PRICING IN INTERNATIONAL MARKETS

Price: A part of the marketing mix:

The price is what the customer pays. It includes direct  and indirect costs as well as opportunity costs.

Direct  costs are cash outlays a customer makes in order to obtain something. An example would be
admission to a national park. Direct costs are, in many cases, a relatively small part of the total cost.
Indirect costs are costs associated with obtaining something. An example would be the cost of driving to
a national park, food and entertainment along the way, etc. The total of the indirect costs is often more,
sometimes much more, than the direct cost.
The total  cost is obtained by adding the direct and indirect costs.
Opportunity  costs are what we give up when we do something. They can have various types of value,
sometimes monetary, sometimes not. Opportunity costs include other things you could be doing instead
of going to a national park. Examples might include mowing the lawn or going to a baseball game
(which would be non-monetary) and not working overtime on Saturday in order to go to a national park
(which would be monetary),
The price the park visitor pays to go to a national park is the total of all costs, including direct, indirect,
and opportunity. The perceived benefits of going to a national park have to be at least as great as the
total of the costs if a potential park visitor is going to make a decision to go to a park.

Determining the price:

How do you set monetary prices? There are basically two ways. I call these cost-based pricing and
value-based pricing.
Cost-based pricing is based on the total of all costs associated with delivering a product or service to a
customer. An example of cost-based pricing would be when an organization identifies all of the costs
associated with producing a product or service, adds them up, adds a margin for profit (in the business
sector) and arrives at the "price" the customer is to be charged. This type of pricing is the "floor" for
pricing decisions in that it is as low as the price can be and still cover all of the costs associated with
delivering the product or service. I'm unaware of applications of this type of pricing in the park service
world, unless it might be applied by concessionaires.
Value-based pricing is based on an organization's perception of the value the potential customer (park
visitor) might place on the product or service. An example of value-based pricing would be when an
organization believes that people would pay Rs20 for a service and decides to price it at Rs20 even
though the price might be set at Rs10 based on a cost-based model. This type of pricing is the "ceiling"
for pricing decisions in that it is as high as the price can be and still find a willing customer. It has no
relationship to the cost of production, rather it is influenced by perception of alternatives customers
face.
A subset of value-based pricing is supply/demand pricing. In this type of pricing, an organization has a
limited supply of the product or service and decides to price it just barely low enough to sell all of the
limited supply. There is no relationship to the cost of production. Sometimes applications
supply/demand pricing are labeled as gouging because the organization is perceived as taking advantage
of the situation.
Political factors  undoubtedly influence some pricing decisions, such as utilities and essential
commodities. I would interpret this as politicians using a value-based price model in order to obtain

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public favor. No concern is shown for the cost of production. Part of the logic of this type of decision is
the reality that a park is a public resource and is, at least to some extent, a public good the value of
which should be available to as many citizens as possible.
In summary, pricing is quite complex. The most responsible means of pricing would probably give
some consideration to all of these pricing concepts, attempting to balance the needs and desires of the
public for access with the real costs associated with delivering the product or service. Responsible
pricing would recognize market segmentation concepts as expressed in differing demand levels and
abilities to pay and attempt to maximize revenue through pricing accordingly. The result would be either
maximizing gain or minimizing loss.

Importance of price in marketing mix:

• Price is the amount of money charged for a product or a service, or the sum of the values that
consumers exchange for the benefits of having or using the product or service
• Price is the only element in the marketing mix that produces revenue.
• Price is also the most flexible element of the marketing mix.
• The most common mistakes in setting prices are;
– pricing that is too cost oriented
– prices that are not revised enough to reflect the market changes
– pricing that does not take rest of the marketing mix into account
– prices that are not varied enough for different products, market segments & purchase occasions

Factors influencing international pricing:

• 
Factors internal to an international firm

– strategic objectives
• cost leader, differentiation, focus
• gain market share, protect market share, to maintain status quo
• revenue, profit or market share maximization
– marketing mix policies
• product, place & promotion
– costs
• short term vs long term cost focus
• full cost, variable cost, marginal cost pricing
– organizational considerations
• transfer pricing
• cost vs profit center

• 
Factors external to an international firm

– nature of market (buyer or seller)

