International Pricing Decisions

International Pricing Decisions

Learning Objectives

1. Components of pricing as competitive tools in international marketing2. The pricing pitfalls directly related to international marketing3. How to control pricing in parallel imports or gray markets

Chapter Learning Objectives

4. Price escalation and how to minimize its effect5. Countertrading and its place in international marketing practice6. The mechanics of price quotations

Introduction

Pricing strategy forms another cornerstone of a global marketing programit represents one of the most critical and complex issues in global marketing (due to economic, financial, and mathematical implications)Price is the only marketing mix element that generates revenues. All other elements entail costsNeed to devote special care in pricing products to market products at a profitA companys global pricing policy may make or break its overseas expansion efforts (due to foreign exchange complications)Firms also face significant challenges in coordinating (standardizing or adapting) their pricing strategies across various countries they operate inThis topic reviews the plethora of international pricing strategy issues

Pricing Objectives

In general, price decisions are viewed in two ways:Pricing as an active instrument of accomplishing marketing objectives, or Pricing as a static element in a business decisionThe more control a company has over the final selling price of a product, the better it is able to achieve its marketing goalsIt is not always possible to control end pricesBroader product lines and the larger the number of countries involved, the more complex the process of controlling prices charged to the end user

Parallel Importation or Gray Markets

On account of competition, firms may have to charge different prices from country to country In international marketing, this causes a vexing problem: Parallel Importation or Gray MarketsParallel imports develop when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturers regular distribution system The possibility of a parallel market occurs whenever price differences are greater than the cost of transportation between two markets

Parallel Importation or Gray Markets

For example, the ulcer drug Losec sells for only $18 in Spain but goes for $39 in Germany; and the heart drug Plavix costs $55 in France and sells for $79 in London Thus, it is possible for an intermediary to buy products in countries where it is less expensive and divert it to countries where the price is higher and make a profit Exclusive distribution, a practice often used by companies to maintain high retail margins encourage retailers to stock large assortments, or to maintain the exclusive-quality image of a product, can create a favorable condition for parallel importing

Effects of Parallel Importation

Parallel imports can do long-term damage in the market for trademarked productsCustomers who unknowingly buy unauthorized imports have no assurance of the quality of the item they buy, of warranty support, or of authorized service or replacement partsIf a product fails, the consumer blames the owner of the trademarkCompanies can restrict the gray market by policing distribution channels In some countries firms get help from the legal system

Approaches to International Pricing

Full-Cost Pricing: no unit of a similar product is different from any other unit in terms of cost, which must bear its full share of the total fixed and variable cost.There are several approaches to pricing in international markets, which include:

2.Variable-Cost Pricing: firms regard foreign sales as bonus sales and assume that any return over their variable cost makes a contribution to net profitPrices are often set on a cost-plus basis, i.e., total costs plus a profit marginThis is a practical approach to pricing when a company has high fixed costs and unused production capacity

Approaches to International Pricing

3.Skimming Pricing: This is used to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for a product

4.Penetration Pricing: This is used to stimulate market growth and capture market share by deliberately offering products at low pricesIt is used to acquire and hold share of market

Price Escalation

Costs of Exporting: the term relates to situations in which ultimate prices are raised by shipping costs, insurance, packing, tariffs, longer channels of distribution, larger middlemen margins, special taxes, administrative costs, and exchange rate fluctuationsPrice escalation refers to the added costs incurred as a result of exporting products from one country to anotherThere are several factors that lead to higher prices:

Price Escalation (contd ..)

2.Taxes, Tariffs, and Administrative Costs: These costs results in higher prices, which are generally passed on to the buyer of the product

3.Inflation: Inflation causes consumer prices to escalate and the consumer is faced with rising prices that eventually exclude many consumers from the market

Price Escalation (contd ..)

4.Middleman and Transportation Costs: Longer channel length, performance of marketing functions and higher margins may make it necessary to increase prices

5.Exchange Rate Fluctuations and Varying Currency Values: Currency values swing vis--vis other currencies on a daily basis, which may make it necessary to increase prices

Export Strategies Under Varying Currency ConditionsStress, price benefits

Expand product line and add more costly featuresShift sourcing and manufacturing to domestic marketExploit export opportunities in all marketsConduct conventional cash-for-goods tradeUse full-costing approach, but use marginal-cost pricing to penetrate new/competitive marketsWhen Domestic Currency is WEAK...Engage in nonprice competition by improving quality, delivery, and after-sale serviceImprove productivity and engage in vigorous cost reductionShift sourcing and manufacturing overseasGive priority to exports to relatively strong-currency countriesDeal in countertrade with weak-currency countriesTrim profit margins and use marginal-cost pricing

When Domestic Currency is STRONG...SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"Business Horizons, May-June 1988, figure 2, p. 58.

