© 2005 Prentice Hall 11-1
Chapter 11 Pricing Decisions
Power Point By
Kristopher BlanchardNorth Central University
© 2005 Prentice Hall 11-2
managing marketing
from global headquarters
©2005 Dr.Gerard Ryan, Universitat Rovira i Virgili.
International Marketing Mix DecisionsStrategic 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 11-3
InternationalInternationalPricingPricing
StrategiesStrategies
AnalyticDimensions
Decision-Making
Decision-Making
Company InternalFactors
ProfitabilityTransports CostsTariffsTaxesProduction CostsChannel Costs
International Pricing StrategiesInternational Pricing Strategies
Market Factors
Income LevelsCompetition
Customers’ Culture
EnvironmentalFactors
Foreign Exchange RatesInflation RatesPrice ControlsRegulations
Market-by-MarketPricing Uniform Pricing
ManagerialIssues
Transfer PricingForeign CurrenciesParallel Imports/Grey MarketsExport Price EscalationGlobal Pricing Strategies
Financing InternationalTransaction
RisksCustomer-Arranged vs.Supplier-Arranged
Source of Financing
Commercial BanksGovernmentsNon-cash Transactions:Counter-trading
Source: Jeannet & Hennessey, 2001
© 2005 Prentice Hall 11-4
The Gaps that the Euro Could ClosePrices on selected goods and services (1998!)
The Gaps that the Euro Could ClosePrices 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 modelb Model 4504 in Spain, 2240 elsewherec Mercedes C-class without insurance
Cateora & Ghauri, International Marketing, European Edition, © 2000 McGraw-Hill
© 2005 Prentice Hall 11-5
managing marketing
from global headquarters
©2005 Dr.Gerard Ryan, Universitat Rovira i Virgili.
International Marketing Mix DecisionsStrategic Alternatives in international and
global marketing mix decisions. Managerial issues
Prices for a Volkswagen Golf*
BRITAIN $13,040
FINLAND 8,290
FRANCE 10,510
GERMANY 11,040
ITALY 10,690
International Pricing comparisons
© 2005 Prentice Hall 11-6
United States*** $2.54 2.54Argentina Peso2.50 2.50 0.98 1.00 -2Australia A$3.00 1.52 1.18 1.98 -40Brazil Real3.60 1.64 1.42 2.19 -35Britain £1.99 2.85 1.28** 1.43** 12Canada C$3.33 2.14 1.31 1.56 -16Chile Peso1260 2.10 496 601 -17China Yuan9.90 1.20 3.90 8.28 -53Czech Rep Koruna56.00 1.43 22.00 39.0 -44Denmark DKr24.75 2.93 9.74 8.46 15Euro 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 -18Hong Kong HK$10.70 1.37 4.21 7.80 -46Hungary Fo399 1.32 157 303 -48Indonesia Rupiah14700 1.35 5787 10855 -47Japan 294 2.38 116 124 -6Malaysia M$4.52 1.19 1.78 3.80 -53Mexico Peso21.9 2.36 8.62 9.29 -7New Zealand NZ$3.60 1.46 1.42 2.47 -43Philippines Peso 59.00 1.17 23.2 50.3 -54Poland Zloty5.90 1.46 2.32 4.03 -42Russia Rouble35.00 1.21 13.8 28.9 -52Singapore S$3.30 1.82 1.30 1.81 -28South Africa Rand9.70 1.19 3.82 8.13 -53South Korea Won3000 2.27 1181 1325 -11Sweden SKr24.0 2.33 9.45 10.28 -8Switzerland SFr6.30 3.65 2.48 1.73 44Taiwan NT$70.0 2.13 27.6 32.9 -16Thailand Baht55.0 1.21 21.7 45.5 -52
The Hamburger StandardThe Hamburger Standard Under (-)/ over (+) valuation Local Currency Dollars Implied PPP* Actual $ exchange against the of the dollar rate 17/04/01 dollar %
Under (-)/ over (+) valuation Local Currency Dollars Implied PPP* Actual $ exchange against the of the dollar rate 17/04/01 dollar %
© 2005 Prentice Hall 11-7
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
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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
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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
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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
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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
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Target Costing – 8 Questions1. 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 11-13
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_%28pricing_policy%29
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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
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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
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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.
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Environmental Influences on Pricing Decisions
Currency Fluctuations
Inflationary Environment
Government Controls, Subsidies, Regulations
Competitive Behavior
Sourcing
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Global Pricing: Three Policy Alternatives
Extension
Adaptation
Geocentric
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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
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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 countriesTo prove, both price discrimination and injury must be shown
© 2005 Prentice Hall 11-22
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 highVertical price fixing occurs when a manufacture conspires with wholesalers/retailers to ensure certain retail prices are maintained
© 2005 Prentice Hall 11-23
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 jurisdictionIntra-corporate exchanges– Cost-based transfer pricing– Market-based transfer pricing– Negotiated transfer pricing
© 2005 Prentice Hall 11-24
Countertrade
Countertrade occurs when payment is made in some form other than money
Options
– Barter
– Counter-purchase
– Offset
– Compensation trading
– Cooperation agreements
– Switch trading
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Barter
The least complex and oldest form of bilateral, non-monetary counter-trade
A direct exchange of goods or services between two parties
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Looking Ahead
Chapter 12 Global Marketing Channels and Physical Distribution
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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
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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
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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
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Geocentric
Intermediate course of action
Recognizes that several factors are relevant to pricing decision– Local costs– Income levels– Competition– Local marketing strategy
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Currency Fluctuations
Return
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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
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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
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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
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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
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Can you stay competitive while staying local?