MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 1

GLOBAL PRICING ISSUES• Price--definition • Applicability of price

research outside U.S./Western Europe

• Pricing issues in international trade

• Pricing under “hard” currency scarcity

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 2

Approaches to Pricing

• Cost based– “Cost-plus”– Marginal cost for new market– Experience based costing

• Prestige pricing

• Market based pricing (demand)

• Perceived customer value

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 3

Reasons for Cost Declines With Volume• Experience curves

• Economies of– Scale– Scope

• Spreading R&D costs over more units

• Lower costs of operating in other markets– Labor costs– Costs of other resources

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 4

Experience Curves

• Experience apart from economies of scale and volume buying power• 80% vs. 64% experience curves (actual numbers will vary depending

on specifics)• Costs of initial units are very high and not very meaningful• With time, subsequent declines in cost take longer

Experience Curve Costs of Production

0

0.2

0.4

0.6

0.8

1

1.2

0 1,000 2,000 3,000 4,000

Cumulative Production

Unit

Co

st

Cost--U.S.

Cost--Japan

80%64%

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 5

The Role of Cost

PRICECONSIDERED

INVESTMENTIN SPECIAL

VALUE

MARKET PRICESFOR SIMILAR

VALUE

CUSTOMERVALUE

LOWER COST THROUGH VOLUME

PRODUCTIONAND MARKETING

COST

VALUE >COST +

PROFIT?

VALUE > DIFFERENTIALFROM LOWER COST

ALTERNATIVE?

PRICE OFFERINGIF VIABLE

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 6

Financial Issues

• Currency of transaction– One side will face exchange rate risks– Costs of hedging and futures contracts– Currency convertibility and repatriability

• Transfer prices between subsidiaries– Fairness of evaluation– Tax consequences need for “arms length”

transaction

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 7

Price and Positioning• Strategies

– Market brand– Value brand– Prestige brand

• Impact of Product Life Cycle (PLC)• Cross-market spillover• Policies

– Polycentric (price set for each set of markets)– Geocentric (global policy but individual mark-up

decisions)– Ethnocentric (same price across countries)

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 8

“Gray” Trade• “Gray” vs. “black” markets

– Parallel importing– Re-importing (e.g., U.S. pharmaceuticals)

• Legality• Diversion to higher cost markets (arbitrage)• “Consumer tourism”—forms

– Limited quantities– Trip made for purchase of bringing back materials– “Nominal” travel to legitimize purchase

• Manufacturer response

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 9

Counter Trade

• Barter

• Compensation deals

• Counter purchases

• Product Buy-Back

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 10

Effects of the Euro• Stable “exchange rates”• Easier comparability of prices across

countries• May have served as sign of international

competitive pressures• Changing prices to the Euro

– Possible opportunity for price increase– Rounding issues– Highly visible and “institutionalized” prices– Concerns about competitor strategies

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 11

Distribution• Transportation logistics• Role of channel

members– customs

– legal restrictions

• Structure of channels• Legal issues• Infrastructure issues

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 12

Retailers--Formats• Level of

– service

– assortment

• Tradition of where merchandise is sold

• Location and convenience

• (Inter)national vs. local chains

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 13

Global Retailing• Increasing presence of international retailers

across countries– Outright entry– Acquisition of local chains continued under the

original name and position

• May be able to take advantage of cross-market– Bargaining power– Economies of scale

• Balance with local sourcing

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 14

Legal Constraints on Retailing• Restricted store

hours• Regulation of

assortment• Preferences for small

retailers• Product uniformity• Price maintenance/

selective discounts

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 15

Parallel Distribution• “Gray” market vs. counterfeiting• Gray markets--diversion from

– authorized to unauthorized dealers within a country

– lower cost areas (e.g., Mercedes Benz from Europe to U.S.)

– temporary promotions in one region

– highly taxed areas (usually through tourist purchases)

MKTG 769 PRICING AND DISTRIBUTION Lars Perner, Instructor 16

Effects of Gray Trade• Brand equity• Relationships with

established dealers• Legal liabilities• Complication of

marketing strategies