International Pricing Strategy

1. International Pricing Strategy Dana-Nicoleta Lascu Chapter 16

2. Chapter Objectives • Identify pricing-related internal challenges facing international firms. • Identify pricing-related challenges imposed by competition on international firms. • Identify pricing related challenges imposed by environment-related elements. • Identify pricing-related challenges imposed by the economic and financial environment on international firms. • Address international pricing decisions of international firms.

3. Pricing Decisions and Procedures • Pricing decisions are affected by a number of factors: • Production Facilities: • The location of production facilities determines the extent to which a company can control costs and price their products competitively. • Large multinational corporations use a strategy whereby they shift their production facilities to optimal locations in order to take advantage of lower costs and exchange rates. • Smaller firms are often limited to exporting. • Ability to Keep Track of Costs: • Product components are often manufactured in different countries and the final product is assembled in yet other countries. These products are then sold all over the world, making it difficult to keep track of product costs.

4. Environmental-Related Challenges and Pricing Decisions: The Competitive Environment • Competition: • International and local competition can create serious problems for the international firm. • Competition can lower prices by manufacturing in a low-labor-cost country. • In addition, local competitors can offer legal copycat products at a much lower price.

5. Environmental-Related Challenges and Pricing Decisions: The Competitive Environment (contd.) • Gray Market/Parallel Imports as a Competitive Threat: • Gray markets, or parallel imports are distribution systems that are not authorized by the manufacturer. • They are used to divert products from low-price markets to higher-price markets. • The diverting party benefits from the difference in price and the manufacturer gains lower profits.

6. Environmental-Related Challenges and Pricing Decisions: The Competitive Environment (contd.) • Dumping as a Competitive Threat: • Involves selling products below cost to get rid of excess inventory or to undermine competition. • In other examples, a foreign company may impose high prices on the products it sells in the home market, where it has a monopoly status as a result of import barriers; the company can then use those high profits to sell at much lower prices in foreign markets in order to build market share and drive out competitors.

7. Environmental-Related Challenges and Pricing Decisions: The Competitive Environment (contd.) • Dumping as a Competitive Threat (contd.): • The World Trade Organization allows governments to regulate antidumping activity in their own national markets by imposing: • Anti-dumping duties – duties that must be paid by firms as a punishment for engaging in unfair price competition. • Countervailing duties – duties imposed on subsidized products imported into the country.

8. Environmental-Related Challenges and Pricing Decisions: The Political and Legal Environment • National governments interfere in the pricing strategies of multinational firms by imposing regulations and restrictions. • National governments also use numerous strategies to restrict the repatriation of profits and to tax and/or encourage the reinvestment of profits. • Local governments have the right to set high tariffs on imports that challenge emerging local producers, as stated in the infant-industry argument.

9. Environmental-Related Challenges and Pricing Decisions: The Political and Legal Environment (contd.) • Multinational firms counter local government actions using transfer pricing: • A pricing strategy used in intra-firm sales for commercial transactions between units of the same corporation, within or beyond the national borders of the parent company. • In transfer pricing, the parent company charges the subsidiary or the joint venture a sales price established at market level or at cost, where cost reflects the opportunity cost of the product. • Transfer pricing helps multinationals underreport profits and thus decrease tax burden in countries where the company has foreign direct investment. • Price of Protectionism: Protectionism adds to the final price paid by consumers in the form of subsidies, tariffs, and other restrictions that force the foreign firm to raise prices.

10. Environmental-Related Challenges and Pricing Decisions: The Economic and Financial Environment • Inflationary pressures on price: Inflationary environment places strong pressures on companies to lower prices. • Often, pricing competitively, a strategy used by companies during the downside of an economic cycle, means that companies are not making a profit. • Fluctuating exchange rates: • Represent a challenge to multinational firms. Firms can cover any possible losses in exchange rate fluctuations by including a percentage that accounts for such fluctuations. • Shortage of hard currency.

11. Environmental-Related Challenges and Pricing Decisions: The Economic and Financial Environment (contd.) • Shortage of hard currency can be addressed using countertrade. • Countertrade: • Low-income countries face a significant shortage of hard currency reserves (hard currency is currency accepted for payment by any international seller). • Alternatively, soft currencies are currencies kept at a high artificial exchange rate and controlled by the national government. • Countertrade involves selling a product to a buyer and agreeing to accept products from the buyer's firm in return for payment.