– level of market development/sophistication
– market demand and consumers’ ability to buy
– competitive situation & consumer surplus
– product life-cycle-stage
– type of packaging, environmental issues
– distribution & marketing costs
– transportation costs
– government policies, tariffs, taxes & other restrictions
– country of origin image
– after-sales service, warranties & guaranties
– exchange rate fluctuation
– environmental factors

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– hidden costs

Factors contributing the selection of final price:

• Psychological effects of price

• Influence of other marketing mix elements
• Company pricing policies
• Costs
• Impact of price on other parties
– distributors or dealers
– company sales force
– competitors
Managing price escalation in foreign markets:

• Rearrange the distribution channel

– length of channel / exorbitant margins
• Eliminate costly features (or make them optional)
– no-frills versions - sell core products
• Downsize the product
– offer smaller version or a lesser count
• Assemble or manufacture the product in foreign markets
– closer proximity to customers - lower costs
• Adapt the product to escape tariffs and taxes
– by shifting it to different tax classification

Pricing in inflationary environments:

- Modify components, ingredients, parts and/or packaging materials

- Source materials from low-cost suppliers
- Shorten credit terms
- Include escalator clauses in long-term contracts - to hedge against inflation
- Quote prices in a stable currency
- Pursue rapid inventory turnovers
- Draw lessons from other countries

Exporters strategies under varying currency conditions:

When domestic currency is WEAK…

– Stress price benefits

– Expand product line and add more costly features
– Shift sourcing manufacturing to domestic market
– Exploit export opportunities in all markets
– Use a full-costing approach, but employ marginal-cost pricing to penetrate new or competitive
markets
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– Speed repatriation of foreign-earned income and collections
– Minimize expenditures in local or host country currency
– Buy needed services (advertising, insurance, transportation, etc.) in domestic market
– Bill foreign customers in their own currency

When domestic currency is STRONG…

- Engage in non-price 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 countries with relatively strong currencies
- Trim profit margins and use marginal-cost pricing
- Keep the foreign-earned income in host country; slow down collections
- Maximize expenditures in local or host country currency
- Buy needed services abroad and pay for them in local currencies
- Bill foreign customers in the domestic currency

Marketing > Pricing Strategy

Pricing Strategy

One of the four major elements of the marketing mix is price. Pricing is an important
strategic issue because it is related to product positioning. Furthermore, pricing affects
other marketing mix elements such as product features, channel decisions, and promotion.

While there is no single recipe to determine pricing, the following is a general sequence of
steps that might be followed for developing the pricing of a new product:

1. Develop marketing strategy - perform marketing analysis, segmentation,

targeting, and positioning.
2. Make marketing mix decisions - define the product, distribution, and promotional
tactics.
3. Estimate the demand curve - understand how quantity demanded varies with
price.
4. Calculate cost - include fixed and variable costs associated with the product.
5. Understand environmental factors - evaluate likely competitor actions,
understand legal constraints, etc.
6. Set pricing objectives - for example, profit maximization, revenue maximization,
or price stabilization (status quo).
7. Determine pricing - using information collected in the above steps, select a pricing
method, develop the pricing structure, and define discounts.
These steps are interrelated and are not necessarily performed in the above order.
Nonetheless, the above list serves to present a starting framework.

Marketing Strategy and the Marketing Mix

Before the product is developed, the marketing strategy is formulated, including target
market selection and product positioning. There usually is a tradeoff between product
quality and price, so price is an important variable in positioning.

Because of inherent tradeoffs between marketing mix elements, pricing will depend on other

product, distribution, and promotion decisions.

Estimate the Demand Curve

Because there is a relationship between price and quantity demanded, it is important to

understand the impact of pricing on sales by estimating the demand curve for the product.

For existing products, experiments can be performed at prices above and below the current
price in order to determine the price elasticity of demand. Inelastic demand indicates that
price increases might be feasible.

Calculate Costs

If the firm has decided to launch the product, there likely is at least a basic understanding
of the costs involved, otherwise, there might be no profit to be made. The unit cost of the
product sets the lower limit of what the firm might charge, and determines the profit margin
at higher prices.

The total unit cost of a producing a product is composed of the variable cost of producing
each additional unit and fixed costs that are incurred regardless of the quantity produced.
The pricing policy should consider both types of costs.

