© 2005 Prentice Hall11-1 Chapter 11 Pricing Decisions

© 2005 Prentice Hall11-2 managing marketing from global headquarters ©2005 Dr.Gerard Ryan, Universitat Rovira i Virgili. International Marketing Mix Decisions Strategic Alternatives in international and global marketing mix decisions. Managerial issues International Pricing considerations Global pricing is one of the most critical and complex issues in international marketing. Price is the only marketing mix instrument that creates revenues. All other elements entail costs. A company’s global pricing policy may make or break its overseas expansion efforts. Multinationals also face the challenges of how to coordinate their pricing across different countries.

© 2005 Prentice Hall11-3 International Pricing Strategies Analytic Dimensions Decision- Making Company Internal Factors Profitability Transports Costs Tariffs Taxes Production Costs Channel Costs International Pricing Strategies Market Factors Income Levels Competition Customers’ Culture Environmental Factors Foreign Exchange Rates Inflation Rates Price Controls Regulations Market-by-Market Pricing Uniform Pricing Managerial Issues Transfer Pricing Foreign Currencies Parallel Imports/Grey Markets Export Price Escalation Global Pricing Strategies Financing International Transaction Risks Customer-Arranged vs. Supplier-Arranged Source of Financing Commercial Banks Governments Non-cash Transactions: Counter-trading Source: Jeannet & Hennessey, 2001

© 2005 Prentice Hall11-4 managing marketing from global headquarters ©2005 Dr.Gerard Ryan, Universitat Rovira i Virgili. International Marketing Mix Decisions Strategic Alternatives in international and global marketing mix decisions. Managerial issues Prices for a Volkswagen Golf* BRITAIN$13,040 FINLAND8,290 FRANCE10,510 GERMANY11,040 ITALY10,690 International Pricing comparisons

Pricing Policy A. 2 Pricing Objectives: –1. As an active means of attaining marketing objectives Companies use this when trying to achieve certain objectives, profit margins or targeted market share. –2. As a static element in a business decision Companies use this when they are in a foreign country and marketing is not a priority –Usually associated with trying to get rid of excess inventories The more control a company has over the final selling price of a product, the better it is able to achieve its marketing goals It is not always possible to control end prices

Price Escalation 1.Costs of Exporting: the term relates to situations in which ultimate prices are raised by shipping costs, insurance, packing, tariffs, longer channels of distribution, larger middlemen margins, special taxes, administrative costs, and exchange rate fluctuations Price escalation refers to the added costs incurred as a result of exporting products from one country to another There are several factors that lead to higher prices:

Price Escalation (Cont.) 2.Taxes, Tariffs, and Administrative Costs: These costs results in higher prices, which are generally passed on to the buyer of the product 3.Inflation: Inflation causes consumer prices to escalate and the consumer is faced with rising prices that eventually exclude many consumers from the market

Price Escalation (Cont.) 4.Middleman and Transportation Costs: Longer channel length, performance of marketing functions and higher margins may make it necessary to increase prices 5.Exchange Rate Fluctuations and Varying Currency Values: Currency values swing vis-à-vis other currencies on a daily basis, which may make it necessary to increase prices

© 2005 Prentice Hall11-9 Basic Pricing Concepts The Global Manager must develop systems and policies that address –Price Floors –Price Ceilings –Optimum Prices Must be consistent with global opportunities and constraints

© 2005 Prentice Hall11-10 Global Pricing Objectives and Strategies Managers must determine the objectives for the pricing objectives –Unit Sales –Market Share –Return on investment They must then develop strategies to achieve those objectives –Penetration Pricing –Market Skimming

© 2005 Prentice Hall11-11 Market Skimming and Financial Objectives Market Skimming –Charging a premium price –May occur at the introduction stage of product life cycle Sony Ad. for camcorders

© 2005 Prentice Hall11-12 Penetration Pricing and Non- Financial Objectives Penetration Pricing –Charging a low price in order to penetrate market quickly –Appropriate to saturate market prior to imitation by competitors 1979 Sony Walkman

© 2005 Prentice Hall11-13 Companion Products Products whose sale is dependent upon the sale of primary product –Video games are dependent upon the sale of the game Console “If you make money on the blades you can give away the razors.” X-Box Game System and Sports Game

© 2005 Prentice Hall11-14 Target Costing – 8 Questions 1.Does the price reflect the product’s quality? 2.Is the price competitive given local market conditions? 3.Should the firm pursue market penetration, market skimming, or some other pricing objective? 4.What type of discount (trade, cash, quantity) and allowance (advertising, trade-off) should the firm offer its international customers? 5.Should prices differ with market segment? 6.What pricing options are available if the firm’s costs increase or decrease? Is demand in the international market elastic or inelastic? 7.Are the firm’s prices likely to be viewed by the host- country government as reasonable or exploitative? 8.Do the foreign country’s dumping laws pose a problem?

