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Chapter 11

Pricing Decisions

© 2005 Prentice Hall 11-1


managing
marketing International Marketing Mix Decisions
Strategic Alternatives in international and
global marketing mix decisions. Managerial issues

International Pricing considerations

Global pricing is one of the most critical and


complex issues in international marketing.
Price is the only marketing mix instrument that
creates revenues. All other elements entail
costs.
A company’s global pricing policy may make
or break its overseas expansion efforts.
Multinationals also face the challenges of how
to coordinate their pricing across different
countries.

© 2005 Prentice Hall


©2005 Dr.Gerard Ryan, Universitat Rovira i Virgili.
11-2
International Pricing Strategies
Company Internal Environmental
Market Factors
Factors Factors
Profitability Income Levels Foreign Exchange
Analytic Transports Costs Competition Rates
Dimensions Tariffs Customers’ Culture Inflation Rates
Taxes Price Controls
Production Costs Regulations
Channel Costs

Decision- Market-by-Market International


Pricing Uniform Pricing
Making Pricing
Strategies

Managerial Financing International


Source of Financing
Issues Transaction

Decision- Transfer Pricing Risks Commercial Banks


Foreign Currencies Customer-Arranged vs. Governments
Making Parallel Imports/Grey Supplier-Arranged Non-cash Transactions:
Markets Counter-trading
Export Price Escalation
Global
© 2005 Prentice Hall Pricing Strategies 11-3
Source: Jeannet & Hennessey, 2001
The Gaps that the Euro Could Close
Prices on selected goods and services (1998!)
Belgium France Germany Italy Spain
1.5 litre bottle of Coca Cola 2.05 1.05 1.89 1.65 1.14
Big Mac 2.86 3.08 2.67 2.48 2.38
VW Golf GLa 13,553 16,317 13,999 17,056 17,356
Unleaded petrol per litre 0.93 1.03 0.87 0.94 0.73
Dry cleaning man’s shirt 3.68 4.67 2.43 2.75 2.92
Underground or bus ticket 1.32 1.20 2.10 0.83 0.82
Pair of Levi 501 jeans 71 83 81 69 70
Compaq Pressario computer b 1,316 1,348 917 1,208 1,267
1 day car rental c 154 110 103 243 113
1 hour of translation 89 104 78 55 39

All prices in 1998 US$


a Two door model
b Model 4504 in Spain, 2240 elsewhere
c Mercedes C-class without insurance
© 2005 Prentice Hall 11-4
Cateora & Ghauri, International Marketing, European Edition, © 2000 McGraw-Hill
managing
marketing International Marketing Mix Decisions
Strategic Alternatives in international and
global marketing mix decisions. Managerial issues

International Pricing comparisons

Prices for a
Volkswagen Golf*

BRITAIN $13,040

FINLAND 8,290

FRANCE 10,510

GERMANY 11,040

ITALY 10,690
© 2005 Prentice Hall
©2005 Dr.Gerard Ryan, Universitat Rovira i Virgili.
11-5
Under (-)/
The Hamburger Standard over (+)
valuation
Local Currency Dollars Implied PPP* Actual $ exchange against the
of the dollar rate 17/04/01 dollar %

United States*** $2.54 2.54


Argentina Peso2.50 2.50 0.98 1.00 -2
Australia A$3.00 1.52 1.18 1.98 -40
Brazil Real3.60 1.64 1.42 2.19 -35
Britain £1.99 2.85 1.28** 1.43** 12
Canada C$3.33 2.14 1.31 1.56 -16
Chile Peso1260 2.10 496 601 -17
China Yuan9.90 1.20 3.90 8.28 -53
Czech Rep Koruna56.00 1.43 22.00 39.0 -44
Denmark DKr24.75 2.93 9.74 8.46 15
Euro area 2.57 2.27 0.99 € 0.88 € -11
France FFr18.5 2.49 7.28 7.44 -2
Germany DM5.10 2.30 2.01 2.22 -9
Italy Lire4300 1.96 1693 2195 -23
Spain Pta395 2.09 156 189 -18
Hong Kong HK$10.70 1.37 4.21 7.80 -46
Hungary Fo399 1.32 157 303 -48
Indonesia Rupiah14700 1.35 5787 10855 -47
Japan 294 2.38 116 124 -6
Malaysia M$4.52 1.19 1.78 3.80 -53
Mexico Peso21.9 2.36 8.62 9.29 -7
New Zealand NZ$3.60 1.46 1.42 2.47 -43
Philippines Peso 59.00 1.17 23.2 50.3 -54
Poland Zloty5.90 1.46 2.32 4.03 -42
Russia Rouble35.00 1.21 13.8 28.9 -52
Singapore S$3.30 1.82 1.30 1.81 -28
South Africa Rand9.70 1.19 3.82 8.13 -53
South Korea Won3000 2.27 1181 1325 -11
Sweden SKr24.0 2.33 9.45 10.28 -8
Switzerland SFr6.30 3.65 2.48 1.73 44
Taiwan NT$70.0 2.13 27.6 32.9 -16
Thailand Baht55.0 1.21 21.7 45.5 -52

