Lecture 4 International Pricing Strategy

Facets prices Gap between domestic and pricing exporting

3 Costs Price floor  Direct cost (Labor + rawmat + shipping) = (excess capacity)  Full costs Cost floor  Between d.c/ f.c.

Costs Price floor Full Costs Cost floor

5

6 Market Conditions Determines the upper limit for prices Price ceiling

Demand – market conditions SET BY DEMAND

8 Competition Cost Price floor Demand Price ceiling Competition helps where actual price should be set.

Competition SET BY THE COMPETITION

EXAMPLE Actual company:  Price 1700 € Competitors:  Company a: 1500€  Company b: 1200€  Company c: 1000€ Attributes:  Software.  Battery.  Brand.  Internet conection.

Market research ATRIBUTTESWEIGHT Software (S)0,40 Battery (B)0,30 Brand (BR)0,15 Internet Conection (IC)0,15 1,00 SBBRIC Our company40 10 Company a30 20 Company b25 Company c20 30

Global Quality Our company: Software40*0,40=16 Battery40*0,3=12 Brand10*0,15=1,5 Int Conec.10*0,15=1,5 Total31

Global Quality each company Company productGlobal Quality Our Company31 Comapny A27 Company B25 Company C23 Average26,50

Perceived Quality Index COMPANYGQAV GQPQI Our Company31/26,5=1,16 Comapny A27/26,5=1 Company B25/26,5=0,94 Company C23/26,5=0,85 If PQI < 1 then perceived quality of the product is below average. If PQI> 1 then perceived quality of the product is above average.

Export Celiling price CompanyInicial PricePQIExport Ceiling price Our Company17001,16=1,16* Company a15001,00=1,00* Company b12000,94=0,94* Company c10000,85=0,85* Average1350

Perceived Value CompanyCeiling/domesticPerceived Value Our Company=1566/17000,92 Company a=1500/15001,00 Company b=1269/12001,05 Company c=1147/10001,14

17 Legal & Political Influence Restricts the company to set prices strictly on economical basis. Some countries have the right to control the prosperity of their citizens. Antidumping legislations, Tariffs, import restrictions.

18 Price Quotation Export prices are quoted in various ways. The major system is trade terms. They determine the cost that exporter will bear.

19 Transfer Pricing Products sold to foreign subsidiaries or partnership. Wolly owned Competitive price list Costs Legal restrictions Partially owned Contracts / share % Volume / tax& tariffs

20 Currency Issues Exporter can choose its own currency, buyer’s currency or some “third party” currency. Be carefull about the flooting of the currency. Try to find stable currency. Also purchasing currency is a driver.

21 Fundamental Export Pricing Strategy Full costs to be covered, not easy all the time. Direct cost (mostly derived from domestic sales) harmful. Cost and volume relationship: Experience- curve pricing (Leantiacles, 85). As volume increases, unit cost decreases. So initial price is set below unit costs to gain price advantage. Different than break even pricing strategy

22 a.Skimming the market Largest short run profit then retire from the biz. Getting highest possible price / keep it high till small market exhausted. Then may lower.

Skimming the market - innovation

24 b.Sliding down the demand curve  Reduces the prices faster & further; for competition.

25 c.Pre-emptive pricing  Setting the prices so low as to discourage competition. Price is close to total unit cost.

26 d.Penetration pricing  Establishing the price sufficiently low to rapidly create a mass market.

27 e.Extinction pricing  Eliminate existing competitors from international markets by large – low cost producers. China

28 Relation of Export to Domestic Prices Export <Domestics: Manufacturer’s product is less well known in foreign markets than domestic. (To secure market acceptance & initial purchase) Export >Domestic: Increased initial cost to enter a foreign market is considerable. Selling expense is higher than in domestic market due to complexities of procedure, difficulties...etc. Export=Domestic: When entering a foreign market for the first time and has not enough market research.

exercise Floor ExportDomes.Competit.P Value , , , , ,7 29 N priceStartegy 2890Skimming 1785Sliding Down 1190Preemptive 1190Penetration 1190Extinction

COST VS PERCEIVED VALUE 30