1. Pricing for International Markets

2. Argentina Prices 2003 Meals: Pizza AR$ 5 - AR$ 20 Parrillada (barbecue) from AR$ 8 Ice cream from AR$ 2 Tenedor libre (all-you-can-eat restaurants) AR$ 6 Breakfast in a patisserie AR$ 2 - AR$ 4 Coffee in Recoleta neighborhood AR$ 2 - AR$ 3.50 Lunch/dinner in a pattisserie AR$ 7 - AR$ 15 Dinner per person: from AR$ 15 Palermo Viejo neigborhood (lunch - dinner) AR$ 15 and AR$ 25 Menú ejecutivo (midday menu) (noon, from Monday through Friday): AR$ 7 - AR$ 10 Transportation: Bus: AR$ 0.75 - AR$ 0.80 liter of gasoline: AR$ 1- AR$ 2 Going out: Cinema: AR$ 4.50 - AR$ 10. Ticket for a Boca-River soccer match: AR$ 15 - AR$ 30. Hotels: 5* Hotel – Double room AR$ 500 - AR$ 1000. 4* Hotel – Double room AR$ 140 - AR$ 220. 3* Hotel – Double room AR$50 - AR$ 150. 1* Hotel – Double room AR$25 - AR$ 50.

4. Role of Pricing Determines success or failure Segments markets Defines products Creates customer incentives Sends signals to competitors

5. Approaches to International Pricing Skimming Vs. Penetration Skimming –Pricing above competitors’ prices when competition is minimal –Reach segment which is insensitive to price –Focus on quality, uniqueness and status –Where only two income levels, wealthy & poor

6. Approaches to International Pricing Penetration –Price lower than competitors in order to quickly penetrate the market at competitors' expense –Stimulate market growth and capture market share

7. Why Price Escalation? “People traveling abroad are surprised to find goods that are relatively inexpensive in their home country priced outrageously high in other countries.”

8. Price Escalation The Lower Prices are at Home Aspirin$ 0.99$ 1.23$ 7.07$ 6.53$ 1.78 Movie7.5010.507.8917.294.55 Levi 501 jeans39.9974.9275.4079.7354.54 Ray-Ban sunglasses 45.0088.5081.23134.4989.39 Sony Walkman 59.9574.9886.00211.34110.00 Nike Air Jordans 125.00134.99157.71172.91154.24 Nikon camera629.95840.00691.00768.491,054.42 New YorkLondonParisTokyoMexico City SOURCE: Norihiki Shirouzu, “Luxury Prices for U.S. Goods No Longer Pass Muster in Japan,” Wall Street Journal, February 8, 1996, p. B1; and Elizabeth Fleick, “The Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell about Prices,” Time International, December 13, 1999, p. 38. 18-7 Irwin/McGraw-Hill Los AngelesMadridStockholmBerlinRome Mariah Carey CD16.2216.0917.8215.3120.67 Windows 98117.99123.94179.79211.20264.46 Diapers13.525.035.426.8610.55

9. Why Price Escalation? Taxes Tariffs Administrative Costs Inflation Exchange Rate Fluctuations Varying Currency Values Middlemen and Transportation Cost

10. Sample Causes and Effects of Price Escalation Manufacturing net$ 5.00$ 5.00$ 5.00$ 5.00 Transport, c.i.f.n.a.6.106.106.10 Tariff (20 percent c.i.f. value)n.a.1.221.221.22 Importer paysn.a.n.a.7.327.32 Importer margin when1.83 sold to wholesaler+0.73 * (25 percent) on costn.a.n.a.1.832.56 Wholesaler pays landed cost5.007.329.15+9.88 3.29 +0.99 * Wholesaler margin (33 1 / 3 percent on cost)1.672.443.05=4.28 Retailer pays6.679.7612.2014.16 7.08 +1.42 * Retail margin (50 percent on cost)3.344.886.10=8.50 Retail price10.0114.6418.3022.66 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 18-6 Irwin/McGraw-Hill

11. Approaches to Lessening Price Escalation Lower Cost of Goods  Lower Manufacturing Costs  Eliminate Functional Features  Lower Quality Lower Tariffs  Tariff Reclassification  Product Modification  Partial Assembly  Repack aging Lower Distribution Costs  Shorten Channels of Distribution  Lower Shipping Costs Foreign Trade Zones-Payment of import duties is postponed until product leaves FTZ & enters the country 18-8 Irwin/McGraw-Hill

12. Free Trade Zone in Uruguay

14. Irwin/McGraw-Hill 18-9 Benefits of A Foreign Trade Zone (FTC) Tariffs 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 costs. Ocean transportation rates are affected by weight and volume; thus, unassembled goods may qualify for lower freight rates. If local content, such as packaging or component parts, can be used in the final assembly, there may be further reduction of tariffs.

15. Lower Home Market Prices Justified by: No cost advantages to producing overseas Few or no challenges from international competition Limited market potential International buyers can afford higher prices

16. Higher Home Market Prices Justified by: Lower labor or raw material cost in the international market Strong local competition in the international market Lower buying power of host-country consumers Goal: increase market share via penetration pricing