Pricing decisions in international marketing

Pricing decisions in international marketing
© 2018 Taylor & Francis

Classification of industries
Globalisation drivers Number of competitors in the industry Many Few Multi-local industry Few threats of global players entering the market. Local opportunities for SMEs Potentially global industry Technological changes may drive the industry towards global. Global industry Large players operating on a global scale threaten SMEs in local markets. Global opportunities Trade and economic liberalisation may drive the industry towards global Classification of industries © 2018 Taylor & Francis

Four categories – four main strategies
The multinational player Patchy investments in selected markets. Consolidation and “clearing up” Securing market leadership through new product develop- ment and consolidation of relations, brands and networks The global market leader Limited threats of globalisation drivers and selected opportunities of multi- domestic setting Great threats, but also great opportunities of globalisation drivers Adult internationalisation Preparedness for Small steps in neighbouring markets. “The road is paved as you go.” The careful newcomer The market is conquered in great leaps! Niches and niches. Networks, networks, networks The bold newcomer Child Multi-local Global Industry globality Four categories – four main strategies BI/Solberg 2015 © 2018 Taylor & Francis

Three questions What is globalisation?
How does globalisation affect pricing policies? What is so special about international pricing? © 2018 Taylor & Francis

International Pricing in the Literature
Pricing in general remains unexplored (Nagle 1987, Sethuraman and Tellis 1991) Writing on international pricing is even more scant, with some notable exceptions: Normative studies (Cavusgil 1988, 1996; Walters 1989; Weekly, 1992) Empirical studies (Piercy 1981; Solberg 1988; Diamantopoulos & Mathews 1985; Myers 1997a & b; Stöttinger 2001; Myers & Griffith 1999; Myers & Harvey 2001;Tzokas et al. 2000; Obadia 2013; Obadia & Stöttinger 2015) © 2018 Taylor & Francis

Issues in International Pricing
1. Organisational problems - multiple decision makers - top-heavy decision processes - bureaucratic systems - lack of communication - incentives Agency problems 2. Pricing approaches - rigid cost plus - flexible cost plus - dynamic incremental - marginal Market adaptation problems Information sources - cost and profit margin data - market information (competition, customers, regulations, etc.) - information asymmetry Agency problems 4. Market structure - Atomistic/monopolistic - multi-local/global Price formation problems © 2018 Taylor & Francis

Factors in international pricing
Objectives Market share/positioning Return on investments Primary/secondary market Time perspective long/short term Number of markets International pricing policy Cost factors Variable/fixed Customs, transport, etc. Adaptation Risk/terms of payment Exporting costs Organisation Approaches to pricing Cost plus Market based Marginal pricing Combined/flexible Market factors Consumption patterns Preferences Competition Distribution structure Product live cycle Taxes, legal aspects, etc. Factors in international pricing © 2018 Taylor & Francis

Market position in local market
Investment markets Exploration markets High Peripheral markets Market growth “Accordion” markets Established markets Low Pull-out markets Strong Weak Market position in local market Strategic role of international market portfolio Based on BCG © 2018 Taylor & Francis

Different strategic approaches in different markets
Investment markets Establish your own sales subsidiary Build market shares by accessing key marketing channels and adapting marketing programmes Exploration markets Sell through independent reps Adapt to local market Evaluate competitors Mexico Taiwan Ukra- ine High US Nether lands Peripheral markets Exploit produc-tion capacity Respond to un-solicited orders Ice land France Use the price mechanism (marginal pricing) to exploit market opportunities Use trading houses or distributors Sell standard commodity “Accordeon” markets Established markets Assess future growth prospects Reassert your operation mode Strengthen your relations with your distribution channels Innovate your marketing strategy (positioning, new channels, etc.) Thai land Malay sia Medium-term market growth Colom bia Norway Pull-out markets Is it for some reason important to stay in this market? Sweden Low Nigeria Strong Weak Market position in local market Different strategic approaches in different markets Cases plotted in the BCG matrix © 2018 Taylor & Francis

Medium-term market growth Market position in local market
Secondary markets Primary markets Mexico Taiwan Ukra- ine High US Nether lands Ice land France Thai land Malay sia Medium-term market growth Norway Colom bia Sweden Low Nigeria Strong Weak Market position in local market Different strategic approaches in different markets Cases plotted in the BCG matrix © 2018 Taylor & Francis

Marketing objectives and pricing policies
Market category Primary markets Long term Short term Secondary markets Marketing objectives Market position High return on sales Sales/market share Serve markets reason- bly well (future primary market?) Capacity utilisation Response to a specific business opportunity Response to competition Pricing policy High price Introductory price or “high” price/ad campaign Prices should give reasonable contribution Marginal pricing © 2018 Taylor & Francis

Approaches to international pricing
Market based (adapts to the local market conditions – both buyer preferences and competition) Rigid cost plus (same mark-up in all markets) Flexible cost plus (some adaptation to the local situation) Marginal cost pricing (extremely adapted, but mostly to the internal potential within the firm) © 2018 Taylor & Francis

Contribution and cost methods in marginal exporting
Contribution/market method* Cost plus method Domestic Exports Domestic Exports Sales volume (units) , , , ,000 Depreciation and fixed manufacturing costs (mill. Euros) – Variable manufacturing costs (mill. Euros) Total manufacturing costs (mill. Euros) Unit cost (euros) , , , ,500 *Marginal pricing © 2018 Taylor & Francis

