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International Marketing 14th Edition P h i l i p R. C a t e o r a M a r y C. G i l l y John L. Graham Pricing for International Markets Chapter 18 McGraw-Hill/Irwin International Marketing 14/e Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. What Should You Learn? • Components of pricing as competitive tools in international marketing • The pricing pitfalls directly related to international marketing • How to control pricing in parallel imports or gray markets • Price escalation and how to minimize its effect • Countertrading and its place in international marketing practices • The mechanics of price quotations 18-2 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 18-3 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 18-4 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 18-5 How Gray-Market Goods End Up in U.S. Stores Exhibit 18.1 18-6 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 18-7 Full-Cost Versus Variable-Cost Pricing • 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 18-8 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 18-9 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 another country – Administrative costs ► ► ► Include export and import licenses Other documents Physical arrangements for getting the product from port of entry to the buyer’s location 18-10 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 18-11 Price Escalation • Varying currency values – Changing values of a country’s currency relative to other currencies – Cost-plus pricing • Middleman and transportation costs – Channel diversity – Underdeveloped marketing and distribution channel infrastructures 18-12 Sample Causes and Effects of Price Escalation Exhibit 18.2 18-13 Approaches to Lessening Price Escalation • Lowering cost of goods – Manufacturing in a third country – Eliminating costly functional features – Lowering overall product quality • Lowering tariffs – Reclassifying products into a different, and lower customs classification – Modify product to qualify for a lower tariff rate within classification – Requiring assembly or further processing – Repackaging 18-14 Approaches to Lessening Price Escalation • Lowering distribution costs – Shorter channels – 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 18-15 How Are Foreign Trade Zones Used? Exhibit 18.3 18-16 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 for cash • Can ease the problems of selling new, experimental equipment – Because less risk is involved for the users 18-17 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 18-18 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 18-19 Countertrade as a Pricing Tool • Types of countertrade – – – – Barter Compensation deals Counterpurchase or offset trade Product buyback agreement 18-20 Countertrade as a Pricing Tool • Problems of countertrading – Determining the value of and potential demand for the goods offered – Barter houses • 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 18-21 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 18-22 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 18-23 Price Quotations • May include specific elements affecting the price – – – – – Credit Sales terms Transportation Currency Type of documentation required • Should define quantity and quality 18-24 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 Redistribute profits May take over entire selling function – Examples ► ► ► OPEC The Trans-Atlantic Conference Agreement De Beers 18-25 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 18-26 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 18-27 Summary • 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 – A shrewd sense of market strategy 18-28