© 2005 Prentice Hall 11-6


Basic Pricing Concepts
The Global Manager must develop systems
and policies that address
– Price Floors
– Price Ceilings
– Optimum Prices
Must be consistent with global opportunities
and constraints

© 2005 Prentice Hall 11-7


Global Pricing Objectives and
Strategies
Managers must determine the objectives for the
pricing objectives
– Unit Sales
– Market Share
– Return on investment
They must then develop strategies to achieve those
objectives
– Penetration Pricing
– Market Skimming

© 2005 Prentice Hall 11-8


Market Skimming and Financial
Objectives
Market Skimming
– Charging a premium
price
– May occur at the
introduction stage of
product life cycle

Sony Ad. for camcorders

© 2005 Prentice Hall 11-9


Penetration Pricing and Non-
Financial Objectives
Penetration Pricing
– Charging a low price in
order to penetrate
market quickly
– Appropriate to saturate
market prior to
imitation by
competitors

1979 Sony Walkman


© 2005 Prentice Hall 11-10
Companion Products
Products whose sale is
dependent upon the sale of
primary product
– Video games are dependent
upon the sale of the game
Console
“If you make money on
the blades you can give
away the razors.”

X-Box Game System and Sports Game

© 2005 Prentice Hall 11-11


Target Costing – 8 Questions
1. Does the price reflect the product’s quality?
2. Is the price competitive given local market conditions?
3. Should the firm pursue market penetration, market
skimming, or some other pricing objective?
4. What type of discount (trade, cash, quantity) and
allowance (advertising, trade-off) should the firm offer its
international customers?
5. Should prices differ with market segment?
6. What pricing options are available if the firm’s costs
increase or decrease? Is demand in the international
market elastic or inelastic?
7. Are the firm’s prices likely to be viewed by the host-
country government as reasonable or exploitative?
8. Do the foreign country’s dumping laws pose a problem?

© 2005 Prentice Hall 11-12


Dumping
In international trade, this occurs when one
country exports a significant amount of
goods to another country at prices much
lower than in the domestic market
http://en.wikipedia.org/wiki/Dumping_%28
pricing_policy%29

© 2005 Prentice Hall 11-13


Target Costing
Cost-Based Pricing is based on an analysis
of internal and external cost
Firms using western cost accounting
principles use the Full absorption cost
method
– Per-unit product costs are the sum of all past or
current direct and indirect manufacturing and
overhead costs

© 2005 Prentice Hall 11-14


Target Costing
Rigid cost-plus pricing means that
companies set prices without regard to the
eight foundational pricing considerations
Flexible cost-plus pricing ensures that
prices are competitive in the contest of the
particular market environment

© 2005 Prentice Hall 11-15


Terms of the Sale
Incoterms make international trade easier
and help traders in different countries to
understand one another. These standard
trade definitions that are most commonly
used in international contracts are protected
by ICC copyright
– Ex-works – seller places goods at the disposal of the
buyer at the time specified in the contract; buyer takes
delivery at the premises of the seller and bears all risks
and expenses from that point on.
– Delivery duty paid – seller agrees to deliver the goods
to the buyer at the place he or she names in the country
of import with all costs, including duties, paid.
© 2005 Prentice Hall 11-17
Environmental Influences on Pricing
Decisions
Currency Fluctuations
Inflationary Environment
Government Controls, Subsidies,
Regulations
Competitive Behavior
Sourcing

