Pricing Strategy International Market Lecture 5 and 6

8/10/2019 Pricing Strategy International Market Lecture 5 and 6

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Learning objectives.

Components of pricing in Internationalmarketing.

Pricing pitfalls directly related to Internationalmarketing.

How to control pricing in parallel imports or greymarket.

Price escalation and how to minimize its effects.

Counter trading and its place in internationalmarketing practice.

The mechanics of price quotation.


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Pricing policy.

A. Pricing objectives. As an active means of

attaining marketing objectives.

Companies use this when trying to achieve certainobjectives, profit margin or targeted market share.

The more company has control over the final selling price of the product the ,

better it is able to achieve its marketing objectives.

It is always not possible to control end price.


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Pricing policy.

C. Exclusive Distribution.

Where manufacturers select preferred distributors

to sell its products at premium prices in order to

Maintain high profit margins, stock large

assortments, and to maintain the exclusive

quality image. They also contribute to parallel

imports.


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Pricing policy

Approaches to International pricing.

Full cost v/s Variable cost.

Full cost is determined by combining total cost plus a

profit margin to every unit.

Every unit must bear the total cost including

international units sold.

Variable cost.

Variable cost is determined through the incremental

cost associated with producing goods for selling them

in international market. This can appear to be dumping.


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Price escalation.

Price escalation refers to added cost incurredas a result of exporting, products, goods or

service from one country to another.

Several factors lead to high prices.


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Price escalation.

1. Cost of Exporting.

Relates to situations in which

ultimate prices are raised by,

shipping costs, insurance,

packaging, longer channels of

distribution, larger middle man

margin, special taxes,

administrative costs andexchange rate fluctuations.


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Price escalation.

2. Taxes, Tariff and Administrative costs.

These costs results in higher price of the

product which is generally passed on to theconsumer.

3. Inflation. Inflation causes consumer

prices to escalate and consumer is faced

with rising prices that eventually excludes

many consumers from the market.


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Price escalation.

4. Middle man and transportation costs.

Longer channel length, performance of

marketing functions and higher margins

may make it difficult to reduce prices.

5. Exchange Rate Fluctuations and Varying

Currency Values: Currency values swingvis--vis other currency on a daily basis,

which make it necessary to increase

prices.


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Price Escalation

The Lower Prices are at Home

Aspirin $ 0.99 $ 1.23 $ 7.07 $ 6.53 $ 1.78

Movie 7.50 10.50 7.89 17.29 4.55

Levi 501 jeans 39.99 74.92 75.40 79.73 54.54

Ray-Ban sunglasses 45.00 88.50 81.23 134.49 89.39Sony Walkman 59.95 74.98 86.00 211.34 110.00

Nike Air Jordans 125.00 134.99 157.71 172.91 154.24

Nikon camera 629.95 840.00 691.00 768.49 1,054.42

New York London Paris Tokyo Mexico City

SOURCE: Norihiki Shirouzu, Luxury Prices for U.S. Goods No Longer Pass Muster

in Japan, Wall Street Journal, February 8, 1996, p. B1; and Elizabeth Fleick, The

Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell about Prices,

Time International, December 13, 1999, p. 38.

18-7

Irwin/McGraw-Hill

Los Angeles Madrid Stockholm Berlin Rome

Mariah Carey CD 16.22 16.09 17.82 15.31 20.67

Windows 98 117.99 123.94 179.79 211.20 264.46

Diapers 13.52 5.03 5.42 6.86 10.55


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Price escalation.

How to Lower the Effects of Price Escalation 1. Lower cost of goods through

Manufacturing overseas where labor costs are lower (China)

Eliminate features or product quality

Proctor Gambles strategy for selling toilet paper in Brazil

2. Lower tariffs through Reclassification

Persuading foreign countrys government

Modification of product to fit in another class

3. Lower distribution costs through Eliminate or reduction of middlemen

Especially where value-added taxes are imposed


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Price escalation.

How to Lower the Effects of Price Escalation

4. Using Foreign Trade Zones Imported goods stored or processed without imposing

tariffs or duties until items leave FTZ areas and is

imported into host country FTZs can lower costs through:

Lower duties imposed

Lower labor costs in importing country

Lower ocean transportation costs withunassembled goods (weight and volume are less)

Using local materials in final assembly


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Pricing strategies.

