSA, Large enough to handle resource disadvantages)

Indirect export

Indirect export

Direct Export

JV Indirect export

Acquisition/alliance

WOS Acquisition /alliance

WOS