Pricing for International Markets

1. Chapter 18 Pricing for International Markets McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Learning Objectives 1. Components of pricing as competitive tools in international marketing 2. The pricing pitfalls directly related to international marketing 3. How to control pricing in parallel imports or gray markets

3. Chapter Learning Objectives 4. Price escalation and how to minimize its effect 5. Countertrading and its place in international marketing practice 6. The mechanics of price quotations

4. A. 2 Pricing Objectives: 1. As an active means of attaining marketing objectives Companies use this when trying to achieve certain objectives, profit margins or targeted market share. 2. As a static element in a business decision Companies use this when they are foreign marketing is not a priority Usually associated with trying to get rid of excess inventories Pricing Policy • The more control a company has over the final selling price of a product, the better it is able to achieve its marketing goals • It is not always possible to control end prices

5. B. Parallel Imports Where a manufacturing company sells its products to a specific country; and those products are further sold to another unintended country “Gray Market” situation can occur See Crossing Borders 18-1 pg. 532 (Levi Strauss) 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. This also contributes to parallel imports Exhibit 18.1 pg. 534 “How Gray-Market Goods End Up in the U.S.” Pricing Policy

7. Approaches to International Pricing Full Cost vs Variable Cost Full Cost is determined by combining the total cost plus a profit margin to every unit Every unit must bear the total cost (including international units sold) Variable cost is determined thru the incremental cost associated with producing goods for selling them in international markets Can appear to be “dumping” Pricing Policy

8. Approaches to International Pricing Skimming Vs. Penetration Pricing Skimming is used when the marketplace is insensitive to price; therefore premium price is charged Market places high value on items either because of it’s unique features; quality or it has little or no competition Penetration Pricing is used to stimulate market growth; therefore prices are set low See “Crossing Borders” 18.2 pg. 550 (Charmin – using skimming of penetration pricing policies in Britain?) Pricing Policy

10. Costs of Exporting: the term relates to situations in which ultimate prices are raised by shipping costs, insurance, packing, tariffs, longer channels of distribution, larger middlemen margins, special taxes, administrative costs, and exchange rate fluctuations Price Escalation • Price escalation refers to the added costs incurred as a result of exporting products from one country to another There are several factors that lead to higher prices:

11. 2. Taxes, Tariffs, and Administrative Costs: These costs results in higher prices, which are generally passed on to the buyer of the product Price Escalation (Cont.) 3. Inflation: Inflation causes consumer prices to escalate and the consumer is faced with rising prices that eventually exclude many consumers from the market

12. Price Escalation (Cont.) 4. Middleman and Transportation Costs: Longer channel length, performance of marketing functions and higher margins may make it necessary to increase prices 5. Exchange Rate Fluctuations and Varying Currency Values: Currency values swing vis-à-vis other currencies on a daily basis, which may make it necessary to increase prices

16. Effects of Price Escalation and Sample Causes Foreign Foreign Foreign Example 1: Example 2: Example 3: Assuming the Importer and Same as 2 but same channels with same margins with 10 percent Domestic wholesaler import- and channels cumulative Example ing directly turnover tax 18-6 Manufacturing net $ 5.00 $ 5.00 $ 5.00 $ 5.00 Transport, c.i.f. n.a. 6.10 6.10 6.10 Tariff (20 percent c.i.f. value) n.a. 1.22 1.22 1.22 Importer pays n.a. n.a. 7.32 7.32 Importer margin when 1.83 sold to wholesaler +0.73 * (25 percent) on cost n.a. n.a. 1.83 2.56 Wholesaler pays landed cost 5.00 7.32 9.15 +9.88 3.29 +0.99 * Wholesaler margin (331/3 percent on cost) 1.67 2.44 3.05 =4.28 Retailer pays 6.67 9.76 12.20 14.16 7.08 +1.42 * Retail margin (50 percent on cost) 3.34 4.88 6.10 =8.50 Retail price 10.01 14.64 18.30 22.66 Notes: a. All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable. b. The exhibit assumes that all domestic transportation costs are absorbed by the middleman. c. Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown. * Turnover Tax Irwin/McGraw-Hill

17. Price Escalation The Lower Prices are at Home New York London Paris Tokyo Mexico City 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 89.39 Sony 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 18-7 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 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. Irwin/McGraw-Hill

18. 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 Gamble’s strategy for selling toilet paper in Brazil 2. Lower tariffs through Reclassification Persuading foreign country’s 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 Price Escalation

19. 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 FTZ’s can lower costs through: Lower duties imposed Lower labor costs in importing country Lower ocean transportation costs with unassembled goods (weight and volume are less) Using local materials in final assembly See Exhibit 18.4 “How Are Foreign Trade Zones Used?” Price Escalation

21. 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 company’s 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. Pricing Issues

22. Barter: is the direct exchange of goods between two parties in a transaction Compensation deals: is the payment in goods and in cash Counter-purchase or off-set trade: the seller agrees to sell a 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 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 Countertrade 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:

23. 3. Transfer Pricing Strategy Intra-company transfer of pricing 4. Administered Pricing Attempt by companies within same industry to set prices in international markets Cartels OPEC Shipping Industry Diamond cartel – controlled by DeBeers 5. Government Influenced Pricing Other Pricing Strategies

24. 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 prices 4. Arm’s-length sales using the same prices as quoted to independent customers Transfer Pricing Strategy • Prices of goods transferred from a company’s operations or sales units in one country to its units elsewhere, which refers to intracompany pricing or transfer pricing, may be adjusted to enhance the ultimate profit of the company as a whole Four arrangements for pricing goods for intracompany transfer are as follows:

25. Benefits of Transfer Pricing Strategy 1. Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low 2. 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 3. Facilitating dividend repatriation when dividend repatriation is curtailed by government policy by inflating prices of goods transferred