Environmental Factors

Pricing must take into account the competitive and legal environment in which the company
operates. From a competitive standpoint, the firm must consider the implications of its
pricing on the pricing decisions of competitors. For example, setting the price too low may
risk a price war that may not be in the best interest of either side. Setting the price too high
may attract a large number of competitors who want to share in the profits.

From a legal standpoint, a firm is not free to price its products at any level it chooses. For
example, there may be price controls that prohibit pricing a product too high. Pricing it too
low may be considered predatory pricing or "dumping" in the case of international trade.
Offering a different price for different consumers may violate laws against price
discrimination. Finally, collusion with competitors to fix prices at an agreed level is illegal in
many countries.

Pricing Objectives
The firm's pricing objectives must be identified in order to determine the optimal pricing.
Common objectives include the following:

 Current profit maximization - seeks to maximize current profit, taking into

account revenue and costs. Current profit maximization may not be the best
objective if it results in lower long-term profits.
 Current revenue maximization - seeks to maximize current revenue with no
regard to profit margins. The underlying objective often is to maximize long-term
profits by increasing market share and lowering costs.
 Maximize quantity - seeks to maximize the number of units sold or the number of
customers served in order to decrease long-term costs as predicted by
the experience curve.
 Maximize profit margin - attempts to maximize the unit profit margin, recognizing
that quantities will be low.
 Quality leadership - use price to signal high quality in an attempt to position the
product as the quality leader.
 Partial cost recovery - an organization that has other revenue sources may seek
only partial cost recovery.
 Survival - in situations such as market decline and overcapacity, the goal may be to
select a price that will cover costs and permit the firm to remain in the market. In
this case, survival may take a priority over profits, so this objective is considered
temporary.
 Status quo - the firm may seek price stabilization in order to avoid price wars and
maintain a moderate but stable level of profit.

For new products, the pricing objective often is either to maximize profit margin or to
maximize quantity (market share). To meet these objectives, skim pricing and penetration
pricing strategies often are employed. Joel Dean discussed these pricing policies in his
classic HBR article entitled, Pricing Policies for New Products.

Skim pricing attempts to "skim the cream" off the top of the market by setting a high price
and selling to those customers who are less price sensitive. Skimming is a strategy used to
pursue the objective of profit margin maximization.

Skimming is most appropriate when:

 Demand is expected to be relatively inelastic; that is, the customers are not highly
price sensitive.
 Large cost savings are not expected at high volumes, or it is difficult to predict the
cost savings that would be achieved at high volume.
 The company does not have the resources to finance the large capital expenditures
necessary for high volume production with initially low profit margins.

Penetration pricing pursues the objective of quantity maximization by means of a low

price. It is most appropriate when:

 Demand is expected to be highly elastic; that is, customers are price sensitive and
the quantity demanded will increase significantly as price declines.
 Large decreases in cost are expected as cumulative volume increases.
 The product is of the nature of something that can gain mass appeal fairly quickly.
 There is a threat of impending competition.
As the product lifecycle progresses, there likely will be changes in the demand curve and
costs. As such, the pricing policy should be reevaluated over time.

The pricing objective depends on many factors including production cost, existence of
economies of scale, barriers to entry, product differentiation, rate of product diffusion, the
firm's resources, and the product's anticipated price elasticity of demand.

Pricing Methods

To set the specific price level that achieves their pricing objectives, managers may make
use of several pricing methods. These methods include:

 Cost-plus pricing - set the price at the production cost plus a certain profit margin.
 Target return pricing - set the price to achieve a target return-on-investment.
 Value-based pricing - base the price on the effective value to the customer relative
to alternative products.
 Psychological pricing - base the price on factors such as signals of product quality,
popular price points, and what the consumer perceives to be fair.

In addition to setting the price level, managers have the opportunity to design innovative
pricing models that better meet the needs of both the firm and its customers. For example,
software traditionally was purchased as a product in which customers made a one-time
payment and then owned a perpetual license to the software. Many software suppliers have
changed their pricing to a subscription model in which the customer subscribes for a set
period of time, such as one year. Afterwards, the subscription must be renewed or the
software no longer will function. This model offers stability to both the supplier and the
customer since it reduces the large swings in software investment cycles.

