Pricing for International Markets

International Pricing Full Cost vs Variable Cost Skimming vs Penetration

What is dumping? F Companies may be accused of dumping if the price of their product in foreign markets is:- –Lower than competition in the country of origin –Lower than normal export prices Dumping Tariffs

What factors influence consumer prices overseas? F Tariffs on imports F “Dumping” tariffs F Sales taxes F Distributive channel costs F Added middlemen costs F Shipping costs F Fluctuating exchange rates

Price Escalation - The Lower Prices are at Home Aspirin $ 0.99 $ 1.23$ 7.08$ 6.53 $ 1.78 Cup of coffee Movie Compact disk Levi 501 jeans Ray-Ban sunglasses Sony Walkman Nike Air Jordans Gucci men's loafers Nikon camera , New York London Paris Tokyo Mexico City SOURCE: "Tourists and Bargains Galore," Fortune, June 13, 1994, p. 12.

Sample Causes and Effects of Price Escalation Manufacturing net$ 5.00$ 5.00$ 5.00$ 5.00 Transport, c.i.f.n.a Tariff (20 percent c.i.f. value)n.a Importer paysn.a.n.a Importer margin when 1.83 sold to wholesaler+0.73 * (25 percent) on costn.a.n.a Wholesaler pays landed cost * Wholesaler margin (33 1 / 3 percent on cost) =4.28 Retailer pays * Retail margin (50 percent on cost) =8.50 Retail price ForeignForeignForeign Example 1:Example 2:Example 3: Assuming theImporter andSame as 2 but same channels withsame marginswith 10 percent Domestic wholesaler import-and channelscumulative Example ing directlyturnover tax Notes:a.All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable. b.The exhibit assumes that all domestic transportation costs are absorbed by the middleman. c.Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown. * Turnover Tax

How can price escalation be counteracted? F Reduce the price of the product, tariffs, or any other cost in marketing the product F Offsetting tariffs and transportation charges by the net price for goods sold in foreign markets -> dumping allegations F Modify the product in a way that tariffs are reduced F Manufacture within the country -> eliminate tariffs and most transportation costs; lower labor costs F Shorten channels of distribution F Eliminate costly functions and features of product

Changing currency values have an impact on export strategies F Strong dollar F Weak dollar Price resistance since it takes a large quantity of local currency to buy a U.S. dollar Demand for U.S. goods increase since fewer units of local currencies are needed to buy a U.S. dollar Cost plus pricing

Potential for Gray Markets Audio cassette$11 - $14$6 - $8 Auto-Reverse Walkman7050 Braun Juicer3220 Canon Autoboy Camera Channel No. 5 ( 1 / 2 oz)15385 Compact disk Lady Remington shaver8646 Rolex watch4,8573,078 Average TokyoShop America ProductRetail PriceCatalog Price SOURCE: Shop America LTD. as quoted in "Can This Catalog Company Crack the Japanese Marketing Mass?" Business Week, March 19, 1990, p. 60.

Parallel Imports - What causes them? F Variations in value of currencies b/w countries - e.g. Cabbage Patch Dolls F Purposely restricting supply of a product in a market - e.g. Mercedes-Benz F Pricing policies that permit large price differentials - e.g. Japanese Domestic pricing vs. foreign -> Cannon Cameras F Price differences greater than the cost of transportation between countries e.g. Cartier and Gucci

Countertrades R esults from shortages in hard currency available to industrializing nations Communist countries must purchase goods from non- Communist suppliers with monies earned from Western nations LDCs’ inflation-ridden or weak currencies are reserved for top priority purchases; countertrading used for less important goods

Countertrades Barter Compensation Deals Counterpurchase or Offset Trade Product Buy-Back Agreement

Why Purchasers Impose Countertrade Obligations 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

Types of Software Piracy F Business Software Piracy by End-Users F Piracy of Entertainment Software F Optical Disk Manufacturing and Smuggling F Unlicensed Use of Educational Software F Internet Piracy and Piracy Tools (Hackz/Crackz)

Business Software Piracy Rates and Losses Rates and Losses F Vietnam F China F Indonesia F Thailand F Philippines F Malaysia Source: 1998 BSA/SIIA Piracy Study F 97%$8 million F 96%$843 million F 92%$33 million F 84%$40 million F 78%$25 million F 75%$67 million Source: 1998 BSA/SIIA Piracy Study

Business Software Piracy Rates and Losses F Korea F Hong Kong F Taiwan F Singapore F 65%$117 million F 59%$69 million F 58%$110 million F 54%$49 million Source: 1998 BSA/SIIA Piracy Study

Entertainment Software Piracy F China F Hong Kong F Thailand F Singapore Source: IDSA Software Piracy Study F 95%$1.42 billion F 72%$112 million F 93%N/A F 73%N/A Source: Interactive Digital Software Ass’n

Recurring Problems F Inadequate Substantive Protection and Broad Exceptions to Exclusive Rights F Insufficient Civil Remedies to Pursue End- User Piracy F Ineffective Criminal Penalties and Enforcement F Ineffective Border Control