Svend Hollensen
GLOBAL MARKETING4th Edition
15 Pricing decisions and terms of doing business
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-2
Learning objectives (1)
Explain how internal and external variables influence international pricing decisions
Explain why and how prices escalate in export selling
Discuss the strategic options in determining the price level for a new product
Explain the necessary sales volume increase as a consequence of a price decrease
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-3
Learning objectives (2)
Explain what is meant by experience curve pricing
Explore the special roles and problems of transfer pricing in global marketing
Discuss how varying currency conditions challenge the international marketer
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-4
Learning objectives (3)
Identify and explain the different terms of sale (price quotations)
Discuss the conditions that affect terms of payment
Discuss the role of expert credit and financing for successful export marketing
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-5
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
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-6
Figure 15.1 International pricing framework
Firm-level factorsEnvironmental
factors
Product factors Market factors
Firm performance
Other elements
Pricing strategiesFirst Time Pricing 00 Price Changes over PLCPricing across products 00Pricing across countries
TermsTerms of sale 00 Payments
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-7
Internal factors affecting international pricing decisions
Firm-level factorsCorporate and
marketing objectivesCompetitive strategyFirm positioningProduct developmentProduction locationMarket entry modes
Product factorsStage in PLCPlace in product lineMost important
product featuresProduct positioningProduct cost structure
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-8
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
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-9
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
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-10
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-11
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
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-12
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-13
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
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-14
Factors influencing customer sensitivity to price (2)
Perceived benefit for customer increasesProduct 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
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-15
What is this?
What price strategy involves charging a high price at the top end of the market with the objective of achieving the highest possible contribution in a short time?
Skimming
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Problems with skimming
Having a small market share makes the firm vulnerable to aggressive local competition
Maintenance of a high-quality product requires a lot of resources
If product is sold more cheaply at home or in another country grey marketing is likely
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-17
What is this?
What price strategy involves charging a final price based on competitive prices?
Market pricing
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-18
What is this?
What price strategy involves charging a low price with the objective of achieving the highest possible sales?
Penetration pricing
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-19
Motives for penetration pricing
Intensive local competition
Lower income levels of locals
View of exporting as marginal activity
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-20
What is this?
What price changes are based on the idea that total unit costs of a product in real terms can be reduced by a certain percentage with each doubling of cumulative production?
Experience curve pricing
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-21
Figure 15.3 Experience curves of value chain activities
Source: Czepiel, 1992, p. 154.
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-22
Hollensen, Global Marketing 4e, © Pearson Education 2008
Agreement on Custom Valuation
15-23
The value of goods traded that is taken into account by customs authorities is of major importance to exporters and importers. If the value is more than what it should be, it will result in higher duties at the importer’s expenses, consequently making the product less competitive.
The Agreement on Customs Valuation (ACV), which was adopted during the Uruguay Round, intends to address these problems, and indicates how goods are to be valued by customs authorities.
The Agreement lists various alternatives methods of valuing goods.
The first method – the priority method – bases the customs value on the transaction value of the goods when they are exported under normal conditions.
These measures are likely to discourage invoicing firms from lowering prices with a view of saving on customs duties, in agreement with the importing party.
Hollensen, Global Marketing 4e, © Pearson Education 2008
Pre-Shipment Inspection
15-24
Many governments, in particular developing countries, request that goods be inspected before shipment
Independent firms provide inspection services, and certify the quality and quantity of products exported
It reduces the risk of under- or over-invoicing.
Inspections should be carried out in a non-discriminatory manner
It also provides a new institutional mechanism for handling complaints regarding alleged arbitrary decisions by inspection companies
It may also reduce the level of customs-related corruption
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Subsidies GATT has attempted in the past and during the Uruguay Round to limit their use and ill effects. WTO treatment of subsidies depends on whether the goods exported are industrial or agricultural products.
Two types of subsidies are prohibited (so-called red subsidies): export subsidies that are contingent one way or another on export performance and import substitution subsidies that are contingent to the use of domestic products Subsidies that are non-actionable (green subsidies) are non-specific subsidies that do not favor any firm over other firms. Basic assistance to research, regional assistance and assistance for the adaptation to new environmental regulations are examples of green subsidies. With regard to pricing, the reduction in the margin of subsidy in the export price of products originating from countries that support heavily the agricultural sector is likely to make many products uncompetitive on world market. It will increase the relevance of adding value to products in order reduce the burden of a comparative disadvantage in the primary sector.
Hollensen, Global Marketing 4e, © Pearson Education 2008
Agreement on Anti-Dumping Practices
15-26
A product is to be considered as being dumped, i.e. introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.
When a Firms may want to set the export price at a lower level than the normal price with a view of gaining market share or access to a new market. It is a rather common practice in exporting
Dumping is not allowed only if it causes or threatens to cause material injury to an industry or if it delays the establishment of a domestic industry in a member country.
Hollensen, Global Marketing 4e, © Pearson Education 2008
Duty Remission
15-27
Under GATT, members are allowed to return to exporters the duty that they paid on imported inputs that are being re-exported in exported products
The same principle applies to indirect taxes charged to exported products (e.g. sales taxes, value-added tax, excise tax, Agreement on SMC, Annex I). Such remissions are not considered to be subsidies and exporters should take advantage of these measures with a view of lowering their export prices and of making their products more competitive.
Duty drawbacks are made available to exporters in many countries (ITC/CS, 1999 p. 125). It appears, however, that only experienced exporters take advantage of these measures.
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-28
What is this?
What term is used to describe the prices charged for intracompany movement of goods and services?
Transfer pricing
Hollensen, Global Marketing 4e, © Pearson Education 2008
Transfer Pricing
15-29
Firms should be attentive to this rule since governments usually monitor quite carefully the transfer pricing practices of multinational firms, and apply stiff sanctions when firms are caught not applying fair transfer prices (Al-Eryani, Alam and Akhter 1990).
