UNIT V

Pricing Decisions
 BASIC CONCEPTS OF PRICING
• International trade-lower price
• law of one price
• Role of marketing managers
• Pricing strategy- diff. across globe
• e.g. Stella artois- low priced, everyday;
Belgium brand-export quality
Global Pricing Objectives & Strategies:
• Pricing objectives may also vary depending on a product’s
life-cycle stage and the country-specific competitive
situation.
• The Global Manager must develop systems and policies
that address
– Price Floor: minimum price (GOVT. or group imposed price
control)
– Price Ceiling: maximum price (max. high price fixed for a
product; govt. has control over it to safe guard consumers)
– Optimum Prices: function of demand
• Must be consistent with global opportunities and
constraints
• Internet price transparency
• Internal groups may have conflicting price objectives.

• Division VPs, regional executives, and country managers are

each concerned about profitability at their respective
organizational levels.

• The controller and Financial VP are concerned about profits.

The manufacturing VP seeks long production runs for
maximum manufacturing efficiency.

• The tax manager is concerned about regulations regarding

transfer pricing.
Contd…
• Managers must determine the objectives for the
pricing
– Unit Sales
– Market Share
– Return on investment

• They must then develop strategies to achieve those

objectives
– Penetration Pricing
– Market Skimming
 Market Skimming and
Financial Objectives
• Market Skimming
– Charging a premium price
– May occur at the introduction stage of product life cycle
– Luxury goods marketers use price to differentiate products
• LVMH, Mercedes-Benz
• By setting a deliberately high price, demand is
limited to innovators and early adopters who
are willing and able to pay the price.

• When the product enters the growth stage of

the life cycle and competition increases,
manufacturers start to cut prices. This strategy
has been used consistently in the consumer
electronics industry;

E.g. Sony & its product variant

Penetration Pricing and Non-Financial Objectives
• Price can be used as a competitive weapon to gain or maintain
market position.

• Charging a low price in order to penetrate market quickly

• Appropriate to saturate market prior to imitation by competitors

• Scale-efficient plants and low-cost labor allowed these companies

to blitz the market.

• E.G: Packaged food product makers

• Penetration pricing often means that the product may be sold at a

loss for a certain length of time.
Companion Products or
“Razors and Blades” Pricing
• Products whose sale is dependent upon the sale of primary
product
– Video games are dependent upon the sale of the game variety.
• “If you make money on the blades, you can give away the
razors.”
• Cellular service providers subsidize the phone and make
money on calling plans.
• Companion products pricing has long been the preferred
strategy of Vodafone, AT&T, and other cellular service
providers.
 TARGET COSTING PROCESS
• Target costing ensures that development teams will bring
profitable products to market not only with the right level of
quality and functionality but also with appropriate prices for
the target customer segments. The price is set based on the
willingness of customer to pay. Strategy evolved in Japan.

• Toyota, Sony, Olympus, and Komatsu are some of the well-

known Japanese companies that use target costing.

• The target costing process begins with market mapping and

product definition and positioning;
The marketing team
must do the following:
• Determine the segment(s) to be targeted, as well as the prices
that customers in the segment will be willing to pay.

• Using market research techniques such as conjoint analysis, the

team seeks to better understand how customers will perceive
product features and functionalities.

• Compute overall target costs with the aim of ensuring the

company’s future profitability.

• Obey the cardinal rule: If the design team can’t meet the targets,
the product should not be launched.
• Cost-Plus Pricing and Export Price Escalation
Export price escalation is the increase in the final selling
price of goods traded across borders that reflects the
factors (tariffs, distribution channels, unexpected delays)

• 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
• Rigid cost-plus pricing means that companies set prices
without regard to the pricing considerations

• Firms that use rigid cost-plus pricing do not take into account the
conditions outside of the home country.

• The obvious advantage of rigid cost-based pricing is its simplicity

• The disadvantage is that this approach ignores demand and

competitive conditions in target markets; the risk is that prices will
either be set too high or too low.

