Pricing for International Markets

Learning Objectives Components of pricing as competitive tools in international marketing The pricing pitfalls directly related to international marketing How to control pricing in parallel imports or gray markets Price escalation and how to minimize its effect Countertrading and its place in international marketing practices The mechanics of price quotations

Global Perspective The Price War Setting the right price for a product or service can be the key to success or failure An offering’s price must reflect the quality and value the consumer perceives in the product As the globalization of world markets continues, competition intensifies among multinational and home-based companies The marketing manager’s responsibility is to set and control the actual price of goods in different markets in which different sets of variables are to be found

Pricing Policy Pricing Objectives Pricing as an active instrument of accomplishing marketing objectives -The company uses price to achieve a specific objective Pricing as a static element in a business decision -Exports only excess inventory -Places a low priority on foreign business -Views its export sales as passive contributions to sales volume

Pricing Policy Parallel Imports Occurs whenever price differences are greater than the cost of transportation between two markets Major problem for pharmaceutical companies Exclusive distribution Parallel imports develop when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturer’s regular distribution system.

How Gray-Market Goods End up in U.S. Stores Insert Exhibit 18.1

Approaches to International Pricing Full-Cost versus Variable-Cost Pricing Variable-cost pricing – the firm is concerned only with the marginal or incremental cost of producing goods to be sold in overseas markets. Full-cost pricing – companies insist that no unit of a similar product is different from any other unit in terms of cost and that each unit must bear its full share of the total fixed and variable cost

Approaches to International Pricing Skimming versus Penetration Pricing Skimming – a company uses when the objective is to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for the value received. Penetration pricing policy – used to stimulate market and sales growth by deliberately offering products at low prices.

Approaches to International Pricing Skimming versus Penetration Pricing Shoppers Await Opening of First Wal-Mart Outlet in China

Price Escalation Costs of exporting -Price escalation Taxes, tariffs, and administrative costs -Tariff – fee charged when goods are brought into a country from another country -Administrative costs include export and import licenses, other documents, and the physical arrangements for getting the product from port of entry to the buyer’s location

Inflation/Deflation Stacks of Clothing Lure Customers in Tokyo’s Sugamo District

Price Escalation (continued) Inflation -In countries with rapid inflation or exchange variation, the selling price must be related to the cost of goods sold and the cost of replacing the items Deflation -In a deflationary market, it is essential for a company to keep prices low and raise brand value to win the trust of consumers Exchange rate fluctuations -No one is quite sure of the future value of currency -Transactions are increasingly being written in terms of the vendor company’s national currency

Varying Currency Values 2005 Turkey Knocks off 6 Zeros in Anticipation of EU Alignment Bill is Currently Worth 75 Cents

Export Strategies When Currency Varies Alternative Strategies When US Currency is Weak or Strong

Currency Fluctuations Women Looks at Poster in Tokyo McDonalds - $1.45 Special Mc Donald’s Returns Profits from The Effect of Strong Yen

Price Escalation (continued) Varying currency values -Changing values of a country’s currency relative to other currencies -Cost-plus pricing Middleman and transportation costs -Channel diversity -Underdeveloped marketing and distribution channel infrastructures

Sample Causes and Effects of Price Escalation Insert Exhibit 18.3

Sample Effects of Price Escalation Australian Beef Price Rises to 248Y ($2.20US)/100 grams Due to increased tariffs from 38.5% to 50%

Lowering Tariff Costs Dolls or Toys – X Men Action Figures and Tariffs

Using Foreign Trade Zones 100 Free Trade Zones in US Can Help Control Costs

Approaches to Lessening Price Escalation Lowering cost of goods Lowering tariffs Lowering distribution costs Using foreign trade zones to lessen price escalation Dumping

Leasing in International Markets Opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash Can ease the problems of selling new, experimental equipment because less risk is involved for the users Helps guarantee better maintenance and service on overseas equipment Helps to sell other companies in that country Revenue tends to be more stable over a period of time than direct sales would be

Countertrade as a Pricing Tool Why purchasers impose countertrade: -To preserve hard currency -To improve balance of trade -To gain access to new markets -To upgrade manufacturing capabilities -To maintain prices of export goods -To force reinvestment of proceeds from weapons deals

Countertrade as a Pricing Tool (continued) Types of countertrade -Barter -Compensation deals -Counterpurchase or offset trade -Product buyback agreement

Countertrade as a Pricing Tool (continued) Problems of countertrading -Determining the value of and potential demand for the goods offered -Barter houses The Internet and countertrading -Electronic trade dollars -Universal Currency/IRTA Proactive countertrade strategy -Included as part of an overall market strategy -Effective for exchange-poor countries

Transfer Pricing Strategy Benefits: -Lowering duty costs -Reducing income taxes in high-tax countries -Facilitating dividend repatriation when dividend repatriation is curtailed by government policy Arrangements for pricing goods for intracompany transfer: -Sales at the local manufacturing cost plus a standard markup -Sales at the cost of the most efficient producer in the company plus a standard markup -Sales at negotiated prices -Arm’s-length sales using the same prices as quoted to independent customers

Price Quotations May include specific elements affecting the price: -Credit -Sales terms -Transportation -Currency -Type of documentation required Should define quantity and quality

Administered Pricing - Cartels OPEC and Oil Prices De Beers and Diamonds

Administered Pricing Cartels -Exists when various companies producing similar products or services work together to control markets for the types of goods and services they produce -Example: OPEC Government-influenced pricing -Establish margins -Set prices and floors or ceilings -Restrict price changes -Compete in the market -Grant subsidies -Act as a purchasing monopoly or selling monopoly

Summary Pricing is one of the most complicated decisions areas encountered by international marketers. International marketers must take many factors into account, not only for each country, but often for each market within a country. Market prices at the consumer level are much more difficult to control in international than in domestic marketing. Controlling costs that lead to price escalation when exporting products from one country to another is one of the most challenging pricing tasks facing the exporter. Countertrading is an important tool to include in pricing policy. Pricing in the international marketplace requires a combination of intimate knowledge of market costs and regulations, an awareness of possible countertrade deals, infinite patience for detail, and a shrewd sense of market strategy.