Pricing for International Markets

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Global PerspectiveThe Price War

• Setting the right price for a product or service can be the key to success or failure

• An offering’s price must reflect the quality and value the consumer perceives in the product

• As the globalization of world markets continues, competition intensifies among multinational and home-based companies

• The marketing manager’s responsibility is to set and control the actual price of goods in different markets in which different sets of variables are to be found

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Pricing PolicyPricing Objectives

• Pricing as an active instrument of accomplishing marketing objectives

- The company uses price to achieve a specific objective

• Pricing as a static element in a business decision- Exports only excess inventory- Places a low priority on foreign business- Views its export sales as passive contributions to sales volume

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Pricing PolicyParallel Imports

• Occurs whenever price differences are greater than the cost of transportation between two markets

• Major problem for pharmaceutical companies• Exclusive distribution

Parallel imports develop when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturer’s regular distribution system.

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How Gray-Market Goods End up in U.S. Stores

• Insert Exhibit 18.1

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Approaches to International PricingFull-Cost versus Variable-Cost Pricing

• Variable-cost pricing – the firm is concerned only with the marginal or incremental cost of producing goods to be sold in overseas markets.

• Full-cost pricing – companies insist that no unit of a similar product is different from any other unit in terms of cost and that each unit must bear its full share of the total fixed and variable cost

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Approaches to International PricingSkimming versus Penetration Pricing

• Skimming – a company uses when the objective is to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for the value received.

• Penetration pricing policy – used to stimulate market and sales growth by deliberately offering products at low prices.

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Approaches to International PricingSkimming versus Penetration Pricing

Shoppers Await Opening of First Wal-Mart Outlet in China

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Price Escalation

• Costs of exporting- Price escalation

• Taxes, tariffs, and administrative costs- Tariff – fee charged when goods are brought into a country from

another country- Administrative costs include export and import licenses, other

documents, and the physical arrangements for getting the product from port of entry to the buyer’s location

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Inflation/Deflation

Stacks of Clothing Lure Customers in Tokyo’s Sugamo District

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Price Escalation (continued)

• Inflation- In countries with rapid inflation or exchange variation, the selling

price must be related to the cost of goods sold and the cost of replacing the items

• Deflation- In a deflationary market, it is essential for a company to keep prices

low and raise brand value to win the trust of consumers

• Exchange rate fluctuations- No one is quite sure of the future value of currency- Transactions are increasingly being written in terms of the vendor

company’s national currency

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Varying Currency Values

2005 Turkey Knocks off 6 Zeros in Anticipation of EU Alignment

Bill is Currently Worth 75 Cents

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Export Strategies When Currency Varies

Alternative Strategies When US Currency is Weak or Strong

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Currency Fluctuations

Women Looks at Poster in Tokyo McDonalds - $1.45 Special Mc Donald’s Returns Profits from The Effect of Strong Yen

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Price Escalation (continued)

• Varying currency values- Changing values of a country’s currency relative to other currencies- Cost-plus pricing

• Middleman and transportation costs- Channel diversity- Underdeveloped marketing and distribution channel infrastructures

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Sample Causes and Effects of Price Escalation

• Insert Exhibit 18.3

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Sample Effects of Price Escalation

Australian Beef Price Rises to 248Y ($2.20US)/100 grams Due to increased tariffs from 38.5% to 50%

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Lowering Tariff Costs

Dolls or Toys – X Men Action Figures and Tariffs

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Using Foreign Trade Zones

100 Free Trade Zones in US Can Help Control Costs

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Approaches to Lessening Price Escalation

• Lowering cost of goods• Lowering tariffs• Lowering distribution costs• Using foreign trade zones to lessen price escalation• Dumping

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Leasing in International Markets

• Opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash

• Can ease the problems of selling new, experimental equipment because less risk is involved for the users

• Helps guarantee better maintenance and service on overseas equipment

• Helps to sell other companies in that country• Revenue tends to be more stable over a period of time than direct

sales would be

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Countertrade as a Pricing Tool

• Why purchasers impose countertrade:- To preserve hard currency- To improve balance of trade- To gain access to new markets- To upgrade manufacturing capabilities- To maintain prices of export goods- To force reinvestment of proceeds from weapons deals

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Countertrade as a Pricing Tool (continued)

• Types of countertrade- Barter- Compensation deals- Counterpurchase or offset trade- Product buyback agreement

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Countertrade as a Pricing Tool (continued)

• Problems of countertrading- Determining the value of and potential demand for the goods offered- Barter houses

• The Internet and countertrading- Electronic trade dollars- Universal Currency/IRTA

• Proactive countertrade strategy- Included as part of an overall market strategy- Effective for exchange-poor countries

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Transfer Pricing Strategy

• Benefits:- Lowering duty costs- Reducing income taxes in high-tax countries- Facilitating dividend repatriation when dividend repatriation is

curtailed by government policy

• Arrangements for pricing goods for intracompany transfer:- Sales at the local manufacturing cost plus a standard markup- Sales at the cost of the most efficient producer in the company plus a

standard markup- Sales at negotiated prices- Arm’s-length sales using the same prices as quoted to independent

customers

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Price Quotations

• May include specific elements affecting the price:- Credit- Sales terms- Transportation- Currency- Type of documentation required

• Should define quantity and quality

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Administered Pricing - Cartels

OPEC and Oil Prices

De Beers and Diamonds

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Administered Pricing

• Cartels- Exists when various companies producing similar products or

services work together to control markets for the types of goods and services they produce

- Example: OPEC

• Government-influenced pricing- Establish margins- Set prices and floors or ceilings- Restrict price changes- Compete in the market- Grant subsidies- Act as a purchasing monopoly or selling monopoly