Issues with different methods of pricing strategies:

1. Dumping

Defined as either products that are sold in international markets

below their production cost; or products priced lower in foreign

markets than sold in the companys domestic markets

WTO has set up penalties for dumping thru:

Countervailing duties

Minimum Access Volume (MAV)(restricts volume that can a

country can import)

2. Screwdriver Plants

Company sets up plants to assemble products in the importing

country where they sell the final products.


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Pricing strategies.

3. Transfer Pricing Strategy

Intra-company transfer of pricing

4. Administered Pricing

Attempt by companies within same industry to setprices in international markets

Cartels

OPEC

Shipping Industry

Diamond cartelcontrolled by DeBeers

5. Government Influenced Pricing


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Counter trade as a pricing tool.

Countertrade is a pricing tool that every international

marketer must be ready to employ

There are four distinct transactions in countertrading, which

include:


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Counter trade as a pricing tool.

1. Barter:is the direct exchange of goods between two parties

in a transaction

2. Compensation deals:is the payment in goods and in cash

3. Counter-purchase or off-set trade: the seller agrees to sella 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 market

4. Buy-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 buyer


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Transfer pricing strategy.Prices 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 thecompany as a whole


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Transfer pricing strategy.

Four arrangements for pricing goods for intra company transfer

are as follows:

1. Sales at the local manufacturing

cost plus a standard markup

2. Sales at the cost of the most

efficient producer in the company

plus a standard markup

3. Sales at negotiated prices4. Arms-length sales using the same

prices as quoted to independent

customers


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Benefits of transfer pricing.

Lowering duty costs by shipping goodsinto high-tariff countries at minimal

transfer prices so that duty base and

duty are low

Reducing income taxes in high-tax

countries by overpricing goods

transferred to units in such countries;

profits are eliminated and shifted to

low-tax countries

Facilitating dividend repatriation when

dividend repatriation is curtailed by

government policy by inflating prices of

goods transferred


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Different prices in different

distribution channels

in

Source: Presentation Zinocker, Simon, Kucher & Partner, dec.2006.


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Big mac index

Having trouble keeping track of currencyfluctuations?

The Economist tracks the average price of a

McDonalds Big Mac across the globe to give

you a feel for whether a currency is under- or

over-valued.


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Role of price in marketing exchanges.

Price willing to pay Price willing to sell.

Customer Producer

Money

Time

Cognitive Activity

Behavior effort

+

Value

=

Production

Promotion

Distribution

Market research

+

Profit

=


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International pricing framework

Firm-level factorsEnvironmental

factors

Product factors Market factors

Firm performance

Other

elementsPricing strategies

Terms

Source: Hollensen, Global marketing, 4e, 2008.


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Internal factors affecting international

pricing decisions.Firm level Factors. Product level Factors.

1. Corporate and marketing strategy.

2. Competitive strategy.

3. Firm positioning.

4. Product layout.

5. Production layout.

6. Market entry modes.

1. Stages in PLC.

2. Place in product line.

3. Most important product features.

4. Product positioning.

5. Product cost structure.


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External factors affecting international

pricing decisions.Environmental Factors. Market Factors.

1. Government influences and

constraints.

2. Inflation.

3. Currency fluctuations.4. Business cycle stage.

1. Customers perceptions.

2. Customers ability to pay.

3. Nature of competition.

4. Competitors objectives,strategies, strengths and

weaknesses.

5. Grey market appeal.


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Special issues in international pricing .

1. Price escalation

2. Skimming

3. Market pricing

4. Penetration pricing5. Experience curve pricing

6. Bundle pricing

7. Transfer pricing

What influences the height

of international prices?

1. Currency.

2. Internationalcommercial terms.

3. Financial terms.

4. Terms of payment.


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Price escalation.

Is a price-related phenomenon caused by the

summation of all cost factors in the

distribution channel including ex-works price,

shipping costs, tariffs, and distributor mark-up.


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Skimming.

A price strategy involved charging a high price at

the top end of the market with the objective

of achieving the highest possible contribution

in a short time.


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Market pricing.

When a price strategy involves charging a final

price based on competitive prices.


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Penetration pricing.

When a price strategy involves charging a low

price with the objective of achieving the

highest possible sales.


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Experience curve pricing.

When 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.


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Bundle pricing.

When price strategy is based on grouping

products and services in a system-solution

product in order to overcome possible

customer price concerns.


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Global pricing contract.

