Pricing for International Marketing

8/3/2019 Pricing for International Marketing

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PRICING FOR

INTERNATIONAL MARKETS

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Introduction

Global pricing is one of the most critical and complex issues that globalfirms face so it can give a break or a boost to company’s revenue.

Importance:

Price is the only marketing mix that generates revenue all other entailcosts.

Local pricing v/s Global pricing – Image consistency issue

Lack of the coordination in the global market will give rise to gray market

or parallel trade situation 5 C’s are main drivers of global pricing strategies of any company

operating internationally: COMPANY,COST, CUSTOMER, COMPETITIONand CHANNELS

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Global Pricing

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Company

Growth Maximization/revenue maximization

Market penetration

Projection of an image

Companies objectives and goals are different in different market. Forexample. New Balance, the US based shoe maker sells its shoes inFrance as haute couture rather than athletic shoes and they price itat almost double of the price in US.

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Costs

Costs are different in different markets because of various reasons likelabor, raw material etc.

Costs are very prominent in pricing decision of a firm because pricing

is done to cover the cost involved.

Two costs are thereFixed costs, Variable costs

Export Pricing policies:

Cost-Plus Pricing: adds international costs and a mark-

up to the domestic manufacturing cost. Dynamic Incremental Pricing:

Only incremental costs should be recuperated.

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Customer

If costs set the floor for pricing , consumer willingness to pay sets a ceilingto the price. Consumer’s role in international pricing is derived by thesereasons:

Buying power

Habits & Spending patterns

Availability of substitutes

Option to tackle customers issue:

Downsizing

Niche player targeting upper end

Sell older version at low prices

Example: Proctor & Gamble downsized the packet size of Ariel in Egyptthereby lowering cash outlay for ordinary consumers.

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Competition

Competition plays an important role in pricing because we have differentkinds of competition in different market:

Number of competitors:

Monopoly, Perfect competition

Nature of competition:

Global or local players, state owned or private owned

Position of company in the competition:

Price leaders or price takers Knockoff items / counterfeit products:

Imitation products offered for sale

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Channels

Distribution channels determine pricing in different ways dependingupon:

Length of channels:

producer to consumer in how many steps

Balance of power between manufacturer and retailers Unauthorized distribution channels in the grey markets

Example:

US and Germany have direct marketers , supermarkets and specialtyretails for personal computers where as in Britain prices are 50 %

higher than in Germany with market dominated by Dixons , a retailchain that charges high margins.

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Global Pricing Strategies

Companies face many problems in setting their international prices.

Possible approaches include:

Charge a uniform price all around the world.

Charge what consumers in each country will pay. Use a standard markup of costs everywhere.

International prices tend to be higher than domestic prices becauseof price escalation .

Companies may become guilty of dumping –a foreign subsidiarycharges less than its costs or less than it charges in its home market.

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Profit-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Status Quo Pricing Objectives

Pricing Objectives

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Importance of Price

To earn a profit,marketers must select a price

that is not too highor too low,a price that equals

the perceived value to target consumers

Revenue = Unit Price X Number of Units Sold

Revenue pays for every activity.

What’s left over is Profit.

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Profit-Oriented Pricing

Objectives

Profit-Oriented Pricing Objectives

Profit

Maximization

Satisfactory

Profits

TargetReturn on

Investment

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Sales-Oriented Pricing

Objectives

Market

Share

Sales

Maximization

Sales-Oriented Pricing Objectives

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Cost Determinant of Price

MethodsUsed toSet Prices

Markup pricing

Key Stoning

Profit Maximization Pricing

Break-Even Pricing

Introductory Price Point

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Markup Pricing

MarkupPricing

The cost of buying the product fromthe producer plus amounts for

profit and for expenses not

otherwise accounted for.

KeystoningThe practice of marking up pricesby 100%, or doubling the cost.

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Profit Maximization

ProfitMaximization

A method of setting prices thatoccurs when marginal revenue

equals marginal cost.

Marginal

Revenue

The extra revenue associated withselling an extra unit of output, or

the change in total revenue with aone-unit change in output.

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Break-Even Pricing

Quantity

$

2,000

0 1,000 2,000 3,000 4,000 5,000 6,000

4,000

Fixed costs

Total Revenue

Total Costs

Break-even pointVariable Costs



Special Pricing Tactics

Single-Price Tactic

Flexible Pricing

Leader Pricing

Bait Pricing

Price Bundling

Two-Part Pricing

All goods offered at the same price

Different customers pay different price

Sell product at near or below cost

Lure customers through false or misleadingprice advertising

Combining two or more products in asingle package

Two separate charges to consume a single good

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EXPORT PRICING

Export Cost Factors

Export Pricing Strategy

Export Pricing Methods of Manufacturers

Export Cost Factors

Product modification cost

Promotion cost Packaging cost

After-sales service cost

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Export Pricing Strategy

High pricing strategy

Unique or new products

High profit margin

Attracts competition

Higher price at the beginning and lower pricelater

Low pricing strategy

To penetrate foreign markets

To increase market share

To dispose of excess or obsolete inventory

To discourage new competition

Cannot be a long-term strategy

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Moderate pricing strategy

Adequate profit margin

Can meet competition and maintainmarket shares

Should be long-term strategy

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Pricing PracticesHigher Home Market Prices

Justified by:

Lower labor or raw material cost in the internationalmarket

Strong local competition in the international market

Lower buying power of host-country consumers

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

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Different prices in different

distribution channels

in €

Source: Presentation Zinocker, Simon, Kucher & Partner, dec.2006. 24



Initiating and responding to pricechanges

Initiating price cutsimplies the risk of

•Low quality trap

•Cost inflation•Over demand

•Reduction of discounts

Reactions to competitors’

price changes

•Maintain price

•Maintain price and addvalue

•Reduce price

•Increase price and

improve quality

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How to fight a price war?NONPRICE RESPONSES

Reveal your strategiccapabilities and intentions

Offer to match competitors’ prices, offer everyday lowpricing, or reveal your cost advantage.

