Chapter 11
Pricing Decisions
© 2005 Prentice Hall
11-1
managing
marketing
International Marketing Mix Decisions
Strategic 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
©2005 Dr.Gerard Ryan, Universitat Rovira i Virgili.
11-2
International Pricing Strategies
Company Internal
Factors
Analytic
Dimensions
DecisionMaking
Profitability
Transports Costs
Tariffs
Taxes
Production Costs
Channel Costs
Income Levels
Competition
Customers’ Culture
Environmental
Factors
Foreign Exchange
Rates
Inflation Rates
Price Controls
Regulations
Market-by-Market
Pricing
International
Pricing
Strategies
Uniform Pricing
Managerial
Issues
Financing International
Transaction
Source of Financing
Transfer Pricing
Foreign Currencies
Parallel Imports/Grey
Markets
Export Price Escalation
© 2005 Prentice
Hall Pricing Strategies
Global
DecisionMaking
Market Factors
Risks
Customer-Arranged vs.
Supplier-Arranged
Commercial Banks
Governments
Non-cash Transactions:
Counter-trading
11-3
Source: Jeannet & Hennessey,
2001
managing
marketing
International Marketing Mix Decisions
Strategic Alternatives in international and
global marketing mix decisions. Managerial issues
International Pricing comparisons
Prices for a
Volkswagen Golf*
BRITAIN
© 2005 Prentice Hall
©2005 Dr.Gerard Ryan, Universitat Rovira i Virgili.
$13,040
FINLAND
8,290
FRANCE
10,510
GERMANY
11,040
ITALY
10,690
11-4
Pricing Policy
A. 2 Pricing Objectives:
– 1. As an active means of attaining marketing
objectives
• Companies use this when trying to achieve certain
objectives, profit margins or targeted market share.
– 2. As a static element in a business decision
• Companies use this when they are in a foreign country
and marketing is not a priority
– Usually associated with trying to get rid of excess
inventories
•
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
Price Escalation
•
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:
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 (Cont.)
2.
3.
Taxes, Tariffs, and Administrative
Costs: These costs results in higher
prices, which are generally passed on to
the buyer of the product
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 (Cont.)
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
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
© 2005 Prentice Hall
11-9
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
© 2005 Prentice Hall
11-10
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
© 2005 Prentice Hall
11-11
Penetration Pricing and NonFinancial 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
© 2005 Prentice Hall
11-12
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
© 2005 Prentice Hall
11-13
Target Costing – 8 Questions
1. 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 hostcountry government as reasonable or exploitative?
8. Do the foreign country’s dumping laws pose a problem?
© 2005 Prentice Hall
11-14
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_%28
pricing_policy%29
© 2005 Prentice Hall
11-15
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
© 2005 Prentice Hall
11-16
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
© 2005 Prentice Hall
11-17
Environmental Influences on Pricing
Decisions
Currency Fluctuations
Inflationary Environment
Government Controls, Subsidies,
Regulations
Competitive Behavior
Sourcing
© 2005 Prentice Hall
11-19
Global Pricing: Three Policy
Alternatives
Extension
Adaptation
Geocentric
© 2005 Prentice Hall
11-20
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
© 2005 Prentice Hall
11-21
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
countries
To 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 high
Vertical 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 jurisdiction
Intra-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
© 2005 Prentice Hall
11-25
Countertrade as a Pricing Tool
•
Countertrade is a pricing tool that every international marketer must be ready to
employ
•
There are four distinct transactions in countertrading, which include:
1.
2.
3.
4.
Barter: is the direct exchange of goods between two parties in a transaction
Compensation deals: is the payment in goods and in cash
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
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
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
© 2005 Prentice Hall
11-27
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
Return
© 2005 Prentice Hall
11-28
Geocentric
Intermediate course of action
Recognizes that several factors are relevant
to pricing decision
–
–
–
–
Local costs
Income levels
Competition
Local marketing strategy
Return
© 2005 Prentice Hall
11-29
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
© 2005 Prentice Hall
11-30
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
Return
© 2005 Prentice Hall
11-31