L4 International marketing strategy : pricing

Overview

1 Introduction / pricing objectives

2 Cavusgils’ model

3Global pricing

4 Price escalation

5 Impacts that might lead to price escalation

6 Calculation/ example of price escalation

7 Roberts’ model of price determination

8 Target costing

9 Experience curves

10 Countertrade

11 Types of countertrade

12 Transfer pricing

13 International price comparison

14 Matrix pricing

1Pricing objectives

Cavusgil’s model

Company factors- target export markets - S.T.P’s.in those markets- . functional mix strategies in those markets

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_ economics of R&D,technology -N.P.D- factor inputs ( material + labour costs )

productivity , scale and experience effects( see later)

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_distribution /marketing costs -which channels + logistics

to use abroad ?

Product factors – new or current product? Degree of differentiation ?

Stage in P.L.C.?

consumer or industrial product ?

commodity ,manufactured or service good ?

_

Cavusgil’s model continued

Market factors_ consumer income, needs , tastes behaviour( see portfolio)

_ regulatory frame work- controls on import / export

_ dumping , taxes , price controls

_ competition – strengths ,substitutes

_ exchange rate plus forecasts

_ market structure and market prices

_ environment and pricing structure in other markets

Nb All parts of Cavusgils’ model impact upon the pricing policy for a given country / mkt and also

the terms within a given export contract for that market.

3The global price- setting decision process

4Factors influencing price escalation

4Impacts that may lead to price escalation

6 Example of price escalation

7 Robert’s model of export price determination

Ways to reduce costs in the factory

• Substitute alternative materials • Use standard parts or materials • Relax manufacturing tolerances • Utilise standard manufacturing methods • Eliminate unnecessary design features • Design the product and its manufacturing process • ‘Buy- in’ rather than make • Use pre- finished materials • Use pre- fabricated parts • Eliminate parts or operations • Rationalise product ranges / range of parts• Substitute low- cost manufacturing processes • Elininate waste ( japanese mudas )

Reducing cost in the distribution channel

• Move to a low- cost production location e.g Kaliningrad for B.M.W.cars

• Reduce the number of intermediaries in the channel

• Negotiate lower margins with distributors in exchange for more

business/ bigger volumes to handle

• Modularise product &source expensive items abroad e.g. Toyota

piston assemblies for engines

• Ship in ‘K.D.’ form and assemble abroad

• Integrate forward with distribution companies

8The target costing process

Czinkota et al 2011 chp 11 p 369

Traditional (western approaches) v Japanese approaches to setting price

9 Experience curves

Y1 Y2

Experience curves and value chain activities

10 Countertrade

Defn : countertrade is an umbrella term for a whole range of commercial mechanisms for reciprocal trade.These include counterpurchase , barter, buyback, offset, switch trading and evidence accounts.

A characteristic of countertrade is that export sales to a given market are made conditional upon undertakings to accept imports from that market

e.g. A British exporter sells to country X on condition that he accepts agricultural products from country X in payment

Example of countertrade with an international chemical company

Classification of forms of countertrade

Why has countertrade grown?

1 Countries and / or large corporations or individuals have products that they wish to get rid of.

2 Over- printing of the U.S. Dollar domestically means that countries holding large amounts of dollar reserves feel that those reserves are under threat/ loosing value

e.g. China ,India, Russia

This may lead to the need for a replacement currency for financing international trade. Problem is that there isn’t one or not enough of one .Hence countries prefer to trade in e.g. raw materials via countertrade.

3 Instability in the Euro has a similar scenario. Export strength of Germany without accompanying imports e.g. from other E.C. Members like Greece creates huge debts/ borrowing in Greece

11Types of countertrade

1 Counterpurchase

Here 2 parallel contracts are issued .One for the main order and paid for in cash/ credit the other for the counter purchase paid for in goods /services .The latter is usually a fraction or % of the main order price

e.g Indonesia wishes to buy oil from Iran. A deal is negotiated whereby Iran agrees to buy indonesian tea ,plywood and rubber in return for oil.

Continued

2 Barter . This is the direct exchange of ‘goods for goods’.A single contract covers both flows of goods with no cash being involved.

Problem : the supply of the main export good is often delayed until sufficient money has been earned from the sales of the bartered good

e.g. 200,000 tonnes of Greek wheat for 600,000 tonnes of Algerian crude oil

Continued

3 ‘Buyback ‘deals

A buyback deal is where suppliers of e.g capital plant agree to its repayment using the future output of that plant

e.g.Italian producers of acrylic fibre plant ‘sold’ this to Russia in return for deliveries of acrylic fibre to pay for the plant.

e.g. Reed international provided a pulp plant to Sweden .It was paid for with the output of the plant ( paper)

4 ‘Offset ‘trade

These forms of trade are frequently used for’ technology contracts’.The exporter agrees to incorporate into his / her final product the components or sub-assemblies of the importer

e.g. The French E.D.F company will build nuclear power stations for Britain but will incorporate components / pumps from Rolls Royce

( announced 16th Feb2012)

Continued

5 ‘Switch trading’( Swap deals )

Overtime there may be imbalances in long term bilateral trade .This may lead to the accumulation of uncleared credit surpluses

e.g. Brazil used to have large credit surpluses with Poland

In the above situation a third country e.g. U.K. may export to Brazil and the finance for this will come from the sale of Polish exports to U.K. ( or elsewhere)

12Transfer pricing

Manufacturing company

Marketing company

Common ownership

Goods

U.S.A.plant U.K shop

Doole & Lowe(2008) chp 11 ,p 401

Int.

Bo

rde

r

Effects of transfer pricing

International price comparison/ use of matrix pricing

14Matrix pricing : use when there is a large product range/many price changes

References

Czinkota et al( 2011) chp 11,

Kotabe & Helson(2011) chp 12,

Cateora et al (2009) chp 18 p,

Mulbacher et al ( 2006) chp16,

Doole & Lowe (2008 ) chp 11,

Lee & Carter ( 2009 ) chp 14 ,

Ghauri & Cateora(2010) chp 18 ,

Johannsen ( 2006 ) chp 14 ,