Chapter 11 – Pricing and International Markets Doole, Lowe and Kenyon International Marketing Strategy

Learning Objectives Discuss the issues that affect international pricing decisions Evaluate different strategic options for pricing across international markets Differentiate between the problems facing companies engaged in foreign market pricing and those faced by companies trying to coordinate strategies across a range of global markets Find solutions to the problems of pricing in high-risk markets

Domestic vs international pricing Analyzing the factors which influence international pricing such as the cost structures, the value of the product, the market structure, competitor pricing levels and a variety of environmental constraints. Confirming what impact the corporate strategies should have on pricing policy. Evaluating the various strategic pricing options and selecting the most appropriate approach. Implementing the strategy through the use of a variety of tactics and procedures to set prices at SBU level. Managing prices and financing international transactions.

The factors affecting international pricing decisions Factors influencing the pricing strategy Company and product factors: Corporate and marketing objectives Firm and product positioning Product range, life cycle, substitutes, product differentiation and unique selling propositions Cost structures, manufacturing, experience effect and economies of scale Marketing, product development Available resources Inventory Shipping costs

The factors affecting international pricing decisions (cont.) Market factors: Consumers perceptions, expectations and ability to pay Need for product adaptation, market servicing Market structure, distribution channels discounting pressures Market growth, demand elasticities Need for credit Competition objectives, strategies and strengths

The factors affecting international pricing decisions (cont.) Environmental factors: Government influences and constraints Currency fluctuations Business cycle stage, level of inflation Use of non-money payment and leasing

The factors affecting international pricing decisions (cont.)

The factors affecting international pricing decisions (cont.) Specific export costs: Additional freight handling costs Last minute product modifications Packaging and labelling Documentation requirements Insurance Delays in custom clearance Vaguely worded contracts or agreements

The factors affecting international pricing decisions (cont.) Market factors: Consumer response Distinctiveness of product Level of perceived quality Awareness of substitutes Ease of making comparisons Price as a proportion of total expenditure Perceived benefit Use of product in conjunction with another Shared costs of purchase Perishability Competitors’ response Commitment to markets and products Resources available Internal cost structures Customer/distribution chain loyalty

Developing pricing strategies Are you taking a: cost oriented approach? market oriented approach competition oriented approach? Standardization Ethnocentric Adaption Polycentric Invention Geocentric Standardization pricing sets a price for the product as it leaves the factory irrespective of its final distinction. Customers are expected to pay transportation and import duties themselves. Adaptation pricing allows each local subsidiary or partner to set a price which is considered to be most appropriate for local conditions, and no attempt is made to coordinate prices from country to country. Invention pricing involves neither fixing a single price, nor allowing local subsidiaries total freedom for setting prices either, but attempts to take the best of both approaches.

Developing pricing strategies (cont.) The objectives of pricing: Rate of return Market stabilization Demand-led pricing Competition-led pricing To reflect product differentiation Market skimming Market penetration Early cash recovery Prevent new entry

Developing pricing strategies (cont.) Setting a price: Determine export market potential Estimate the price range and target price Calculate sales potential at the target price Evaluate tariff and non-tariff barriers Select suitable pricing strategy in line with company objectives Consider likely competitor response Select pricing tactics, set distributor and end-user prices Monitor performance and take necessary corrective action

Problems of pricing and financing international transactions Multi-national pricing (e.g. cost of selling (e.g. VAT) may be different in each country) Managing foreign currency / floating exchange rates Obtaining payment in high risk markets (e.g. selling products to countries where there is a risk of non-payment, e.g. some African countries.) Administrative problems of cross-border goods transfer (e.g. problems of bureaucracy and delays)

Problems in multi-national pricing What is grey marketing? The practice of buying a product in one market and selling in other markets in order to benefit from the prevailing price differential Grey marketing occurs when trademarked goods are sold through channels of distribution that have not been given authority to sell the goods by the trademark holder. Coca-Cola had to bring forward (inform) the European launched of Vanilla Coke after it found the product was already being sold in the UK by a distributor who had imported it directly from Canada, where it had been launched several months previously.