• This method is attractive to inexperienced exporters who are often

simply testing the market or responding to market in queries rather
than being proactive.
• Flexible cost-plus pricing ensures that prices
are competitive in the contest of the particular
market environment

• Flexible cost-plus pricing sometimes

incorporates the estimated future cost method
to establish the future cost for all component
elements.
 When goods cross international boundaries???
• Obtain export license
• Obtain currency permit
• Pack goods for export
• Transport goods to place of departure
• Prepare a land bill of lading
• Complete necessary customs export papers
• Prepare customs or consular invoices
• Arrange for ocean freight and preparation
• Obtain marine insurance and certificate of the
policy
 INCOTERMS
• Universally recognised set of definitions of
international trade terms
• Recognised by courts and other authorities
• Define the trade contract responsibilities and
liabilities between buyer and seller
• Updated regularly to keep pace with changes
and developments in international trade
Purpose of Incoterms

• Designed for Parties to a Contract

• Provides a set of international rules for foreign
trade
• Reduces uncertainties
• Avoids different interpretations in different
countries
• Additional costs and time can be avoided
 The Terms
• The “E” Term is the term in which seller’s obligation is
at its minimum

• The “F” Term require the seller to deliver as instructed

by the buyer

• The “C” Term require the seller to contract for carriage

at his expense

• The “D” Term signifies arrival contracts

 Incoterms

– 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.
• 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
 Environmental Influences on Pricing
Decisions
• Global marketers must deal with a number of
environmental considerations when making
pricing decisions.
• Among them are currency fluctuations,
inflation, government controls and subsidies,
and competitive behavior.
 Currency Fluctuations:
• In global marketing, fluctuating exchange rates complicate the
task of setting prices.

• Management faces different decision situations, depending on

whether currencies in key markets have strengthened or
weakened relative to the home-country currency.

• A weakening of the home-country currency swings exchange

rates in a favorable direction:

• A producer in a weak-currency country can choose to cut

export prices to increase market share or maintain its prices
and reap healthier profit margins.
• It is a different situation when a company’s home
currency strengthens; this is an unfavorable turn
of events for the typical exporter because
overseas revenues are reduced when translated
into the home-country currency.

• E.G: Now, suppose the U.S. dollar weakens

relative to the Japanese yen. This is good news
for American companies such as Boeing,
Caterpillar, and GE, but bad news for Canon and
Olympus
E.g.:
• Similarly, 100 percent of German automaker
Porsche’s production takes place at home;
Germany serves as its export base. However,
for exports within the euro zone, Porsche is
insulated from currency fluctuations
 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
 Government Controls, Subsidies, and
Regulations
• The types of policies and regulations that affect pricing decisions are:
– Dumping legislation
– Resale price maintenance (RPM) legislation
– Price ceilings
– General reviews of price levels

• Dumping is a process where a company exports a product at a price lower

than the price it normally charges in its own home market.

• RPM-The practice whereby a manufacturer and its distributors agree that

the distributors will sell the manufacturer's product at certain prices
(resale price maintenance), at or above a price floor (minimum resale
price maintenance) or at or below a price ceiling (maximum resale price
maintenance).

• Price ceiling is a situation when the price charged is more than the
equilibrium price determined by market forces of demand and supply. 
• Government action that limits management’s ability to
adjust prices can put pressure on margins.

• When selective controls are imposed, foreign companies are

more vulnerable to control than local ones.

• For example, Procter & Gamble encountered strict price

controls in Venezuela-increases in the cost of raw materials,
P&G was granted only about 50 percent of the price
increases detergent prices in Venezuela were less than what
they were in the United States
 Competitive Behavior
• Pricing decisions are bounded not only by cost and the nature
of demand but also by competitive action.

• 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 in a lower-cost

country, it may be necessary to cut prices to stay competitive

• E.g. Levis Faced stiff competition in US with Wrangler, Lee &

CK. – Closed six plants & moved company’s North American
Production
 Using Sourcing as a Strategic Pricing Tool
• Marketers of domestically manufactured finished products may move to
offshore sourcing of certain components to keep costs down and prices
competitive

• China is “the world’s workshop”

• E.g.: U.S. bicycle companies such as Huffy are relying more heavily on
production sources in China and Taiwan.