© 2005 Prentice Hall 11-18


Global Pricing: Three Policy
Alternatives
Extension
Adaptation
Geocentric

© 2005 Prentice Hall 11-19


Gray Market Goods
Trademarked products are exported from
one country to another where they are sold
by unauthorized persons or organizations
Occurs when product is in short supply,
when producers use skimming strategies in
some markets, and when goods are subject
to substantial mark-ups

© 2005 Prentice Hall 11-20


Dumping
Sale of an imported product at a price lower than
that normally charged in a domestic market or
country of origin.
Occurs when imports sold in the US market are
priced at either levels that represent less than the
cost of production plus an 8% profit margin or at
levels below those prevailing in the producing
countries
To prove, both price discrimination and injury
must be shown

© 2005 Prentice Hall 11-21


Price Fixing
Representatives of two or more companies
secretly set similar prices for their products
– Illegal act because it is anticompetitive
Horizontal price fixing occurs when competitor
within an industry that make and market the same
product conspire to keep prices high
Vertical price fixing occurs when a manufacture
conspires with wholesalers/retailers to ensure
certain retail prices are maintained

© 2005 Prentice Hall 11-22


Transfer Pricing
Pricing of goods, services, and intangible
property bought and sold by operating units
or divisions of a company doing business
with an affiliate in another jurisdiction
Intra-corporate exchanges
– Cost-based transfer pricing
– Market-based transfer pricing
– Negotiated transfer pricing

© 2005 Prentice Hall 11-23


Countertrade
Countertrade occurs when payment is made in some form
other than money
Options
– Barter
– Counter-purchase
– Offset
– Compensation trading
– Cooperation agreements
– Switch trading

© 2005 Prentice Hall 11-24


Barter
The least complex and oldest form of
bilateral, non-monetary counter-trade
A direct exchange of goods or services
between two parties

© 2005 Prentice Hall 11-25


Looking Ahead
Chapter 12 Global Marketing Channels and
Physical Distribution

© 2005 Prentice Hall 11-26


Incoterms
FAS (free alongside ship) named port of destination –
seller places goods alongside the vessel or other mode of
transport and pays all charges up to that point
FOB (free on board) – seller’s responsibility does not end
until goods have actually been placed aboard ship
CIF (cost, insurance, freight) named port of destination –
risk of loss or damage of goods is transferred to buyer once
goods have passed the ship’s rail
CFR (cost and freight) – seller is not responsible at any
point outside of factory

Return
© 2005 Prentice Hall 11-27
Extension
Ethnocentric
Per-unit price of an item is the same no
matter where in the world the buyer is
located
Importer must absorb freight and import
duties
Fails to respond to each national market
Return

© 2005 Prentice Hall 11-28


Adaptation
Polycentric
Permits affiliate managers or independent
distributors to establish price as they feel is
most desirable in their circumstances
Sensitive to market conditions but creates
potential for gray marketing

Return

© 2005 Prentice Hall 11-29


Geocentric
Intermediate course of action
Recognizes that several factors are relevant
to pricing decision
– Local costs
– Income levels
– Competition
– Local marketing strategy

Return
© 2005 Prentice Hall 11-30
Currency Fluctuations

Return
© 2005 Prentice Hall 11-31
Inflationary Environment
Defined as a persistent upward change in
price levels
– Can be caused by an increase in the money
supply
– Can be caused by currency devaluation
Essential requirement for pricing is the
maintenance of operating margins

Return

© 2005 Prentice Hall 11-32


Government Controls, Subsidies,
and Regulations
The types of policies and regulations that
affect pricing decisions are:
– Dumping legislation
– Resale price maintenance legislation
– Price ceilings
– General reviews of price levels

Return

© 2005 Prentice Hall 11-33


Competitive Behavior
If competitors do not adjust their prices in
response to rising costs it is difficult to
adjust your pricing to maintain operating
margins
If competitors are manufacturing or
sourcing I a lower-cost country, it may be
necessary to cut prices to stay competitive

Return

© 2005 Prentice Hall 11-34


Using Sourcing as a Strategic
Pricing Tool
Marketers of
domestically
manufactured finished
products may move to Can you stay competitive
while staying local?
offshore sourcing of
certain components to
keep costs down and
prices competitive

Return

© 2005 Prentice Hall 11-35