Problems in multi-national pricing (cont.) e.g. $15 each in Country A e.g. $20 each in Country C e.g. $10 each in Country C Parallel importing. When the product is priced in the home market where it is produced lower (e.g. $15 each in Country A) than the export market lower (e.g. $20 each in Country C). The grey marketer in the export market will parallel import directly from the home market rather than source from within their own country; for example, there is a strong parallel import trade in Levis jeans between the US and Europe. Re-importing. When the product is priced cheaper in an export market (e.g. $10 each in Country C) than in the home market (e.g. $15 each in Country A), where it was produced; re-importation in this case can be profitable to the grey marketer. Lateral importing. When there is a price difference between export markets, products are sold from one country to another through unauthorized channels.

Problems in multi-national pricing (cont.) Seek government intervention or legal protection Refusal to issue warranties in certain markets Buying out grey marketer Price coordination strategies Economic measures Centralization Formalization Informal coordination

Problems in multi-national pricing (cont.) Currency of pricing Benefits of quoting in a foreign currency provide access to finance abroad At lower interest rates (e.g. if the interest rate of foreign currency is low) good currency management Leading to potential of gaining additional profit (e.g. to quote price in a stable (or appreciating) currency such s UD dollar) responding to condition of contract (e.g. agreement between importer and exporter) customers prefer quotes in own currency Allowing competitive comparison (e.g. in order to know exactly what the eventual price will be.)

Should prices be raised/lowered as exchange rates fluctuate? When the domestic currency is weak: Compete on price (as your products are perceived cheaper) Introduce new products with additional features (e.g. via product innovation) Source / manufacture in the domestic country (e.g. in order to lower production costs) Fully exploit export opportunities Obtain payment in cash Minimise overseas borrowing Invoice in domestic currency Use full cost approach for existing markets / marginal costs for new, more competitive, markets Repatriate foreign earned income quickly (e.g. to avoid further devaluation in domestic currency) Reduce expenditure and buy services (advertising, transport, etc.) locally

Should prices be raised/lowered as exchange rates fluctuate? When the domestic currency is strong: Compete on non-price factors (e.g. provide good quality, delivery, service) Improve productivity and reduce costs Prioritise strong currency countries for exports Use counter-trade (international trade by exchange of goods rather than by currency purchase.) for weak currency countries Reduce profit margins and use marginal costs for pricing Keep the foreign earned income in the local country (e.g. invest in local country) Maximise expenditures in local country currency Buy services abroad in local currencies (as it is cheaper than home country) Borrow money for expansion in local markets Invoice foreign customers in their own currency (as their currency is weak and they need to pay more)

Problems in minimizing the risk of non-payment of high-risk countries Countertrade: Barter (This is single exchange of goods with no direct use of money) Compensation trading (This involves an agreement in which payment for good is accepted in a combination of goods and cash) Counter-purchase (This involves the negotiation of two contracts. In the first, the international marketer agrees to sell the product at an established price in local currency. In the second, simultaneous contract, the international firm buys goods or service for an equivalent or proportionate cash payment from another local supplier.) Offset (This is similar to counter-purchase, but in this case national government cooperate to support the deal. For example, Boeing sod AWACS aircraft to the British Ministry of Defence on the basis that the purchase price would be spent on British goods ) Switch deals (This involves a third party (usually a merchant house), which specializes in barter trading. E.g. disposing of the low-quality goods from an western country to exchange for other products that are suitable for the original western country.) Cooperation agreements (These can be cover buyback deal, pay-as-you-earn deals or a range of other beneficial arrangement made between two parties.) Countertrade is an international trade by exchange of goods rather than by currency purchase.

Problems in minimizing the risk of non-payment of high-risk countries (cont.) Advantages of countertrade: New markets Sell off surplus or poor quality products Strengthens political ties Entry to high risk areas Circumvent (find a way around an obstacle) government restrictions

Problems in minimizing the risk of non-payment of high-risk countries (cont.) Disadvantages and limitations of countertrade: Lack of flexibility Exchange products difficult to sell Difficulties in locating / organizing counter-trade products No guide market prices Difficult profit evaluation May create new competition