Price Discounts

The normally quoted price to end users is known as the list price. This price usually is
discounted for distribution channel members and some end users. There are several types
of discounts, as outlined below.

 Quantity discount - offered to customers who purchase in large quantities.

 Cumulative quantity discount - a discount that increases as the cumulative
quantity increases. Cumulative discounts may be offered to resellers who purchase
large quantities over time but who do not wish to place large individual orders.
 Seasonal discount - based on the time that the purchase is made and designed to
reduce seasonal variation in sales. For example, the travel industry offers much
lower off-season rates. Such discounts do not have to be based on time of the year;
they also can be based on day of the week or time of the day, such as pricing offered
by long distance and wireless service providers.
 Cash discount - extended to customers who pay their bill before a specified date.
 Trade discount - a functional discount offered to channel members for performing
their roles. For example, a trade discount may be offered to a small retailer who may
not purchase in quantity but nonetheless performs the important retail function.
 Promotional discount - a short-term discounted price offered to stimulate sales.
Pricing Methods with Examples - 

Bid Pricing :-The stock exchanges use a system of bid and ask pricing to match buyers and sellers. The
difference between the two prices is thebid/ask spread.

Cost-plus pricing: - It is a pricing method commonly used by firms. It is used primarily because it is easy
to calculate and requires little information. There are several varieties, but the common thread in all of them
is that you first calculate the cost of the product, then include an additional amount to represent profit.
Cost-plus pricing is often used on government contracts, and has been criticized as promoting wasteful
expenditures.

Customary pricing:- is where the product "traditionally" sells for a certain price. Candy bars of a certain
weight all cost a predictable amount -- unless you purchase them in an airport shop.

Dumping Pricing:- The Best example here would be China Dumping the Electronic Goods in the Indian
Market.

Experience curve pricing: -A pricing policy in which a company expands its market share by fixing a low
price that high cost competitors cannot match. For Ex – Spykar Jeans.

Loss Leader Pricing :-The intent of this pricing strategy is to not only have the customer buy the (loss
leader) sale item, but other products that are not discounted. For Eg Big Bazzar.

Prestige pricing:- Cheap products are not taken seriously by some buyers unless they are priced at a
particular level. For example, you can sometimes find clothing of the same quality brand at Nordstrom as
you do at the Men's Warehouse. But because it is priced higher, Nordstrom's clientele believes it to be of
higher quality.

Professional pricing:- Pricing used by people who have great skill or experience in a particular field or
activity. For Eg Corporate Professionals

Promotional pricing :- It is related to the short term promotion of a particular product. For Ex :- Pricing of
a product during its Launch.

Pricing Issues in International Marketing

Price can best be defined in ratio terms, giving the equation

resources given up
price  =     ———————————————                
goods received

This implies that there are several ways that the price can be changed:
  "Sticker" price changes—the most obvious way to change the price is the price tag—
you get the same thing, but for a different (usually larger) amount of money.
 Change quantity. Often, consumers respond unfavorably to an increased sticker price,
and changes in quantity are sometimes noticed less—e.g., in the 1970s, the wholesale
cost of chocolate increased dramatically, and candy manufacturers responded by
making smaller candy bars. Note that, for cash flow reasons, consumers in less
affluent countries may need to buy smaller packages at any one time (e.g., forking out
the money for a large tube of toothpaste is no big deal for most American families, but
it introduces a greater strain on the budget of a family closer to the subsistence
level).
 Change quality. Another way candy manufacturers have effectively increased prices is
through a reduction in quality. In a candy bar, the "gooey" stuff is much cheaper than
chocolate. It is frequently tempting for foreign licensees of a major brand name to use
inferior ingredients.
 Change terms. In the old days, most software manufacturers provided free support for
their programs—it used to be possible to call the WordPerfect Corporation on an 800
number to get free help. Nowadays, you either have to call a 900 number or have a
credit card handy to get help from many software makers. Another way to change
terms is to do away with favorable financing terms.

Reference Prices. Consumers often develop internal reference prices, or

expectations about what something should cost, based mostly on their experience.
Most drivers with long commutes develop a good feeling of what gasoline should cost,
and can tell a bargain or a ripoff.

Reference prices are more likely to be more precise for frequently purchased and
highly visible products. Therefore, retailers very often promote soft drinks, since
consumers tend to have a good idea of prices and these products are quite visible.
The trick, then, is to be more expensive on products where price expectations are
muddier.

