Pricing for International Markets

Chapter 14

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Learning Objectives

1. Components of pricing as competitive tools in international marketing

1. Components of pricing as competitive tools in international marketing

2. The pricing pitfalls directly related to international marketing

2. The pricing pitfalls directly related to international marketing

3. How to control pricing in parallel imports or gray markets

3. How to control pricing in parallel imports or gray markets

Chapter Learning Objectives

4. Price escalation and how to minimize its effect

4. Price escalation and how to minimize its effect

5. Countertrading and its place in international marketing practice

5. Countertrading and its place in international marketing practice

6. The mechanics of price quotations6. The mechanics of price quotations

Introduction• Pricing strategy forms another cornerstone of a global

marketing program–it represents one of the most critical and complex issues in global marketing (due to economic, financial, and mathematical implications)

• Price is the only marketing mix element that generates revenues. All other elements entail costs

• A company’s global pricing policy may make or break its overseas expansion efforts (due to foreign exchange complications)

• Firms also face significant challenges in coordinating (standardizing or adapting) their pricing strategies across various countries they operate in

1.Pricing Objectives

• In general, price decisions are viewed in two ways:

– Pricing as an active instrument of accomplishing marketing objectives, or

– Pricing as a static element in a business decision

• The more control a company has over the final selling price of a product, the better it is able to achieve its marketing goals

• The more control a company has over the final selling price of a product, the better it is able to achieve its marketing goals

• It is not always possible to control end prices• It is not always possible to control end prices

• Broader product lines and the larger the number of countries involved, the more complex the process of controlling prices charged to the end user

• Broader product lines and the larger the number of countries involved, the more complex the process of controlling prices charged to the end user

Parallel Importation or Gray Markets

• On account of competition, firms may have to charge different prices from country to country

• In international marketing, this causes a vexing problem: Parallel Importation or Gray Markets

• 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

• The possibility of a parallel market occurs whenever price differences are greater than the cost of transportation between two markets

Parallel Importation or Gray Markets

• For example, the ulcer drug Losec sells for only $18 in Spain but goes for $39 in Germany; and the heart drug Plavix costs $55 in France and sells for $79 in London

• Thus, it is possible for an intermediary to buy products in countries where it is less expensive and divert it to countries where the price is higher and make a profit

• Exclusive distribution, a practice often used by companies to maintain high retail margins encourage retailers to stock large assortments, or to maintain the exclusive-quality image of a product, can create a favorable condition for parallel importing

Effects of Parallel Importation

• Parallel imports can do long-term damage in the market for trademarked products

• Customers who unknowingly buy unauthorized imports have no assurance of the quality of the item they buy, of warranty support, or of authorized service or replacement parts

• If a product fails, the consumer blames the owner of the trademark, and the quality image of the product is sullied

• Companies can restrict the gray market by policing distribution channels

• In some countries firms get help from the legal system

2.Approaches to International Pricing

1. Full-Cost Pricing: no unit of a similar product is different from any other unit in terms of cost, which must bear its full share of the total fixed and variable cost.

• There are several approaches to pricing in international markets, which include:

• There are several approaches to pricing in international markets, which include:

2. Variable-Cost Pricing: firms regard foreign sales as bonus sales and assume that any return over their variable cost makes a contribution to net profit

• Prices are often set on a cost-plus basis, i.e., total costs plus a profit margin

• Prices are often set on a cost-plus basis, i.e., total costs plus a profit margin

• This is a practical approach to pricing when a company has high fixed costs and unused production capacity

• This is a practical approach to pricing when a company has high fixed costs and unused production capacity

Approaches to International Pricing

3. Skimming Pricing:  This is used to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for a product

4. Penetration Pricing: This is used to stimulate market growth and capture market share by deliberately offering products at low prices

• It is used to acquire and hold share of market

• It is used to acquire and hold share of market

3.Price Escalation

1. Costs of Exporting: the term relates to situations in which ultimate prices are raised by shipping costs, insurance, packing, tariffs, longer channels of distribution, larger middlemen margins, special taxes, administrative costs, and exchange rate fluctuations

• Price escalation refers to the added costs incurred as a result of exporting products from one country to another

• Price escalation refers to the added costs incurred as a result of exporting products from one country to another

There are several factors that lead to higher prices:There are several factors that lead to higher prices:

Price Escalation (contd ..)

2. Taxes, Tariffs, and Administrative Costs: These costs results in higher prices, which are generally passed on to the buyer of the product

3. Inflation: Inflation causes consumer prices to escalate and the consumer is faced with rising prices that eventually exclude many consumers from the market

Price Escalation (contd ..)

4. Middleman and Transportation Costs: Longer channel length, performance of marketing functions and higher margins may make it necessary to increase prices

5. Exchange Rate Fluctuations and Varying Currency Values: Currency values swing vis-à-vis other currencies on a daily basis, which may make it necessary to increase prices

Export Strategies Under Varying Currency Conditions

Stress, price benefits

Expand product line and add more costly features

Shift sourcing and manufacturing to domestic market

Exploit export opportunities in all markets

Conduct conventional cash-for-goods trade

Use full-costing approach, but use marginal-cost pricing to penetrate new/competitive markets

When Domestic Currency is WEAK...

Engage in nonprice 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 relatively strong-currency countries

Deal in countertrade with weak-currency countries

Trim profit margins and use marginal-cost pricing

When Domestic Currency is STRONG...

SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"Business Horizons, May-June 1988, figure 2, p. 58.

Export Strategies Under Varying Currency Conditions

SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"Business Horizons, May-June 1988, figure 2, p. 58.

Speed repatriation of foreign-earned income and collections

Minimize expenditures in local, host country currency

Buy needed services (advertising, insurance, transportation, etc.) in domestic market

Minimize local borrowing

Bill foreign customers in domestic currency

Keep the foreign-earned income in host country, slow collections

Maximize expenditures in local, host country currency

Buy needed services abroad and pay for them in local currencies

Borrow money needed for expansion in local market

Bill foreign customers in their own currency

When Domestic Currency is WEAK...

When Domestic Currency is STRONG...

4.Approaches to Lessening Price Escalation

Methods used to reduce costs and, thus, lower price escalation include:Methods used to reduce costs and, thus, lower price escalation include:

• Lowering Cost of Goods: Firms can lower costs by eliminating costly features in products or by manufacturing products in countries where labor costs are cheaper

• Lowering Tariffs: Firms can lower prices by categorizing products in classifications where the tariffs are lower

• Lowering Distribution Costs: Firms can design channels that are shorter, have fewer middlemen, and by reducing or eliminating middleman markup

• Using Foreign Trade Zones: Firms can manufacture products in free trade zones where the incentive offered is the elimination of local taxes, which keep prices down

5.Dumping

• One approach classifies international shipments as dumped if the products are sold below their cost of production

• The other approach characterizes dumping as selling goods in a foreign market below the price of the same goods in the home market

Economists define dumpingdifferently

Economists define dumpingdifferently

• World Trade Organization (WTO) rules allow for the imposition of a duty when goods are dumped

• A countervailing duty or minimum access volume (MAV), which restricts the amount a country will import, may be imposed on foreign goods benefiting from subsidies whether in production, export, or transportation

6.Leasing in International Markets

• Leasing opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash

• Leasing opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash

• Lease revenue tends to be more stable over a period of time than direct sales would be

• Lease revenue tends to be more stable over a period of time than direct sales would be

• Equipment leased and in use helps to sell other companies in that country

• Equipment leased and in use helps to sell other companies in that country

• Leasing can ease the problem of selling new,experimental equipment,because less risk is involved for the users.

• Leasing can ease the problem of selling new,experimental equipment,because less risk is involved for the users.

• Leasing helps guarantee better maintenance and service on overseas equipment

• Leasing helps guarantee better maintenance and service on overseas equipment

7.Countertrade as a Pricing Tool

1. Barter: is the direct exchange of goods between two parties in a transaction

2. Compensation deals: is the payment in goods and in cash

• Countertrade is a pricing tool that every international marketer must be ready to employ

• Countertrade is a pricing tool that every international marketer must be ready to employ

• There are four distinct transactions in countertrading, which include:

• There are four distinct transactions in countertrading, which include:

7.Countertrade as a Pricing Tool

3.Counter-purchase or off-set trade: the seller agrees to sell a product at a set price to a buyer and receives payment in cash and may also buy goods from the buyer for the total monetary amount involved in the first contract or for a set percentage of that amount, which will be marketed by the seller in its home market

4.Buy-back: This type of agreement is made the seller agrees to accept as partial payment a certain portion of the output that are produced from the plant or machinery that are sold to the buyer

Why Purchasers Impose Countertrade Obligations

• To Preserve Hard Currency

• To Improve Balance of Trade

• To Gain Access to New Markets

• To Upgrade Manufacturing Capabilities

• To Maintain Prices of Export Goods

• To Force Reinvestment of Proceeds

Proactive Countertrade Strategy

1. Is there a ready market for the goods bartered?

2. Is the quality of the goods offered consistent and acceptable?

3. Is an expert needed to handle the negotiations?

4. Is the contract price sufficient to cover the cost of barter and net the desired revenue?

Answering the following questions is suggested before entering into a countertrade agreement:

Answering the following questions is suggested before entering into a countertrade agreement:

8.Transfer Pricing Strategy

1. Sales at the local manufacturing cost plus a standard markup

2. Sales at the cost of the most efficient producer in the company plus a standard markup

3. Sales at negotiated prices

4. Arm’s-length sales using the same prices as quoted to independent customers

• Prices of goods transferred from a company’s operations or sales units in one country to its units elsewhere, which refers to intracompany pricing or transfer pricing, may be adjusted to enhance the ultimate profit of the company as a whole

• Prices of goods transferred from a company’s operations or sales units in one country to its units elsewhere, which refers to intracompany pricing or transfer pricing, may be adjusted to enhance the ultimate profit of the company as a whole

Four arrangements for pricing goods for intracompany transfer are as follows:

Four arrangements for pricing goods for intracompany transfer are as follows:

Benefits of Transfer Pricing Strategy

2. Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries

2. Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries

1. Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low

1. Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low

3. Facilitating dividend repatriation when dividend repatriation is curtailed by government policy by inflating prices of goods transferred

3. Facilitating dividend repatriation when dividend repatriation is curtailed by government policy by inflating prices of goods transferred

summary• 1.Pricing Objectives• 2.Approaches to International Pricing• 3.Price Escalation• 4.Approaches to Lessening Price

Escalation• 5.Dumping• 6.Leasing in International Markets• 7.Countertrade as a Pricing Tool• 8.Transfer Pricing Strategy