© 2005 Prentice Hall11-15 Dumping In international trade, this occurs when one country exports a significant amount of goods to another country at prices much lower than in the domestic market pricing_policy%29

© 2005 Prentice Hall11-16 Target Costing Cost-Based Pricing is based on an analysis of internal and external cost Firms using western cost accounting principles use the Full absorption cost method –Per-unit product costs are the sum of all past or current direct and indirect manufacturing and overhead costs

© 2005 Prentice Hall11-17 Target Costing Rigid cost-plus pricing means that companies set prices without regard to the eight foundational pricing considerations Flexible cost-plus pricing ensures that prices are competitive in the contest of the particular market environment

© 2005 Prentice Hall11-18 Terms of the Sale Obtain export license if required Obtain currency permit Pack goods for export Transport goods to place of departure Prepare a land bill of lading Complete necessary customs export papers Prepare customs or consular invoices Arrange for ocean freight and preparation Obtain marine insurance and certificate of the policy

© 2005 Prentice Hall11-19 Environmental Influences on Pricing Decisions Currency Fluctuations Inflationary Environment Government Controls, Subsidies, Regulations Competitive Behavior Sourcing

© 2005 Prentice Hall11-20 Global Pricing: Three Policy Alternatives Extension Adaptation Geocentric

© 2005 Prentice Hall11-21 Gray Market Goods Trademarked products are exported from one country to another where they are sold by unauthorized persons or organizations Occurs when product is in short supply, when producers use skimming strategies in some markets, and when goods are subject to substantial mark-ups

© 2005 Prentice Hall11-22 Dumping Sale of an imported product at a price lower than that normally charged in a domestic market or country of origin. Occurs when imports sold in the US market are priced at either levels that represent less than the cost of production plus an 8% profit margin or at levels below those prevailing in the producing countries To prove, both price discrimination and injury must be shown

© 2005 Prentice Hall11-23 Price Fixing Representatives of two or more companies secretly set similar prices for their products –Illegal act because it is anticompetitive Horizontal price fixing occurs when competitor within an industry that make and market the same product conspire to keep prices high Vertical price fixing occurs when a manufacture conspires with wholesalers/retailers to ensure certain retail prices are maintained

© 2005 Prentice Hall11-24 Transfer Pricing Pricing of goods, services, and intangible property bought and sold by operating units or divisions of a company doing business with an affiliate in another jurisdiction Intra-corporate exchanges –Cost-based transfer pricing –Market-based transfer pricing –Negotiated transfer pricing

© 2005 Prentice Hall11-25 Countertrade Countertrade occurs when payment is made in some form other than money Options –Barter –Counter-purchase –Offset –Compensation trading –Cooperation agreements –Switch trading

Countertrade as a Pricing Tool 1.Barter: is the direct exchange of goods between two parties in a transaction 2.Compensation deals: is the payment in goods and in cash 3.Counter-purchase or off-set trade: the seller agrees to sell a product at a set price to a buyer and receives payment in cash and may also buy goods from the buyer for the total monetary amount involved in the first contract or for a set percentage of that amount, which will be marketed by the seller in its home market 4.Buy-back: This type of agreement is made the seller agrees to accept as partial payment a certain portion of the output that are produced from the plant or machinery that are sold to the buyer Countertrade is a pricing tool that every international marketer must be ready to employ There are four distinct transactions in countertrading, which include:

© 2005 Prentice Hall11-27 Extension Ethnocentric Per-unit price of an item is the same no matter where in the world the buyer is located Importer must absorb freight and import duties Fails to respond to each national market Return

© 2005 Prentice Hall11-28 Adaptation Polycentric Permits affiliate managers or independent distributors to establish price as they feel is most desirable in their circumstances Sensitive to market conditions but creates potential for gray marketing Return

© 2005 Prentice Hall11-29 Geocentric Intermediate course of action Recognizes that several factors are relevant to pricing decision –Local costs –Income levels –Competition –Local marketing strategy Return

© 2005 Prentice Hall11-30 Inflationary Environment Defined as a persistent upward change in price levels –Can be caused by an increase in the money supply –Can be caused by currency devaluation Essential requirement for pricing is the maintenance of operating margins Return

© 2005 Prentice Hall11-31 Government Controls, Subsidies, and Regulations The types of policies and regulations that affect pricing decisions are: –Dumping legislation –Resale price maintenance legislation –Price ceilings –General reviews of price levels Return