2. Pricing for International Markets Chapter 18 McGraw-Hill/Irwin© 2005 The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint presentation prepared by: Professor Rajiv Mehta Associate Professor of Marketing New Jersey Institute of Technology Newark, N.J.

3. Chapter Learning Objectives 1. Components of pricing as competitive tools in international marketing 2. The pricing pitfalls directly related to international marketing 3. How to control pricing in parallel imports or gray markets

4. Chapter Learning Objectives 4. Price escalation and how to minimize its effect 5. Countertrading and its place in international marketing practice 6. The mechanics of price quotations

5. Introduction Pricing strategy forms another cornerstone of a global marketing program–it represents one of the most critical and complex issues in global marketing (due to economic, financial, and mathematical implications) Price is the only marketing mix element that generates revenues. All other elements entail costs Need to devote special care in pricing products as a manager’s fiduciary responsibility is to market products at a profit and increase shareholder wealth A company’s global pricing policy may make or break its overseas expansion efforts (due to foreign exchange complications) Firms also face significant challenges in coordinating (standardizing or adapting) their pricing strategies across various countries they operate in This chapter reviews the plethora of international pricing strategy issues

6. Pricing Objectives In general, price decisions are viewed in two ways: –Pricing as an active instrument of accomplishing marketing objectives, or –Pricing as a static element in a business decision 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 Broader product lines and the larger the number of countries involved, the more complex the process of controlling prices charged to the end user

7. Parallel Importation or Gray Markets On account of competition, firms may have to charge different prices from country to country In international marketing, this causes a vexing problem: Parallel Importation or Gray Markets 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 The possibility of a parallel market occurs whenever price differences are greater than the cost of transportation between two markets

8. Parallel Importation or Gray Markets For example, the ulcer drug Losec sells for only $18 in Spain but goes for $39 in Germany; and the heart drug Plavix costs $55 in France and sells for $79 in London Thus, it is possible for an intermediary to buy products in countries where it is less expensive and divert it to countries where the price is higher and make a profit Exclusive distribution, a practice often used by companies to maintain high retail ­margins encourage retailers to stock large assortments, or to maintain the exclusive-quality image of a product, can create a favorable condition for parallel importing

9. Effects of Parallel Importation Parallel imports can do long-term damage in the market for trademarked products Customers who unknowingly buy unauthorized imports have no assurance of the quality of the item they buy, of warranty support, or of authorized service or replacement parts If a product fails, the consumer blames the owner of the trademark, and the quality image of the product is sullied Companies can restrict the gray market by policing distribution channels In some countries firms get help from the legal system

11. Approaches to International Pricing 1.Full-Cost Pricing: no unit of a similar product is different from any other unit in terms of cost, which must bear its full share of the total fixed and variable cost. There are several approaches to pricing in international markets, which include: 2.Variable-Cost Pricing: firms regard foreign sales as bonus sales and assume that any return over their variable cost makes a contribution to net profit Prices are often set on a cost-plus basis, i.e., total costs plus a profit margin This is a practical approach to pricing when a company has high fixed costs and unused production capacity

12. Approaches to International Pricing 3.Skimming Pricing: This is used to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for a product 4. Penetration Pricing: This is used to stimulate market growth and capture market share by deliberately offering products at low prices It is used to acquire and hold share of market

14. 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:

15. Price Escalation (contd..) 2.Taxes, Tariffs, and Administrative Costs: These costs results in higher prices, which are generally passed on to the buyer of the product Tariff discriminate against foreign goods Other taxes are Purchase or Excise Taxes – apply to different types of goods and services Value added or turnover taxes- apply to the product as it goes through different distribution channel And retail sales taxes Other taxes are Purchase or Excise Taxes – apply to different types of goods and services Value added or turnover taxes- apply to the product as it goes through different distribution channel And retail sales taxes

16. 3.Inflation: Inflation causes consumer prices to escalate and the consumer is faced with rising prices that 3.Inflation: Inflation causes consumer prices to escalate and the consumer is faced with rising prices that eventually exclude many consumers from the market Inflation in developing countries, especially in Latin America makes widespread price control a constant threat..

17. Price Escalation (contd..) 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

18. Export Strategies Under Varying Currency Conditions Stress, price benefits Expand product line and add more costly features Shift sourcing and manufacturing to domestic market Exploit export opportunities in all markets Conduct conventional cash-for- goods trade Use full-costing approach, but use marginal-cost pricing to penetrate new/competitive markets When Domestic Currency is WEAK... Engage in nonprice competition by improving quality, delivery, and after- sale service Improve productivity and engage in vigorous cost reduction Shift sourcing and manufacturing overseas Give priority to exports to relatively strong-currency countries Deal in countertrade with weak- currency countries Trim profit margins and use marginal- cost pricing When Domestic Currency is STRONG... SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing," Business Horizons, May-June 1988, figure 2, p. 58.

19. Export Strategies Under Varying Currency Conditions SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing," Business Horizons, May-June 1988, figure 2, p. 58. Speed repatriation of foreign-earned income and collections Minimize expenditures in local, host country currency Buy needed services (advertising, insurance, transportation, etc.) in domestic market Minimize local borrowing Bill foreign customers in domestic currency Keep the foreign-earned income in host country, slow collections Maximize expenditures in local, host country currency Buy needed services abroad and pay for them in local currencies Borrow money needed for expansion in local market Bill foreign customers in their own currency When Domestic Currency is WEAK... When Domestic Currency is STRONG...

23. Approaches to Lessening Price Escalation Methods used to reduce costs and, thus, lower price escalation include: Lowering Cost of Goods: Firms can lower costs by eliminating costly features in products or by manufacturing products in countries where labor costs are cheaper Lowering Tariffs: Firms can lower prices by categorizing products in classifications where the tariffs are lower Lowering Distribution Costs: Firms can design channels that are shorter, have fewer middlemen, and by reducing or eliminating middleman markup Using Foreign Trade Zones: Firms can manufacture products in free trade zones where the incentive offered is the elimination of local taxes, which keep prices down

24. Using Foreign Trade Zones to Lessen Price Escalation Tariff may be lower because duties are typically assessed at a lower rate for unassembled versus assembled goods If labor costs are lower in the importing country, substantial savings may be realized in the final product cost Ocean transportation rates are affected by weight and volume; thus unassembled goods may qualify for lower freight cost If local content, such as packaging or component parts, can be used in the final assembly there may be a further reduction in tariff.

26. Dumping One approach classifies international shipments as dumped if the products are sold below their cost of production The other approach characterizes dumping as selling goods in a foreign market below the price of the same goods in the home market Economists define dumping differently Economists define dumping differently World Trade Organization (WTO) rules allow for the imposition of a duty when goods are dumped A countervailing duty or minimum access volume (MAV), which restricts the amount a country will import, may be imposed on foreign goods benefiting from subsidies whether in production, export, or transportation

27. Leasing in International Markets Leasing 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 Lease revenue tends to be more stable over a period of time than direct sales would be Equipment leased and in use helps to sell other companies in that country Leasing helps guarantee better maintenance and service on overseas equipment

28. Countertrade as a Pricing Tool Countertrade is a pricing tool that every international marketer must be ready to employ There are four distinct transactions in countertrading, which include:

29. Why Purchasers Impose Countertrade Obligations To Preserve Hard Currency To Improve Balance of Trade To Gain Access to New Markets To Upgrade Manufacturing Capabilities