I n t e r n a t i o n a l M a r k e t i n g I n t e r n a t i o n a l M a r k e t i n g

Pricing for

International Markets

Chapter 18

1 4 t h E d i t i o nP h i l i p R. C a t e o r a

M a r y C. G i l l yJ o h n L . G r a h a m

McGraw-Hill/IrwinInternational Marketing 14/e

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

18-2

What Should You Learn?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

18-3

Global Perspective –the Price War

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

18-4

Pricing PolicyPricing Objectives

Pricing PolicyPricing 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

18-5

Pricing PolicyParallel ImportsPricing 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

.

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How Gray-Market Goods End Up in U.S. Stores

How Gray-Market Goods End Up in U.S. Stores

Exhibit 18.1

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Approaches to International PricingApproaches 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

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• 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

Full-Cost Versus Variable-Cost Pricing

Full-Cost Versus Variable-Cost Pricing

18-9

Skimming Versus Penetration PricingSkimming 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

18-10

Price EscalationPrice 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

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Price EscalationPrice 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

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Price EscalationPrice 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

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Sample Causes and Effects of Price Escalation

Sample Causes and Effects of Price Escalation

Exhibit 18.2

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Approaches to Lessening Price Escalation

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

18-15

Approaches to Lessening Price Escalation

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

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How Are Foreign Trade Zones Used?How Are Foreign

Trade Zones Used?Exhibit 18.3

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Leasing in International MarketsLeasing 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

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Leasing in International MarketsLeasing 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

18-19

Countertrade as a Pricing ToolCountertrade 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

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Countertrade as a Pricing ToolCountertrade as a Pricing Tool

• Types of countertrade

– Barter– Compensation deals– Counterpurchase or offset trade– Product buyback agreement

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Countertrade as a Pricing ToolCountertrade 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

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Transfer Pricing StrategyTransfer 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

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Transfer Pricing StrategyTransfer 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

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Price QuotationsPrice Quotations

• May include specific elements affecting the price

– Credit– Sales terms– Transportation– Currency– Type of documentation required

• Should define quantity and quality

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Administered PricingAdministered 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

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Administered PricingAdministered 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

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SummarySummary

• 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

18-28

SummarySummary

• 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