• Rationalize the distribution system—Toys ‘R’ Us bypasses layers of

intermediaries in Japan to operate U.S. style warehouse stores

• Rationalization may include selecting new intermediaries, assigning new

responsibilities to old intermediaries or establishing direct marketing.
Global Pricing: Three Policy Alternatives
• What pricing policy should a global company pursue?
• Extension or Ethnocentric
• Adaptation or Polycentric
• Geocentric
Mercedes moved beyond
ethnocentric pricing when Toyota
began offering Lexus—Mercedes
value at $20k less. In 1993,
Mercedes boosted employee
productivity, increased low-cost
suppliers and invested in
production facilities in the U.S. to
move to better pricing.
 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
• The extension approach has the advantage of extreme
simplicity because no information on competitive or market
conditions is required for implementation.
• The disadvantage is that it does not respond to the competitive
and market conditions of each national market and, therefore,
does not maximize the company's profits in each national
market or globally.
 Adaptation or Polycentric
• Permits affiliate managers or independent distributors to
establish price as they feel is most desirable in their
circumstances
• There is no requirement that prices be coordinated from one
country to the next.
• IKEA takes a polycentric approach to pricing: managers in
each country set their own prices.
• Price depend, in part, on local factors such as competition,
wages, taxes, and advertising rates.
• Higher Price in Italy; Lowest in US.
 Geocentric
• More dynamic and proactive than the other two;
Intermediate course of action
• Geocentric pricing neither fixes a single price
worldwide, nor allows subsidiaries or local
distributors to make independent pricing decisions
• Recognizes that several factors are relevant to
pricing decision
– Local costs
– Income levels
– Competition
– Local marketing strategy
 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
• Parallel importing, occurs when companies employ a polycentric,
multinational pricing policy that calls for setting different prices in
different country markets.

• For example, in the European pharmaceuticals market, prices vary

widely. In the United Kingdom and the Netherlands, for example, parallel
imports account for as much as 10 percent of the sales of some
pharmaceutical brands.

• The Internet is emerging as a powerful new tool that allows would-be gray
marketers to access pricing information and reach customers.
 Gray Market Issues
• Dilution of exclusivity-
• Free riding
• Damage to channel relationships
• Undermining segmented pricing schemes
• Reputation and legal liability

Selling drugs out of date leads to

lawsuits.
• Dilution of exclusivity. Authorized dealers are no longer the sole distributors. The product is
often available from multiple sources and margins are threatened.

•  Free riding: If the manufacturer ignores complaints from authorized channel members, those
members may engage in free riding. That is, they may opt to take various actions to offset
downward pressure on margins. These options include cutting back on presale service,
customer education, and salesperson training.

•  Damage to channel relationships: Competition from gray market products can lead to
channel conflict as authorized distributors attempt to cut costs, complain to manufacturers, and
file lawsuits against the gray marketers.

• Undermining segmented pricing schemes: A variety of forces-including falling trade barriers,

the information explosion on the Internet, and modern distribution capabilities-hamper a
company’s ability to pursue local pricing strategies.

•  Reputation and legal liability: Gray market products can compromise a manufacturer’s
reputation and dilute brand equity,
• E.G. when prescription drugs are sold past their expiration dates or electronics equipment is
sold in markets where they are not approved for use or where manufacturers do not honor
warranties.
• PRICE FIXING: In most instances, it is illegal for
representatives of two or more companies to secretly set
similar prices for their products.

• This practice, known as price fixing, is generally held to

be an anticompetitive act.

• Horizontal price fixing occurs when competitor within an

industry that make and market the same product
conspire to keep prices high.

• E.G. the European Commission determined that Procter &

Gamble, Unilever, and Henkel had conspired to set prices
for laundry detergent.
• Vertical price fixing occurs when a manufacture
conspires with wholesalers/retailers to ensure certain
retail prices are maintained.

E.G. the European Commission fined Nintendo nearly

$150 million after it was determined that the video
game company had colluded with European
distributors to fix prices.

• Transfer pricing refers to the pricing of goods,

services, and intangible property bought and sold by
operating units or divisions of the same company.
• Countertrade a countertrade transaction, a
sale results in product flowing in one direction
to a buyer; a separate stream of products and
services, often flowing in the opposite
direction, is also created.

• The most important reason for countertrade is

that developing countries have found it
difficult to obtain bank financing for exports.
BARTER
• The least complex and oldest form of bilateral,
non-monetary countertrade
• A direct exchange of goods or services
between two parties