12. Environmental-Related Challenges and Pricing Decisions: The Economic and Financial Environment (contd.) • A typical countertrade exchange today would involve a seller from a high-income, industrialized country and a buyer from a low-income country where hard currency is scarce and tightly controlled by national institutions. • U.S. Government: Against it, if government mandated. • Countertrade Brokers: • Conducted with the help of brokers who match the exchanges.

13. Environmental-Related Challenges and Pricing Decisions: The Economic and Financial Environment (contd.) • Advantages of Countertrade: • Allows firms from high-income countries to sell their products in markets that would not be accessible otherwise. • Offers low-income countries an opportunity to participate in trade, while allowing their consumers access to consumer products. • Disadvantages of Countertrade: • Foreign lenders may have prior claim on goods offered. • Countertrade limits profit margins, creates economic inefficiency, and distorts prices. • Products traded may be of inferior quality. • Exchange partners can become competitors. • Involves long and expensive negotiations.

14. Environmental-Related Challenges and Pricing Decisions: The Economic and Financial Environment (contd.) • Types of Countertrade: • Barter: • Involves a simple, non-monetized exchange of goods or services between two parties. • Clearing Agreement: • A complex form of countertrade whereby countries trade products up to a certain amount stated in a mutually-agreed-upon hard currency and within a given time frame, and when an imbalance occurs, wing credits are paid in the clearing currency. • Switch Trading: • Involves buying a party's position in a countertrade in exchange for hard currency and then selling it to another customer. • Compensation: • Involves payment for goods in products and in cash, usually in an agreed-upon currency.

15. Environmental-Related Challenges and Pricing Decisions: The Economic and Financial Environment (contd.) • Types of Countertrade (contd.): • Counterpurchase (also known as parallel barter): • Two exchanges that are paid for in cash; involve two parallel contracts whereby the seller agrees to purchase products that are usually unrelated to its business from the buyer and sells them on international markets. • Offset Purchase: • Involves a large hard currency purchase; the seller agrees, in return for the sale of its offer, to purchase products that are valued at a certain percentage of the sale. • Buyback Agreements: • The seller pays up-front in cash, builds and provides a turnkey plant, as well as everything necessary for the production and distribution of the product. • The seller agrees to purchase specific quantities of the plant's output over an extended period of time.

16. Setting Prices • Setting prices is often based on experience and intuition. • The skill lies in assessing differences in consumers' willingness to pay. • Currency fluctuations are important determinants of the final price of items. • Additionally, prices paid down the chain of distribution in business-to-business transactions are also important.

17. Setting Prices (contd.) • Prices Higher in the Home Market: • Justified by factors such as: • Lower labor or material costs in the international market. • Strong local competition in the international market • A lower buying power of host-country consumers • Goals to increase market share by using a penetration pricing strategy in the international market. • Prices Lower in the Home Country: • Justified by such factors as: • Lack of cost advantages to producing overseas. • A lack of international competition. • Limited market potential.

18. Aggressive Export Pricing Dynamic Incremental Pricing: • Assumes certain fixed costs. • Does not factor in internationalpromotion costs for domestic distribution or fulloverhead. • Product cost reflects only variable costs.

19. Standardized vs. Local Pricing Local Pricing: • Prices set to meet purchase power of consumers and to account for differences in distributionsystems, market position, and taxes. Standardized Pricing: • Uniform price worldwide.

20. Penetration Pricing and Skimming Penetration Pricing • Price lower than competitors in orderto quickly penetrate the market at competitors' expense. Skimming • Pricing abovecompetitors’ prices when competition is minimal. • Focus on quality, uniqueness and status.

21. Penetration Pricing and Skimming (contd.) Skimming strategies are often associated with even prices. Here, Japanese luxury goods are priced very high, using even pricing.

22. Penetration Pricing and Skimming (contd.) Alternatively, uneven pricing is an indication of a bargain. These bottles of Italian wine sold in a warehouse club in Germany are indeed bargains.

23. Chapter Summary • Identified pricing-related internal challenges facing international firms. • Identified pricing-related challenges imposed by: • Competition. • Political and legal environment. • Economic and financial environment. • Addressed international pricing decisions.