Chapter 18

1. Chapter 18 Pricing for International Markets

2. Chapter Learning Objectives • Components of pricing as competitive tools in international marketing • Factors driving pricing decisions • The pricing pitfalls directly related to international marketing • How to control pricing in parallel imports or grey markets • Price escalation and how to minimise its effect • Countertrading and its place in international marketing practices • The mechanics of price quotations

3. Global Perspective: Price War in the Video Game Console Market • Setting the right price for a product or service can be the key to success or failure. • An offering’s price must reflect the quality and value the consumer perceives in the product. • Problems affecting global pricing decisions include: • Increased competitive levels • Grey market activities • Counter-trade requirements • Regional trading blocs • Standardisation vs. localisation issues • Emergence of intra-market segments • Exchange rate volatility (AUD) 2008-2012

4. Factors Driving International Pricing • Pricing decisions are influences by a complex set of interrelated factors both internal and external to the firm. • Key internal considerations include: • Cost and goals • Nature of the product or industry • Location of production facilities • Distribution channels. • Key external factors are: • Intensity of price competition • Government policies.

5. Factors Driving International Pricing (cont.) • Cost structure and company goals • Effective strategy might depend on one of combination of objectives: • Maximising profits • Achieving a specific return on investment • Ensuring adequate cash flow • Increasing sales volume • Increasing market share • Beating the competitor’s price • Maintaining or creating a certain image. • Nature of the product or industry • Technically advanced.

6. Factors Driving International Pricing (cont.) • Location of production facilities • Home, host or third country • Response to exchange rage and cost input fluctuations • Distribution channels • Direct vs. indirect • Intensity of price competition • Domestic vs. international products • Extent of product differentiation • Government policies • Inspection costs • Standards • Support for domestic producers

7. Strategic Approaches to InternationalPricing: Full-Cost versus Variable-Cost Pricing • Variable-cost pricing – the firm is concerned only with the marginal or incremental cost of producing goods to be sold in overseas markets • May be subject to Anti-dumping tariffs. • Full-cost pricing – companies insist that no unit of a similar product is different from any other unit in terms of cost and that each unit must bear its full share of the total fixed and variable cost.

8. Strategic Approaches to International Pricing: Skimming versus Penetration Pricing • Skimming – a company uses when the objective is to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for the value received. • skimming the cream-Introductory stage • Penetration pricing policy – used to stimulate market and sales growth by deliberately offering products at low prices. • For instance, the Sony PlayStation 3 was initially sold at $599, but the price has gradually reduced to $299 (US).

9. Price Escalation • Costs of exporting • Price escalation – added costs incurred as result of exporting. • Taxes, tariffs and administrative costs • Tariff – fee charged when goods are brought into a country from another country. • Administrative costs include export and import licenses, other documents and the physical arrangements for getting the product from port of entry to the buyer’s location.

10. Price Escalation (cont.) • Inflation • In countries with rapid inflation or exchange variation, the selling price must be related to the cost of goods sold and the cost of replacing the items. • Deflation • In a deflationary market, it is essential for a company to keep prices low and raise brand value to win the trust of consumers. • Exchange rate fluctuations • No one is quite sure of the future value of currency. • Transactions are increasingly being written in terms of the vendor company’s national currency. • For instance, in 2011 the AUD reached $1.10 versus the USD

11. Price Escalation (cont.) • Varying currency values • Changing values of a country’s currency relative to other currencies. • Cost-plus pricing generally used when value of home currency is weak. • Middleman and transportation costs • Channel diversity. • Underdeveloped marketing and distribution channel infrastructures.

12. Sample Causes and Effects of Price Escalation

13. Approaches to Reducing Price Escalation • Lowering cost of goods • 3rd country manufacturing • Eliminate functional features • Lower product quality • Lowering tariffs • Reclassify or modify products • Repackaging • Lowering distribution costs • Shorter channels • Using foreign trade zones to lessen price escalation • Exemption of duty from labour and overhead costs incurred in FTZ • Dumping

14. Pricing Policy Parallel Imports • Occurs whenever price differences are greater than the cost of transportation between two markets. • Major problem for pharmaceutical companies. • Exclusive distribution. Parallel imports develop when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturer’s regular distribution system.

15. How Grey-Market Goods End Up in US Stores 1. A major US manufacturer agrees to sell its products, at a price competitive for an overseas market, to ‘Buyer X’ who promises to sell the products overseas. 2. The manufacturer ships the goods to Buyer X. 3. Buyer X has a local freight forwarder at the port take possession of the goods. 4. Instead of shipping the goods to their supposed destination, the freight forwarder (at the behest of Buyer X) sends them to smaller distributors and discount outlets in the United States. 5. The freight forwarder sends a bogus bill of lading to the manufacturer, so the company believes the goods have been sold overseas.

16. Leasing in International Markets • Opens the door to a large segment of nominally financed foreign firms that can be purchased on a lease option but might be unable to buy for cash. • Can ease the problems of selling new, experimental equipment because less risk is involved for the users. • Helps guarantee better maintenance and service on overseas equipment. • Helps to sell other companies in that country. • Revenue tends to be more stable over a period of time than direct sales would be.

17. Countertrade as a Pricing Tool • Why purchasers impose countertrade: • To preserve hard currency • To improve balance of trade • To gain access to new markets • To upgrade manufacturing capabilities • To maintain prices of export goods • To force reinvestment of proceeds from weapons deals.

18. Countertrade as a Pricing Tool (cont.) • Types of countertrade • Barter • Compensation deals • Counter-purchase or offset trade • Product buyback agreement.

19. Countertrade as a Pricing Tool (cont.) • Problems of countertrading • Determining the value of and potential demand for the goods offered • Barter houses • The Internet and countertrading • Electronic trade dollars • Universal Currency/IRTA • Proactive countertrade strategy • Included as part of an overall market strategy • Effective for exchange-poor countries.

20. Transfer Pricing Strategy • Benefits: • Lowering duty costs • Reducing income taxes in high-tax countries • Facilitating dividend repatriation when dividend repatriation is curtailed by government policy • Arrangements for pricing goods for intra-company transfer: • Sales at the local manufacturing cost plus a standard markup • Sales at the cost of the most efficient producer in the company plus a standard markup • Sales at negotiated prices • Arm’s-length sales using the same prices as quoted to independent customers.

21. Price Quotations • May include specific elements affecting the price: • Credit • Sales terms • Transportation • Currency • Type of documentation required • Should define quantity and quality.

22. Administered Pricing • Administered pricing is an attempt to establish prices for an entire market. • Cartels • Exists when various companies producing similar products or services work together to control markets for the types of goods and services they produce • Example: OPEC, De Beers. • Government-influenced pricing • Establish margins • Set prices and floors or ceilings • Restrict price changes • Compete in the market • Grant subsidies • Act as a purchasing monopoly or selling monopoly.

23. Summary • Pricing is one of the most complicated decisions areas encountered by international marketers. • International marketers must take many factors into account, not only for each country, but often for each market within a country. • Market prices at the consumer level are much more difficult to control in international than in domestic marketing. • Countertrading is an important tool to include in pricing policy.

24. Summary (cont.) • Pricing in the international marketplace requires a combination of intimate knowledge of market costs and regulations, an awareness of possible countertrade deals, infinite patience for detail and a shrewd sense of market strategy. • Controlling costs that lead to price escalation when exporting products from one country to another is one of the most challenging pricing tasks facing the exporter.