Rigid cost plus Market based Flexible cost plus Marginal pricing
Advantages - Cost control (central) - Doesn’t need “any” market information! Simple/“easy” Same image across countries? Advantages - Reap the market potential - Adapted to local conditions - Involves local reps Disadvantages Loss of control Blurred international brand image Local market knowledge costly Assymetric information? Spillover effects/parallel importation Disadvantages - Inflexible/not adapted to the market - Different market positions - Alienates local reps Advantages - Cost structure optimisation Marginal pricing Disadvantages “Ticket to bankruptcy”? The best of two worlds? Flexible cost plus © 2018 Taylor & Francis

Meet price competition!
Before the introduction of the competitor Your price Competitor’s price B) After the introduction of the competitor Repositioned product High price New product low price C) After repositioning of old product and introduction of new Based on Kotler 1994 © 2018 Taylor & Francis

The role of the product life cycle
Products are located at different points on this curve in different countries Sales Maturing Stagnation Decline Growth Which in turn calls for different strategies in different countries Intro- duction © 2018 Taylor & Francis

Different strategies  Scope for standardisation  Adapted pricing
Concentration on countries that are located at the same stage of the PLC  Scope for standardisation Sales Maturing Stagnation Decline Growth Spread to “all” countries whatever stage of the PLC  Adapted pricing Intro- duction © 2018 Taylor & Francis

International pricing and risk
Risk category Factors Risk coverage Commercial risk Customers Products Operations CAD Letter of credit Bank guaranties GIEK Market info Political risk Import regime Embargoes Devaluation GIEK Analysis Avoid risky countries! Spread among markets Economic risk Exchange rates Interest rates Price changes Same currency for purchase and sales Spread among markets Currency hedging © 2018 Taylor & Francis

Transfer pricing “Normal” calculation Cost price Sales price Profit
Home tax 30% Local customs 50% Local sales price Local margin Local tax 10% Total tax/customs expenditure 100 150 50 15 75 275 5 95 © 2018 Taylor & Francis

Transfer pricing Tax optimisation – high tax at home/low local tax
Cost price Sales price Profit Home tax 30% Local customs 50% Local sales price Local profit Local tax 10% Total tax/customs expenditure 100 - 50 275 125 12,5 62,5 © 2018 Taylor & Francis

Transfer pricing Tax optimisation – low tax at home/high local tax
Cost price Sales price Profit Home tax 10% Local customs 50% Local sales price Local profit Local tax 30% Total tax/customs expenditure 100 150 50 5 75 275 95 © 2018 Taylor & Francis

Transfer pricing summary Hi home low local 100 150 50 15 75 275 5 95
“Normal” calculation Tax “optimisation” Hi home low local 100 150 50 15 75 275 5 95 Low home hi local 100 150 50 5 75 275 15 95 Hi home low local 100 - 50 275 125 12,5 62,5 Low home hi local 100 150 5 75 275 30 90 Cost price Sales price Profit Home tax Local customs Local sales price Local profit Local tax Total tax/customs expenditure © 2018 Taylor & Francis

War- ning Dangerous landscape!!!
Transfer pricing War- ning Dangerous landscape!!! Internal pricing between two units of one multinational company Transfer method Profit accumulation Tax/customs considerations Transfer at cost Local subsidiary Low income tax high customs in export market Transfer at market price Headquarters High income tax low customs in export market Transfer at cost plus Split between HQ/subsidiary The “correct” way seen by the tax/customs authorities © 2018 Taylor & Francis

A contingency approach
Internal capabilities of the firm Access to international market networks Market share in key markets Organisational capabilities External competitive environment – industry globality Industry features (globality/market structure) Globalisation trends Based on Solberg 1997 © 2018 Taylor & Francis

Pricing in international markets – A typology I
High Multi-local price setter Global price leader Internal capabilities of the firm Low Local price follower Global price adaptor Multilocal markets Global markets Industry globality Pricing in international markets – A typology I © 2018 Taylor & Francis

Pricing in different settings
Local price follower Multi-local price setter Global price adaptor Global leader Pricing approach Marginal reactive Or: Rigid cost plus* Flexible proactive Market based/ adapted to the global leader Flexible cost plus proactive Pricing strategy Different across countries/ Or: Same price* Different across countries Same across countries Same but flexible Organisational issues Information assymmetry Decentralisation and control Information assymmetry Multiple decision makers Coordination © 2018 Taylor & Francis * Same price when firm has no international aspiration

Multi-local price setter Pricing in international markets
Global price leader Local market leaders in selected markets Local competition Market based, adapted prices Global market leaders Market and cost oriented Global competition, but local differences “Glocal” prices High Internal capabilities of the firm Local price follower Global price adaptor Unexposed to global forces Limited resources and leverage Dependent on local reps Market based or cost oriented standard prices Low Newcomers to global markets Global competition, but local differences Competition based  standard prices Multilocal markets Global markets Industry globality Pricing in international markets © 2018 Taylor & Francis

Multi-local price setter General results of the study
Global price leader Pricing is strategically oriented, allowing firms to pursue other goals than (short-term) profit Differentiated pricing depending on market situation and company’s position Standardised pricing with minor allowances for local adaptation Extensive monitoring of local reps Comprehensive use of market information High Preparedness for internationalisation Local price follower Global price adaptor Low Some support for standard prices High awareness of opportunistic behavior by local reps monitoring of local pricing Austrianfirms: conservative, cost plus approach Norwegian firms: “whatever-the-market-will-bear” pricing Multi-local markets Global markets Industry globality General results of the study © 2018 Taylor & Francis

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