When a customer requires one global price

per product from the supplier for all its foreign

SBUs and subsidiaries.


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Transfer pricing.

When prices are charged for intra company

movement of goods and services. It may be

based on market price if the same service is to

be procured.


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Different terms of payment.



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he process for handling letters of credit



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Export financing

Commercial banks

Export credit insurance

Factoring

Forfeiting

Bonding

Leasing

Counter-trade

Barter

Compensation dealBuy-back agreement

St t i lt ti i


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Strategic alternatives in

international pricing

1. Standardization

2. Differentiation

1. Skimming

2. Penetration


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Structural factors of standardized versus differentiated

pricing



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Case study: Gillette1. Evaluate the price-level of Gillettes Fusion

2. Discuss whether it is possible for Gillette to standardize pricing

across borders for their new 5-blade, Fusion.

3. Which factors would favour price standardization and which

factors would favour price differentiation?


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Initiating and responding to price


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Initiating and responding to price

changes

Initiating price cuts implies the risk of

Low quality trap

Fragile market share trap

Shallow pocket trap

Initiating price increasesCost inflation

Anticipatory pricing

Over demand

Delayed quotation pricing

Escalator clausesUnbundling

Reduction of discounts

Reactions to competitors price changes

Maintain price

Maintain price and add value

Reduce price

Increase price and improve quality

Launch a low-price fighter line


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How to fight a price war?

NONPRICE RESPONSES

Reveal your strategic

capabilities and intentions

Offer to match competitors prices, offer everyday low

pricing, or reveal your cost advantage.

Compete on quality Increase product differentiation by adding features to aproduct, or build awareness of existing features and their

benefits. Emphasize the performance risks in low-priced

options.

Co-opt contributors Form strategic partnerships by offering cooperative orexclusive deals with suppliers, resellers, or providers of

related services.

PRICE RESPONSES

Use complex price actions Offer bundled prices, two-part pricing, quantity discounts,price promotions, or loyalty programs for products.

Introduce new products Introduce flanking brands that compete in customersegments that are being challenged by competitors.

Deploy simple price

actions

Adjust the products regular price in response to a

competitors price change or another potential entry into

the market.

Source: Rao, Bergen, Davis (2000). How to fight a price war, Harvard business review, pp. 107-116.


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When do negotiations take place?

Small children

In private life (family & marriage)

As consumers

Business

Especially international business

Politics


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Negotiating internationally

Cultural background of the negotiating parties isdifferent.

Thus, successful negotiations require:

Knowledge of the other partys culture Respect

Flexibility

Some examples of cultural shocks when negotiating

from the Arab World, China etc.


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Negotiating internationally

Gap analysis in a cross cultural negotiation

I f i C


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Importance of mastering Cross

Cultural Dimension.

We underestimate CCD

Mastering CCD as the most important step in internationalization

Cultural sensitivity as a precondition for good int. negotiations

Think like locals when in a local environment

Ignorance can impede transfer of knowledge in cross-cultural teams

Foreign knowledge accepted only when foreigners are emotionallyaccepted

To master CCD, strengthen informal contacts before negotiations


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Cross-cultural negotiations


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Positions vs. interests Positions are WHAT I say I want

Wantsneeds

Interests are WHY I want it, motivations and aspirations

Look behind positions for interests

Listening more important than talking

Paraphrasing

Ask WHY, WHY NOT, WHAT IS WRONG WITH

Put yourself in their shoes


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Negotiating tactics

Extreme demands

Tactic of slices

Best offer tactic

Good guys, bad guys tactics


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1. Western - individualistic

Problem-oriented

Linear thinking and problem solving

Ignore history, tradition and interpersonal relationships

Impatient.

Individualistic:

Protestant culture

Status achieved not inherited

Authority as a function of position and can be challenged


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2. Easternhigh context


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What is not allowed in int. negotiations

Ethnocentrism Stereotypes

Discussing religion, racial problems, local

politics

Violating racial or religious rules

Negotiation without an interpreter

Not knowing at all local language


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Some suggestions for good negotiations

Be on time!

Prepare for negotiations!

Study the opponents negotiation style!

Try to negotiate at your place or a neutral place!

Never let the other side know when your deadline is or

that you are in a hurry!

Think strategic!

Mix and mingle! Be considerate and sensitive to

other sides culture and rituals!

Be patient!

Documents

Pricing Strategy International Market Lecture 5 and 6