Export Strategies Under Varying Currency ConditionsSOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"Business Horizons, May-June 1988, figure 2, p. 58.Speed repatriation of foreign-earned income and collectionsMinimize expenditures in local, host country currencyBuy needed services (advertising, insurance, transportation, etc.) in domestic marketMinimize local borrowing

Bill foreign customers in domestic currencyKeep the foreign-earned income in host country, slow collectionsMaximize expenditures in local, host country currencyBuy needed services abroad and pay for them in local currencies

Borrow money needed for expansion in local marketBill foreign customers in their own currencyWhen Domestic Currency is WEAK...When Domestic Currency is STRONG...

Leasing in International MarketsLeasing 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 cashLease revenue tends to be more stable over a period of time than direct sales would beEquipment leased and in use helps to sell other companies in that countryLeasing helps guarantee better maintenance and service on overseas equipment

Dumping

One approach classifies international shipments as dumped if the products are sold below their cost of productionThe other approach characterizes dumping as selling goods in a foreign market below the price of the same goods in the home marketEconomists define dumpingdifferently

World Trade Organization (WTO) rules allow for the imposition of a duty when goods are dumped A countervailing duty or minimum access volume (MAV), which restricts the amount a country will import, may be imposed on foreign goods benefiting from subsidies whether in production, export, or transportation

Approaches to Lessening Price EscalationMethods used to reduce costs and, thus, lower price escalation include:

Lowering Cost of Goods: Firms can lower costs by eliminating costly features in products or by manufacturing products in countries where labor costs are cheaper

Lowering Tariffs: Can lower prices by categorizing products in classes where the tariffs (tax on international trade) are lower

Lowering Distribution Costs: Firms can design channels that are shorter, have fewer middlemen, and by reducing or eliminating middleman markup

Using Foreign Trade Zones: Firms can manufacture products in free trade zones where the incentive offered is the elimination of local taxes, which keep prices down

Countertrade as a Pricing Tool

Barter: is the direct exchange of goods between two parties in a transactionCompensation deals: is the payment in goods and in cashCounter-purchase or off-set trade: the seller agrees to sell a product at a set price to a buyer and receives payment in cash and may also buy goods from the buyer for the total monetary amount involved in the first contract or for a set percentage of that amount, which will be marketed by the seller in its home marketBuy-back: This type of agreement is made the seller agrees to accept as partial payment a certain portion of the output that are produced from the plant or machinery that are sold to the buyerCountertrade is a pricing tool that every international marketer must be ready to employThere are four distinct transactions in countertrading, which include:

Why Purchasers Impose Countertrade Obligations

To Preserve Hard Currency

To Improve Balance of Trade (the difference in value between a country's imports and exports)

To Gain Access to New Markets

To Upgrade Manufacturing Capabilities

To Maintain Prices of Export Goods

To Force Reinvestment of Proceeds

Proactive Countertrade Strategy

Is there a ready market for the goods bartered? Is the quality of the goods offered consistent and acceptable? Is an expert needed to handle the negotiations? Is the contract price sufficient to cover the cost of barter and net the desired revenue?Answering the following questions is suggested before entering into a countertrade agreement:

Transfer Pricing Strategy

1.Sales at the local manufacturing cost + a standard markup2.Sales at the cost of the most efficient producer in the company, + a standard markup3.Sales at negotiated prices4.Arms-length (Atransactionbetween a buyer and seller where both are acting in their own best interests to get the best price. )sales using the same prices as quoted to independent customersPrices of goods transferred from a companys operations or sales units in one country to its units elsewhere, which refers to intra-company pricing or transfer pricing, may be adjusted to enhance the ultimate profit of the company as a wholeFour arrangements for pricing goods for intra-company transfer are as follows:1. Transfer pricingis the setting of thepricefor goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is thetransfer price.