Pricing for International Markets

1. Pricing for International Markets

2. Argentina Prices 2003 Meals: Pizza AR$ 5 - AR$ 20Parrillada (barbecue) from AR$ 8Ice cream from AR$ 2Tenedor libre (all-you-can-eat restaurants) AR$ 6Breakfast in a patisserie AR$ 2 - AR$ 4Coffee in Recoleta neighborhood AR$ 2 - AR$ 3.50Lunch/dinner in a pattisserie AR$ 7 - AR$ 15Dinner per person: from AR$ 15Palermo Viejo neigborhood (lunch - dinner) AR$ 15 and AR$ 25Menú ejecutivo (midday menu) (noon, from Monday through Friday): AR$ 7 - AR$ 10Transportation:Bus: AR$ 0.75 - AR$ 0.80 liter of gasoline: AR$ 1- AR$ 2Going out:Cinema: AR$ 4.50 - AR$ 10.Ticket for a Boca-River soccer match: AR$ 15 - AR$ 30. Hotels:5* Hotel – Double room AR$ 500 - AR$ 1000. 4* Hotel – Double room AR$ 140 - AR$ 220. 3* Hotel – Double room AR$50 - AR$ 150. 1* Hotel – Double room AR$25 - AR$ 50.

4. Role of PricingDetermines success or failure • Segments markets • Defines products • Creates customer incentives • Sends signals to competitors

5. Approaches to International PricingSkimming Vs. Penetration • Skimming • Pricing abovecompetitors’ prices when competition is minimal • Reach segment which is insensitive to price • Focus on quality, uniqueness and status • Where only two income levels, wealthy & poor

6. Approaches to International Pricing • Penetration • Price lower than competitors in orderto quickly penetrate the market at competitors' expense • Stimulate market growth and capture market share

7. Why Price Escalation? • “People traveling abroad are surprised to find goods that are relatively inexpensive in their home country priced outrageously high in other countries.”

8. Price EscalationThe 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

9. Why Price Escalation? • Taxes • Tariffs • Administrative Costs • Inflation • Exchange Rate Fluctuations • Varying Currency Values • Middlemen and Transportation Cost

10. Sample Causes and Effects of Price Escalation 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

11. Approaches to Lessening Price Escalation •  Lower Cost of Goods • Lower Manufacturing Costs • Eliminate Functional Features • Lower Quality •  Lower Tariffs • Tariff Reclassification • Product Modification • Partial Assembly • Repack aging •  Lower Distribution Costs • Shorten Channels of Distribution • Lower Shipping Costs •  Foreign Trade Zones-Payment of import duties is postponed until product leaves FTZ & enters the country 18-8 Irwin/McGraw-Hill

12. Free Trade Zone in Uruguay

13. Free Trade Zone in Uruguay

14. Benefits of A Foreign Trade Zone (FTC) • Tariffs may be lower because duties are typically assessed at a lower rate for unassembled versus assembled goods. • If labor costs are lower in the importing country, substantial savings may be realized in the final product costs. • Ocean transportation rates are affected by weight and volume; thus, unassembled goods may qualify for lower freight rates. • If local content, such as packaging or component parts, can be used in the final assembly, there may be further reduction of tariffs. 18-9 Irwin/McGraw-Hill

15. Lower Home Market Prices • Justified by: • No cost advantages to producing overseas • Few or no challenges from international competition • Limited market potential • International buyers can afford higher prices

16. Higher Home Market Prices • Justified by: • Lower labor or raw material cost in the international market • Strong local competition in the international market • Lower buying power of host-country consumers • Goal: increase market share via penetration pricing