Compete on quality Increase product differentiation by adding features to aproduct, or build awareness of existing features andtheir benefits. Emphasize the performance risks in low-priced options.

Co-opt contributors Form strategic partnerships by offering cooperative orexclusive deals with suppliers, resellers, or providers ofrelated services.

PRICE RESPONSES

Use complex price actions Offer bundled prices, two-part pricing, quantitydiscounts, price promotions, or loyalty programs forproducts.

Introduce new products Introduce flanking brands that compete in customersegments that are being challenged by competitors.

Deploy simple price actions Adjust the product’s regular price in response to a

competitor’s price change or another potential entry into

the market.

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Export Pricing Methods of Manufacturer

Marginal Cost Pricing Method

Assumes that indirect fixed costs are fully recoveredfrom domestic sales

Cost for manufacturing additional unit for export andexporting cost

Includes direct cost of material, labor onlyGeneral & Administrative expenses not included

Cost-plus pricing method

Adding exporting costs to domestic production cost

Include G & A expenses Too high to compete in international market

U.S. manufacturers should convert cost-plus pricingto marginal cost pricing method in determining anexport price

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International pricing

frameworkFirm-level factors

Environmentalfactors

Product factors Market factors

Firm performance

Otherelements

Pricing strategies

Terms

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Factors Affecting International Pricing

InflationExchange

RateFluctuations

ParallelImports

PriceEscalation

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Factors Affecting International Pricing

Inflation Eliminates consumer’s purchasing power Delayed payment will erode profit

Strategy

Careful price quotations and supply contracts Increase brand value Retain and win trust of customers

Exchange Rate Fluctuations

Strategy Review entire operation system Adjust cost structure Increase brand value Check mode of operation in foreign markets

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Strategies Under Varying Currency Conditions

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Global Pricing and Currency Movements

Given sometimes dramatic exchange rate movements, setting prices in afloating exchange rate world poses a tremendous challenge.

How much of an exchange rate gain (loss) should be passed through our

customers?

Customer’s price sensitivity amount of competition in the export market

In what currency should we quote our prices?

Depends on the balance of power between supplier and the customer

Some companies adopt a single currency

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Parallel Imports Distributors in one country sell in another country Not illegal Overstocking Distributor bankrupt Exclusive distributors, luxury products, upscale retailers,

margin

Drugs/medicine Canada USA

Strategy Self-certify the product!

Language, packaging For sale in specific country only Warranty/repair not transferable between countries

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Price Escalation

To cover the incremental costs (shipping, insurance, tariffs, etc),the final foreign retail price will often be much higher than thedomestic retail price. This is known as price escalation.

A direct result of products moving across borders Manufacturers Importers Distributor Jobber

Consumer Import duty , VAT, GST

Operating costs

Additional transportation costs Two distributors: high lot and low lot Insurance, packaging, country of origin, other admin. costs

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Pricing in Inflationary Environments

There are several alternative ways to safeguard against inflation

Modify components, ingredients, parts and/or – packagingmaterials

Source materials form low-cost suppliers Shorten credit terms

Include escalator clauses in long-term contracts

Quote Prices in a stable currency

Pursue rapid inventory turnovers

Draw lessons from other countries

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Transfer pricing

Price of goods transferred between a company’s units in

different countries.

Benefits of transfer price manipulation:

Lower tariffs due to low transfer price.

Reduce income in high tax regions due to high transferprice.

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Transfer Pricing

Home Country Foreign Country

Taxes Taxes

Tariffs

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Bases for transfer pricing

At cost

set at a the level of production cost, subsidiary makesprofit

Arms lengthcharged the same price as any other buyer, parentmakes profit

Cost Plus

profits split between parent and subsidiary

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Anti dumping regulation

Dumping : imports are being sold at an “unfair”price

Protectionism

To minimize risk exposure to antidumping actions,exporters might pursue any of these strategies:

Trading-up (low-value to high-value products)

Service Enhancement: differentiate your product by

adding support services to the core product Distribution and Communication: strategic alliances

Set up units in foreign country

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Price Coordination

When developing a global pricing strategy, one of thethorniest issues is how much coordination should existbetween prices charged in different countries

Nature of customers: With global customers pricecoordination is must. For ex. In Europe, Microsoft setsprices that differ by not more than 5% between countries

Amount of product differentiation: less differentiation , thelarger the need for price coordination.

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Nature of Channels: distribution channels can be viewedas intermediate customers.

Nature of competition: Global competition demands acohesive strategic approach for the entire marketing mixstrategy, including pricing.

Government regulation

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Countertrade

Countertrade is an umbrella term used to describe

unconventional trade-financing transactions that involve some

form of noncash compensation.

Barter: Exchange of goods or services

Switch trading: Practice in which one company sells to another itsobligation to make a purchase in a given country

Counter purchase: Sale of goods and services to a country by acompany that promises to make a future purchase of a specificproduct from the country

Buyback: occurs when a firm builds a plant in a country - or suppliestechnology, equipment, training, or other services to the country andagrees to take a certain percentage of the plant's output as partialpayment for the contract

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Motives Behind Countertrade

Gain access to new or difficult markets

Overcome exchange rate controls or lack of hard currency

Overcome low country credit worthiness

Increase sales volume Generate long-term customer goodwill

Shortcomings of Countertrade

No in-house use for goods offered by customers

Timely and costly negotiations

Uncertainty and lack of information on future prices

Transaction costs

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Pricing for International Marketing