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-30
Gillette relies on product line pricing
www.gillette.com/
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-31
What is this?
What price strategy is based on grouping products and services in a system-solution product in order to overcome possible customer price concerns?
Bundle pricing
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Basic approaches to pricing across countries
Price standardization
Price differentiation
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Figure 15.5 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.
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-34
Figure 15.6 A taxonomy of international pricing practices
3 Multilocal price setter
4 Global price leader
1 Local price follower
2 Global price follower
High
LowPre
pare
dnes
s fo
r in
tern
atio
naliz
atio
n
Multilocal markets Global markets
Industry globalism
Source: Adapted from Solberg et al., 2006, p. 31. In the original article Solberg has used the concept ‘Globality’ instead of ‘Globalism’.
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-35
International pricing practices (1)
Prototype 1: Local price follower
Limited resources and leverage
Dependent on local export intermediary
Cost-oriented, standard prices
Unexposed to global forces
Prototype 2: Global price follower
Newcomers to global markets
Market-oriented, standard prices
Global competition but local differences
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-36
International pricing practices (2)
Prototype 3: Multilocal price setter
Local market leaders in selected markets
Market-oriented, adapted prices
Local competition
Prototype 4: Global price leader
Global market leadersMarket and cost-
oriented ‘global’ pricesGlobal competition but
local differences
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-37
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
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-38
Customer advantages and disadvantages of GPCs
Advantages Lower prices worldwide Higher levels of service Standardization of
products Efficiency of processes Faster diffusion of
innovations
Disadvantages Less adaptability to
market changes Potential for quality
inconsistencies Dependence upon
supplier could result in higher prices
Resistance to GPCs among local managers
Monitoring costs
Source: Source: adapted from Narayandas, Quelch and Swartz, 2000, pp. 61–70.
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-39
Supplier advantages and disadvantages of GPCs
Advantages Access to new markets Economies of scale Influence over market
development through association with industry leaders
Strong relationships developed
Solve price and service anomalies across countries
Disadvantages Resistance to change Loss of customers Risk of failing to deliver
on promises Inappropriate use of cost
information Over dependence on one
customer Conflict in distribution
channels
Source: Source: adapted from Narayandas, Quelch and Swartz, 2000, pp. 61–70.
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Hollensen, Global Marketing 4e, © Pearson Education 2008 15-41
Approaches to transfer pricing
Transfer at cost
Transfer at arm’s length
Transfer at cost plus
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-42
Currency decisions in export pricing
Quote price in foreign currency of buyer’s country
Quote price in currency of exporter’s country
Quote price in currency of a third country
Quote price in currency unit (euro)
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-43
Benefits to quoting price in buyer’s country currency
Quoting in foreign currency could be a condition of the contract
Access to finance abroad at lower interest rates
Good currency management may be a means of gaining additional profits
Customer preference for quotes in their currency
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-44
Euro implications
Lower prices due to price transparency
Real single market without transaction costs
Enhanced competition
Easier entry to foreign markets in EU
Inflation and entry rate stability
Lower costs of doing business
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-45
Delivery terms
EXW Ex-works FCA Free carrier FAS Free alongside ship FOB Free on board CFR Cost and freight CIF Cost, insurance, and
freight CPT Carriage paid to
CIP Carriage and insurance paid to
DAF Delivered at frontierDES Delivered ex-shipDEQ Delivered ex-quayDDU Delivered duty
unpaidDDP Delivered duty paid
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-46
Figure 15.8 Different terms of payment
Source: Chase Manhattan Bank, 1984, p. 5.
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-47
Characteristics of letters of credit
An arrangement by banks for settling international commercial transactions
Provide a form of security for parties involved
Ensure payment, provided that terms and conditions of credit have been fulfilled
Payment based on documents only and not on merchandise or services involved
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-48
Figure 15.9 The process for handling letters of credit
Source: Phillips et al., 1994, p. 454, with permission from ITBP Ltd.
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-49
Letter of credit forms
Revocable L/C
Irrevocable but unconfirmed L/C
Confirmed irrevocable L/C
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-50
Export financing
Commercial banksExport credit
insuranceFactoringForfeitingBonding
LeasingCounter-trade
BarterCompensation dealBuy-back agreement
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-51
For discussion (1)
What are the major causes of international price escalation? Suggest possible courses of action to deal with this problem
Explain how exchange rate and inflation affect the way you price your product
In order to protect themselves, how should marketers price their product in a country with high inflation?
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-52
For discussion (2)
International buyers and sellers of technology frequently disagree on the appropriate price for knowledge. Why?
What methods can be used to compute a transfer price (for transactions between affiliated companies)?
What relevance has the international product life cycle theory for pricing strategy in international firms?
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-53
For discussion (3)
Why is it often difficult to compute fair arm’s-length transfer prices?
Explain these terms of sale: EXW, FAS, FOB, CFR, CIF, DEQ and DDP. Which factors will determine the terms of sale?
Explain these types of letter of credit: revocable/ irrevocable, confirmed/unconfirmed. Under what sets of circumstances would exporters use the following methods of payment: (a) revocable letter of credit; (b) confirmed letter of credit; (c) confirmed irrevocable letter of credit; (d) time draft (i.e. bill of exchange)?
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-54
For discussion (4)
Name some of the financing sources for exporters.
How does inflation affect a country’s currency value? Is it a good idea to borrow or obtain finance in a country with high inflation?
How and why are export credit financing terms and conditions relevant to international pricing?
What is counter-trade? Why should firms be willing to consider counter-trade arrangements in their global marketing efforts?
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-55
Hollensen, Global Marketing 4e, © Pearson Education 2008 15-56
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