International Pricing 1

2 Analysis Factors affecting pricing: Company and product Market Environmental Corporate objective Confirm impact of corporate strategies on pricing policy Options evaluation Selection of most appropriate pricing option Implementation Use of tactics and procedures to set SBU prices Price management Dealing with international pricing problems

 Company and Product Factors  Market Factors  Environmental Factors 3

 Standardisation – Ethnocentric  Adaptation – Polycentric  Invention -Geocentric 4

 achieve predetermined ROI  market stabilisation  pursue market share  reflect differentiation  early cash recovery  prevent new entrants 5

 Based on cost/profit  Cost Plus  Target  Range  Based on competition  Customary  Percentage/quartile 6

 Based on demand  Skimming  Penetration  Perceived value/psychological 7

8 Global Pricing: Important Concepts Rigid Cost-Plus Pricing and Flexible Cost-Plus Pricing Dynamic Incremental Pricing Price Corridor Dumping Parallel Imports and Grey Markets Transfer Pricing Principle of Arm`s Length

9 Environmental Influences on Pricing Decisions (1) Currency Fluctuations Two positions: Fix prices in country target markets Fix prices in home-country currency Pricing should be consistent with the company`s marketing strategy Inflation Inflation is a persistent upward change in price levels Inflation requires periodic price adjustments

10 Environmental Influences on Pricing Decisions (2) Government Controls and Subsidies In countries, which are undergoing severe financial difficulties, governments may restrict price increases or prescribe fixed prices Competitive Behaviour and Market Demand Pricing decisions are also dependent on the nature of demand and competitive action

11 Rigid Cost-Plus Pricing Adding up all the costs required to get the product to where it is sold All costs incurred in getting a product to an international market are taken into account Cost-Plus Pricing sometimes ignores competitive conditions Rigid cost-plus pricing is mostly used by companies new to foreign business

12 Flexible Cost-Plus Pricing Flexible cost-plus pricing is based on the same principle as rigid-cost plus pricing However: Prices may vary, if the market situation requires (e.g. the nature of the customer, the size of the order or the intensity of local competition)

13 Dynamic Incremental Pricing Price setting practice which is based on the idea that fixed costs occur regardless of whether the company is successful or not The goal is to regain at least variable costs and international marketing and promotion costs in export ventures This strategy is also known as penetration pricing Penetration pricing means that the product may be sold at a loss for a certain time to gain market share

 Transportation costs  Taxes, tariffs, admin costs  Intermediary margins & costs  Inflation  Exchange rate fluctuations/Varying currency values 14

15 Price Escalation – An Illustration Escalation of Costs Through Exporting Export price (£) Domestic price (£) Manufacturer’s price Sea freight and insurance Landed cost (CIF) ( cost, insurance, freight ) Import tariff: 8 per cent on CIF value CIF plus tariff 17.5 per cent VAT Distributor purchase price Distributor mark-up (15 per cent) Retailer purchase price Retail margin 40 per cent Consumer purchase price

 Lower production costs  Economies of scale  Learning curve benefits  Relocate production facility  Adapt product  Reclassify to lower tariffs  Reduce distribution costs  Use FTZs  Carefully manage currency fluctuations 16

 Benefits of quoting in a foreign currency  provide access to finance abroad At lower interest rates  good currency management Leading to potential of gaining additional profit  customers prefer quotes in own currency Allowing competitive comparison 17

 Compete on price  Introduce new products with additional features  Source / manufacture in the domestic country  Fully exploit export opportunities  Obtain payment in cash  Use full cost approach for existing markets / marginal costs for new, more competitive, markets  Repatriate foreign earned income quickly  Reduce expenditure and buy services (advertising, transport, etc) locally  Minimise overseas borrowing  Invoice in domestic currency 18

 Compete on non-price factors (quality, delivery, service)  Improve productivity and reduce costs  Prioritise strong currency countries for exports  Use counter-trade for weak currency countries  Reduce profit margins and use marginal costs for pricing  Keep the foreign earned income in the local country  Maximise expenditures in local country currency  Buy services abroad in local currencies  Borrow money for expansion in local markets  Invoice foreign customers in their own currency 19

 Bases of Transfer:  At cost  At cost plus  Most efficient producer + mark-up  At arm’s length  Strategic Use:  Create and maintain barriers to entry  Avoid domestic tax liabilities  Avoid foreign tax  Manage levels of market involvement 20

21 Transfer Pricing Pricing transactions between buyers and sellers that belong to the same corporation The approach used will vary with the nature of the firm: Cost-Based Transfer Pricing Market-Based Transfer Pricing Negotiated Transfer Pricing

22 Tax Regulations and Transfer Prices Companies sometimes use transfer prices to shift profits from high-tax to low-tax countries The principle of arm`s length is a way of establishing a transfer price between company units. The price shall amount to what two independent, unrelated entities would negotiate

Authentic items sold through unauthorised distribution channels, as a result of:  Price segmentation  Exchange rate fluctuations 23

24 Grey Markets and Parallel Imports Distribution of trademarked products in a country through channels unauthorised by the trademark owner Grey marketers take advantage of price differences between markets by re-importing branded merchandise from low-price to high-price markets Parallel Imports reduce or cannibalise sales by authorised channel members in high-price countries

25 SOURCE: Assmus and Weiss (1995)

 Seek government intervention or legal protection  Refusal to issue warranties in certain markets  Buying out grey marketer  Price coordination strategies  Adaptation for different markets 26

 A sale that encompasses more than an exchange for money (Czinkota & Ronkainen, 2004)  Barter  Compensation trading  Counter-purchase  Offset  Switch deals 27

ADVANTAGES  Reduces financial risk  Allows covert reduction of prices  Gain entry to new markets  Provide stability for long-term sales  Can ensure quality of an international transaction DISADVANTAGES  Time consuming & complicated  Compensation goods often unattractive & hard to dispose of  Difficult to evaluate in terms of profitability  Can create new competitors 28

29 Standardisation vs. Differentiation in International Pricing It is an important question whether prices should be standardised across markets or differentiated between international markets Companies do not act consistently Cross-subsidisation: a company uses financial resources from one area to compete in another area

30 Influences on Prices Standardisation vs. Differentiation Customer Preferences Competitive Situation CostSituation Inflation/Exchange Rates Regulations/ Tariffs and Duties Reduction of Trade Barriers Decreasing Transportation Costs Active Retailers/Grey Markets/GlobalSourcing Improved Communication and InformationFlow Increasing Brand Globalisation/ Standardisation OptimalPrices! Price Nivellation? FutureDevelopments External Drivers Market - Related Drivers External Drivers Company - Related Drivers Factors Driving Price Differentiation Factors Driving Price Standardisation

31 An International Price Corridor

32 Decision Making Framework for International Pricing

33 Dumping A company exports a product at a price lower than the price it normally charges in its own home market Dumping is an important global pricing issue, because it is sometimes regarded as unfair competition Organisations like the WTO or OECD have issued guidelines how to treat these problematic situations