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Chapter 18 - Pricing for international markets. What you should learn from chapter 18: Components of pricing as competitive tools in international marketing, how to control pricing in parallel import or gray markets, price escalation and how to minimize its effect, countertrading and its place in international marketing practices, the mechanics of price quotations, the mechanics of getting paid.
International Marketi ng 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 McGrawHill/Irwin International Marketing 14/e Copyrightâ2009byTheMcGrawưHillCompanies,Inc.Allrightsreserved 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 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 ... problem for pharmaceutical companies • Exclusive distribution 1 8-5 How Gray-Market Goods End Up in U.S Stores Exhibit 18. 1 1 8-6 Approaches to International Pricing • Company policy relates to net price... considerations • Employ pricing as part of strategic mix – Market-oriented pricing factors 1 8-7 Full-Cost Versus Variable-Cost Pricing • Variable-cost pricing – Firm is concerned only with the marginal... country below the price of the same goods in the home market 1 8-1 5 How Are Foreign Trade Zones Used? Exhibit 18. 3 1 8-1 6 Leasing in International Markets • Selling technique that alleviates high