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INTERNATIONAL MARKETING MANAGEMENT

SESSION 10:

INTERNATIONAL PRICING

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ISSUES IN ESTABLISHING INTERNATIONAL PRICING POLICY

Use of Price as a Competitive Tool

Standardized vs. Differentiated Prices

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PRICING: BARRIERS TO STANDARDIZATION

Shipping and Transportation Costs, Tariffs

Income Levels, Price Sensitivity

Prices of Competing and Substitute Products

Trade Margins, Taxes, Price Regulation

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FACTORS COMPLICATING INTERNATIONAL PRICING DECISIONS

Foreign Exchange Risk: Changes in Value of One Currency vs. Another

HEDGING

Rates of Inflation

Lack of Foreign Exchange

BARTERING

Gray Markets

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PORTRAIT OF A DEAL

GOVERNOR of Yamal-NenetsRegion demands payment of

energy royalties from gasmonopoly GAZPROM.

1 GAZPROM, claiming to lackcash, offers to pay in gas.2

GOVERNOR asks barterspecialist, ANDREI TOLMACHEV,

to trade the gas for an airplane.3 TOLMACHEV then signs

contract with aircraftmanufacturer AVIACAR.4

AVIACAR, lacking cash, can’t buycomponents to make the plane. TOLMACHEV

trades more than 100 cars, tractors, and busesto acquire a $2 million engine and swaps$250,000 of electricity and tires to secureelectrical equipment from different companies.

5GOVERNOR gets hisplane six months after

the transaction begins.TOLMACHEV earns acommission equal to 10%of the $17 million plane.

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GRAY MARKETS

DEFINITION

Branded or trade-marked product sold through unauthorized distribution channels triggered by price differentials between countries

POSITIVE CONSEQUENCES

Taps Price-Sensitive Customers

NEGATIVE CONSEQUENCES Damage to Trademark/Quality Image Legal Liabilities -- Warranties, etc. Strained Channel/Distributor Relations Disruption of Global Marketing Strategy

STRATEGIES TO COUNTERACT GRAY MARKETS Price Cutting Differentiate Product Model, Warranties, etc. Cutoff/Control Supply Promote Gray Market Product Limitations

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COST-BASED PRICING

COSTS

Production

Freight and Packaging

Handling and Processing Costs

DUTIES

Import Duties

Custom Duties

MARGINS

Importer Margins

Distribution Margins

PRICE ESCALATION

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NON-COST FACTORS TO CONSIDER IN INTERNATIONAL PRICING

DEMAND

Price Sensitivity

Modes of Payment

Quality and Prestige Associations

COMPETITION

Prices of Competing and Substitute Products

Competitor Reaction

DISTRIBUTION

Availability of Certain Outlets/Discounters, etc.

Regulation of Retail/Wholesale Margins and Prices

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ONE CAR, SO MANY PRICES

Prices for a Volkswagen Golf*

BRITAIN $13,040

FINLAND 8,290

FRANCE 10,510

GERMANY 11,040

ITALY 10,690* Excludes taxes

DATA: EUROPEAN UNION

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United States*** $2.54 2.54Argentina Peso2.50 2.50 0.98 1.00 -2Australia A$3.00 1.52 1.18 1.98 -40Brazil Real3.60 1.64 1.42 2.19 -35Britain £1.99 2.85 1.28** 1.43** 12Canada C$3.33 2.14 1.31 1.56 -16Chile Peso1260 2.10 496 601 -17China Yuan9.90 1.20 3.90 8.28 -53Czech Rep Koruna56.00 1.43 22.00 39.0 -44Denmark DKr24.75 2.93 9.74 8.46 15Euro area 2.57 2.27 0.99 € 0.88 € -11 France FFr18.5 2.49 7.28 7.44 -2 Germany DM5.10 2.30 2.01 2.22 -9 Italy Lire4300 1.96 1693 2195 -23 Spain Pta395 2.09 156 189 -18Hong Kong HK$10.70 1.37 4.21 7.80 -46Hungary Fo399 1.32 157 303 -48Indonesia Rupiah14700 1.35 5787 10855 -47Japan 294 2.38 116 124 -6Malaysia M$4.52 1.19 1.78 3.80 -53Mexico Peso21.9 2.36 8.62 9.29 -7New Zealand NZ$3.60 1.46 1.42 2.47 -43Philippines Peso 59.00 1.17 23.2 50.3 -54Poland Zloty5.90 1.46 2.32 4.03 -42Russia Rouble35.00 1.21 13.8 28.9 -52Singapore S$3.30 1.82 1.30 1.81 -28South Africa Rand9.70 1.19 3.82 8.13 -53South Korea Won3000 2.27 1181 1325 -11Sweden SKr24.0 2.33 9.45 10.28 -8Switzerland SFr6.30 3.65 2.48 1.73 44Taiwan NT$70.0 2.13 27.6 32.9 -16Thailand Baht55.0 1.21 21.7 45.5 -52

The Hamburger StandardThe Hamburger Standard Under (-)/ over (+) valuation Local Currency Dollars Implied PPP* Actual $ exchange against the of the dollar rate 17/04/01 dollar %

Under (-)/ over (+) valuation Local Currency Dollars Implied PPP* Actual $ exchange against the of the dollar rate 17/04/01 dollar %

Big Mac PricesBig Mac Prices

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*Purchasing-power parity: local price divided by price in United States***Average of New York, Chicago, San Francisco and Atlanta ** £ Dollars per pound € Dollars per Euro

Source: McDonald’s; The Economist

*Purchasing-power parity: local price divided by price in United States***Average of New York, Chicago, San Francisco and Atlanta ** £ Dollars per pound € Dollars per Euro

Source: McDonald’s; The Economist

YenYen

RR

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SUMMARY

Aggressive Pricing as Difficult to Sustain

Difficult to Standardize Pricing Internationally

Importance of Considering Demand, Competition and Infrastructure Factors