International Pricing Decision

MEANING
 In any country, three basic factors determine the boundaries within which market
prices should be set.
 The first is product cost, which establishes a price floor, or minimum price. Although
it sis certainly possible to price a product below the cost boundary, few firms can
afford to do this for extended period of time.
 The second competitive prices for comparable products create a price ceiling or
upper boundary.
 International competition almost always puts pressure on the prices of domestic
companies. A wide spread effect of international trade is to lower prices.
 Indeed, on to the major benefit of to a country of international business is the
favorable impact of international competition on national price level, and in turn on a
country’s rate of inflation.
 Between lower and upper boundaries for every product there is an optimum price,
which is a function of the demand for the product as determined by the willingness
and ability of customer to buy.
 Sometimes the optimum price can be affected by arbitrageurs, who exploit price
differences in different countries.
BASIC CONCEPT OF PRICING
1. Does the price Reflects the product’s quality?
2. Is the price competitive?
3. Should the market pursue market penetrations, Market Skimming, or some other
pricing objectives?
4. What kind of discounts (Trade, Cash, Quantity) allowances (advertising, trade-
off) should the firm offers its international customers?
5. Should pricing is differed by market segment?
6. What pricing options are available if the firms cost increase or decreases?
7. Are the prices likely to be viewed by the host-country government as reasonable
or exploitative?
8. Do the target country’s dumping laws pose a problem?
ENVIORNMENTAL INFLUENCES ON PRICING
1. Currency Fluctuations
 Fluctuating currency values are a fact of life in international business. The
marketer must decide what to do about this fact.
 Are price adjustments appropriate when currencies strengthen or waken?
 There are two extreme positions; one is to fix the price of products in county
target market. If this is done, any appropriation or depreciation of the value of the
currency in the country of production will lead to gain or losses for the seller.
 The other extreme position is to fix the price of products in home country
currency. If this is done, any appreciation or deprecation of the home-country
currency will result in price increases or decreases for customers with no
immediate consequences for the seller
 In practice, companies rarely assume either of this extreme position. Pricing
decisions should be consistent with the company’s overall business and marketing
 strategy: If the strategy is long term, then it makes no sense to give up market
share in order to maintain export margins.
 When currency fluctuations result in appreciation in the value of the currency of a
country that is an exporter, wise companies do two things: They accept that
currency fluctuations may unfavorably impact operating margins, and they double
their efforts to reduce costs.
2. Exchange rate Clauses
 Many sales are contracting to supply goods or services over time. When these
contracts are between parties in two countries, the problem of exchange rate
fluctuations and exchange risk is addressed.
 An exchange rate clause allows the buyers and seller to agree to supply and
purchase at fixed prices in each company’s national currency.
 If the exchange rate fluctuates within a specified range, say minimum 5%, the
fluctuations do not affect the pricing agreement that is spelled out in the exchange
rate clause. Small fluctuations in exchange rates are not a problem for most
buyers and sellers.
 Exchange rate clauses are designed to protect both the buyers and sellers from
unforeseen large swings in currencies.
 Purpose: To protect parties from unforeseen large swings in currencies.
 Exchange rate review is made quarterly to determine possible adjustments for the
next period.
 Comparison basis is the three-month daily average and the initial average.
 The basic design of an exchange rate clause is straightforward: Review exchange
rate periodically and compare the daily average during the review period and the
initial base average.
 If the comparison produces exchange rate fluctuations that are outside the agreed
range fluctuation, an adjustment is made to align prices with the new exchange
rate.
 If fluctuation is grater than some limit the parties agree to discuss and negotiate
new prices.
 The clause accepts the foreign exchange market’s effect on currency value, but
only if it is within the range of 5to10%.
 Anything less than 5% does not affect pricing, and any thing more than 10%
opens up a renegotiation of prices.
3. Pricing in an Inflationary Environment
 Inflation or persistent upward change in price levels is worldwide phenomenon.
 Inflation requires periodic price adjustment. These adjustments are necessitated
by rising costs that must be covered by increased selling prices.
 An essential requirement when pricing in an inflationary environment is the
maintenance of operating profit margin.
 Regardless of cost accounting practices, if a company maintains its margins, it has
effectively protected itself from the effects of inflation. To keep up with inflation
in Peru, for example, P&G has resorted to biweekly increases in detergent prices
of 20% to 30%.
