Lecture International marketing (14/e) - Chapter 18

Chapter 18 - Pricing for international markets. What you should learn from chapter 18: Components of pricing as competitive tools in international marketing, how to control pricing in parallel import or gray markets, price escalation and how to minimize its effect, countertrading and its place in international marketing practices, the mechanics of price quotations, the mechanics of getting paid.

I n t e r n a t i o n a l M a r k e t i

n g

Pricing for International Markets

What Should You Learn?

marketing practices

Global Perspective –

the Price War

• Setting the right price for a product or service

– Key to success or failure

• An offering’s price

– Must reflect the quality and value the consumer perceives in the

product

• Globalization of world markets

– Intensifies competition among multinational and home-based companies

• The marketing manager’s responsibility

– To set and control the actual price of goods in different markets

in which different sets of variables are to be found

Pricing Policy Pricing Objectives

• Pricing as an active instrument of accomplishing

marketing objectives

– The company uses price to achieve a specific objective

• Pricing as a static element in a business

decision

– Exports only excess inventory

– Places a low priority on foreign business

– Views its export sales as passive contributions to sales volume

Pricing Policy Parallel Imports

• Parallel imports

– Develop when importers buy products from distributors in one country and sell them in another to distributors who are not part

of the manufacturer’s regular distribution system

• Occur whenever price differences are greater

than cost of transportation between two markets

• Major problem for pharmaceutical companies

• Exclusive distribution

.

How Gray-Market Goods

End Up in U.S Stores

Exhibit 18.1

Approaches to International Pricing

• Company policy relates to net price received

– Control over end prices

– Control over net prices

• Cost and market considerations

• Employ pricing as part of strategic mix

– Market-oriented pricing factors

• Variable-cost pricing

– Firm is concerned only with the marginal or incremental cost of

producing goods to be sold in overseas markets

• Full-cost pricing

– Companies insist that no unit of a similar product is different

from any other unit in terms of cost

– Each unit must bear full share of the total fixed and variable cost

Full-Cost Versus Variable-Cost Pricing

Skimming Versus Penetration Pricing

• Skimming

– Used by a company when the objective is to reach a segment of

the market that is relatively price insensitive

– Market is willing to pay a premium price for the value received

• Penetration pricing policy

– Used to stimulate market and sales growth by deliberately

offering products at low prices

Price Escalation

• Costs of exporting

– Price escalation

• Taxes, tariffs, and administrative costs

– Taxes include tariffs

– Tariff – fee charged when goods are brought into a country from

Price Escalation

• Inflation

– In countries with rapid inflation or exchange variation, the selling

price must be related to the cost of goods sold and the cost of replacing the items

• Deflation

– In a deflationary market, it is essential for a company to keep

prices low and raise brand value to win the trust of consumers

• Exchange rate fluctuations

– No one is quite sure of the future value of currency

– Transactions are increasingly being written in terms of the

vendor company’s national currency

Price Escalation

• Varying currency values

– Changing values of a country’s currency relative to other

Sample Causes and Effects

of Price Escalation

Approaches to Lessening

Price Escalation

• Lowering cost of goods

– Manufacturing in a third country

– Eliminating costly functional features

– Lowering overall product quality

– Reducing or eliminating middlemen

• Using foreign trade zones to lessen price

escalation

– Establish free trade zones (FTZs) or free ports

► Tax-free enclave not considered part of country

► Postpones payment of duties and tariffs

• Dumping

– Use of marginal (variable) cost pricing

– Selling goods in foreign country below the price of the same goods in the home market

How Are Foreign Trade Zones Used?

Exhibit 18.3

Leasing in International Markets

• Selling technique that alleviates high prices and

capital shortages

• Opens the door to a large segment of nominally

financed foreign firms

– Firms can be sold on a lease option but might be unable to buy

Leasing in International Markets

• Helps guarantee better maintenance and service

on overseas equipment

• Helps to sell other companies in that country

• Revenue tends to be more stable over a period

of time than direct sales

• Leasing disadvantages

– Inflation may lead to heavy losses at end of contract period

– Currency devaluation, expropriation and political risks

Countertrade as a Pricing Tool

• A tool every international marketer must be

ready to employ

– Often gives company a competitive advantage

• Russia and PepsiCo

– Trading vodka and wine for soft drinks

• Countertrade – part of the market-pricing tool kit

Countertrade as a Pricing Tool

• Types of countertrade

– Barter

– Compensation deals

– Counterpurchase or offset trade

– Product buyback agreement

• The Internet and countertrading

– Electronic trade dollars

– Universal Currency/IRTA

• Proactive countertrade strategy

– Included as part of an overall market strategy

– Effective for exchange-poor countries

Transfer Pricing Strategy

• Prices of goods transferred from a company’s

operations or sales units in one country to its units elsewhere

– May be adjusted to enhance the ultimate profit of company

• Benefits

– Lowering duty costs

– Reducing income taxes in high-tax countries

– Facilitating dividend repatriation when dividend repatriation is curtailed by government policy

Transfer Pricing Strategy

• Objectives

– Maximizing profits for corporation

– Facilitating parent-company control

– Providing all levels of management control over profitability

• Arrangements for pricing goods for

intracompany transfer

– Sales at the local manufacturing cost plus a standard markup– Sales at the cost of the most efficient producer in the company

plus a standard markup

– Sales at negotiated prices

– Arm’s-length sales using the same prices as quoted to

independent customers

– Type of documentation required

• Should define quantity and quality

Administered Pricing

• Cartels

– Exist when various companies producing similar products or

services work together

► To control markets for the types of goods and services they produce

– May use formal agreements

► To set prices

► Establish levels of production and sales for participating countries

► Allocate market territories

Administered Pricing

• Government-influenced pricing

– Establishes margins

– Sets prices and floors or ceilings

– Restricts price changes

– Competes in the market

– Grants subsidies

– Acts as a purchasing monopsony or selling monopoly

Summary

• Pricing is one of the most complicated decisions

areas encountered by international marketers

• International marketers must take many factors

into account

– For each country

– For each market within a country

• Market prices at consumer level are much more

difficult to control in international than in

domestic marketing

• Controlling costs that lead to price escalation

when exporting products is:

– One of the most challenging pricing tasks facing the exporter

• Countertrading is an important tool in pricing

policy

• Pricing in the international marketplace

– Requires a combination of intimate knowledge of market costs

and regulations

– An awareness of possible countertrade deals,

– Infinite patience for detail