Marketers often try to influence people's price perceptions through the use
ofexternal reference prices—indicators given to the consumer as to how much
something should cost. Examples include:

 Manufacturer's Suggested Retail Price (MSRP). This is often pure fiction. The suggested
retail prices in certain categories are deliberately set so high that even full service
retailers can sell at a "discount." Thus, although the consumer may contrast the
offering price against the MSRP, this latter figure is quite misleading.
 "SALE! Now $2.99; Regular Price $5.00." For this strategy to be used legally in most
countries, the claim must be true (consistency of enforcement in some countries is, of
course, another matter). However, certain products are put on sale so frequently that
the "regular" price is meaningless. In the early 1990s, Sears was reported to sell some
55% of its merchandise on sale.
 "WAS $10.00, now $6.99."
 "Sold elsewhere for $150.00; our price: $99.99."

Reference prices have significant international implications. While marketers may

choose to introduce a product at a low price in order to induce trial, which is useful in
a new market where the penetration of a product is low, this may have serious
repercussions as consumers may develop a low reference price and may thus resist
paying higher prices in the future.
Selected International Pricing Issues. In some cultures, particularly where retail stores
are smaller and the buyer has the opportunity to interact with the owner, bargaining
may be more common, and it may thus be more difficult for the manufacturer to
influence retail level pricing.

Two phenomena may occur when products are sold in disparate markets. When a
product is exported, price escalation, whereby the product dramatically increases in
price in the export market, is likely to take place. This usually occurs because a
longer distribution chain is necessary and because smaller quantities sold through this
route will usually not allow for economies of scale. "Gray" markets occur when
products are diverted from one market in which they are cheaper to another one
where prices are higher—e.g., Luis Vuitton bags were significantly more expensive in
Japan than in France, since the profit maximizing price in Japan was higher and thus
bags would be bought in France and shipped to Japan for resale. The manufacturer
therefore imposed quantity limits on buyers. Since these quantity limits were
circumvented by enterprising exchange students who were recruited to buy their
quota on a daily basis, prices eventually had to be lowered in Japan to make the
practice of diversion unattractive. Where the local government imposes price
controls, a firm may find the market profitable to enter nevertheless since revenues
from the new market only have to cover marginal costs. However, products may then
be attractive to divert to countries without such controls.

Transfer pricing involves what one subsidiary will charge another for products or
components supplied for use in another country. Firms will often try to charge high
prices to subsidiaries in countries with high taxes so that the income earned there will
be minimized.

Antitrust laws are relevant in pricing decisions, and anti-dumping regulations are
especially noteworthy. In general, it is illegal to sell a product below your cost of
production, which may make a penetration pricing entry strategy infeasible. Japan
has actively lobbied the World Trade Organization (WTO) to relax its regulations,
which generally require firms to price no lower than their average fully absorbed cost
(which incorporates both variable and fixed costs).
Alternatives to "hard" currency deals. Buyers in some countries do not have ready
access to convertible currency, and governments will often try limit firms’ ability to
spend money abroad. Thus, some firms have been forced into non-cash deals. In
barter, the seller takes payment in some product produced in the buying country—
e.g., Lockheed (back when it was an independent firm) took Spanish wine in return
for aircraft, and sellers to Eastern Europe have taken their payment in ham. An offset
contract is somewhat more flexible in that the buyer can get paid but instead has to
buy, or cause others to buy, products for a certain value within a specified period of
time.

Psychological issues: Most pricing research has been done on North Americans, and
this raises serious problems of generalizability. Americans are used to sales, for
example, while consumers in countries where goods are more scarce may attribute a
sale to low quality rather than a desire to gain market share. There is some evidence
that perceived price quality relationships are quite high in Britain and Japan (thus,
discount stores have had difficulty there), while in developing countries, there is less
trust in the market. Cultural differences may influence the extent of effort put into
evaluating deals (potentially impacting the effectiveness of odd-even pricing and
promotion signaling). The fact that consumers in some economies are usually paid
weekly, as opposed to biweekly or monthly, may influence the effectiveness of
framing attempts—"a dollar a day" is a much bigger chunk from a weekly than a
monthly paycheck.