4. Government Controls and Subsidies
 If government action limits the freedom of management to adjust prices the
maintenance of margins is definitely compromised.
 Under certain conditions, government action is a real threat to the profitability of
a subsidiary operation.
 In country that undergoing severe financial difficulties and is in the midst of a
financial crises, government officials are under pressure to take some type of
action.
 In some cases government will take expedient steps rather than getting at the
underlying causes of inflation and foreign exchange shortages.
 Such steps might include the use of broad or selective price controls. When
selective controls are imposed, foreign companies are more vulnerable to control
than local business, particularly if the outsiders lack the political influence over
government decision making by local mangers.
 Government control can also take the form of prior cash deposit requirements
imposed on importers. This is requirement that a company has to tie up funds in
the form of a non-interest-bearing deposit for a specified period of time if it
wishes to import products.
 Such requirements clearly create an incentive for a company to minimize the price
of the imported product; lower prices mean smaller deposits.
 Other government requirements that affect the pricing decision are profit transfer
rules that restrict the conditions under which profits can be transferred out of a
company.
 Under such rules, a high transfer price paid fro imported goods by an affiliated
company can be interpreted as device fro transferring profits out of a country.
 Government subsidies can also force a company to make strategic use of sourcing
to be price competitive.
5. Competitive Behavior
 Pricing decision is bounded not only by cost and the nature of demand but also by
competitive action.
 If competitors do not adjust their price in response to rising costs, management-
even if acutely aware of the effect of rising costs on operating on operating
margins-will be severely constrained in its ability to adjust prices accordingly.
 Conversely, if competitors are manufacturing sourcing in a lower cost country, it
may be necessary to cut prices to stay competitive
6. Price and Quality Relationships
 Is there a relationship between price and quality?
 Do you get what you pay for?
 The study says that, this is not surprising when one recognizes that consumer
make purchase decisions with limited information and rely more on product
appearance and style and less on technical quality as measured by testing
organizations.
Global Pricing Objectives and Strategies
1. Market Skimming
  The market skimming pricing strategy is a deliberate attempt to reach a market
segment that is willing to pay a premium price for product.
 The product must create high value for buyers. This pricing strategy often used in the
introductory phase of the PLC, when both production capacity and competition are
limited.
 By setting a deliberately high price, demand is limited to early adopters who are
willing and able to pay the price.
 One goal of this pricing strategy is t maximize revenue on limited volume and to
match demand to available supply.
 Another goal of market skimming pricing is to reinforce customers’ perception of
high product value. When this is done, the price is part of the total product
positioning strategy.
2. Penetration Pricing
 Penetrating pricing uses pricing as a competitive weapon to gain market position.
The majority of companies using this type of pricing in international marketing are
located in the Pacific Rim.
 Scale-efficient plants and low cost labor allow these companies to blitz the market.
 It should be noted that a first-time exporter is unlikely to use penetration pricing. The
reason is simple: Penetration pricing often means that the product may be sold at a
loss for a certain length of time.
 Companies that are new to exporting cannot absorb such losses. They are not likely
to have the marketing system in place that allows global companies such as Sony to
make effective use of penetration pricing to achieve market saturation before the
product is copied by competitors.
3. Market Holding
 This strategy is frequently adopted by companies that want to maintain their share of
the market.
 In single-country marketing, this strategy often involves reacting to price
adjustments by competitors.
 For example, when one airline announces special bargain fares, most competing
carriers must match the offer or risk losing passengers.
 This strategy dictates that source country currency appreciation will not be
automatically passed on in the form of higher prices.
 If the competitive situation in market countries is price sensitive, manufacturer must
absorb the cost of currency appreciation by accepting lower margins in order to
maintain competitive prices in country markets.
 A strong home currency and rising cost s in the home country may also force a
company to shift its sourcing to in-country or third-country licensing agreements,
rather than exporting from the home country, to maintain market share.
 When currency of a country weakens, it becomes more difficult to compete on price
with imported products. However, a weak-currency country can be a windfall for a
global company with production operation in weak currency country.
4. Cost Plus/Price Escalation
 Companies new to exporting frequently use a strategy known as cost-plus pricing to
gain a grip in global marketplace.
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