How to Set Price

The global manager must

develop systems and
Pricing Decisions policies that address
Price floor: minimum price
Price ceiling: maximum price
Global Marketing Optimum prices: function of
Chapter 11 demand
Must be consistent with
global opportunities and
constraints
Global Marketing - Schrage 11-2

Basic Pricing Concepts

Market Price Strategy
May make or break your
profitability
May not be able to use the same
strategy
Internationally as Domestically
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Global Marketing - Schrage
Law of One Price would prevail in a
truly global market
International trade helps keep
prices low and low prices keep
inflation in check
Global markets exist for certain
products—integrated circuits,
crude oil
National markets reflect costs,
regulation, demand, competition—
beer
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Global Marketing - Schrage

Global Pricing Objectives and Market Skimming and Financial

Strategies Objectives

Managers must determine the objectives Market skimming

for the pricing objectives Charging a premium
Unit sales price
Market share May occur at the
Return on investment introduction stage
of product life
They must then develop strategies to cycle
achieve those objectives Regain investment
Penetration pricing in R&D and product
Market skimming development faster
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1
Penetration Pricing and
Non-financial Objectives
Companion Products
Penetration pricing Products whose sale is
dependent upon the
Charging a low price in
sale of primary
order to penetrate
product
market quickly
Video games are
Appropriate to saturate dependent upon the sale
X-Box Game System and Sports
market prior to imitation Game of the game console
by competitors “If you make money on
Goal is to gain majority the blades, you can give
market share away the razors.”

1979 Sony Walkman

Global Marketing - Schrage 11-7 Global Marketing - Schrage 11-8

The Target-Costing Process Target Costing—Eight 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
Determine the segment(s) to be skimming, or some other pricing objective?
targeted 4. What type of discount (trade, cash, quantity) and
allowance (advertising, trade-off) should the firm offer
Compute overall target costs its international customers?
5. Should prices differ with market segment?
Allocate target costs to product’s 6. What pricing options are available if the firm’s costs
various functions increase or decrease? Is demand in the international
market elastic or inelastic?
Obey the cardinal rule 7. Are the firm’s prices likely to be viewed by the host-
country government as reasonable or exploitative?
8. Do the foreign country’s dumping laws pose a problem?

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Target Costing Target Costing

Cost-based pricing is based on an Rigid cost-plus pricing means that
analysis of internal and external cost companies set prices without regard
Firms using western cost accounting to the eight foundational pricing
principles use the full absorption cost considerations
method Flexible cost-plus pricing ensures that
Per-unit product costs are the sum of prices are competitive in the contest
all past or current direct and indirect of the particular market environment
manufacturing and overhead costs

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Terms of the Sale Terms of the Sale
Obtain export license if required There are 13 Incoterms set by the ICC
Obtain currency permit
Pack goods for export Incoterms
Transport goods to place of departure Ex-works—seller places goods at the disposal
of the buyer at the time specified in the
Prepare a land bill of lading contract; buyer takes delivery at the premises
Complete necessary customs export papers of the seller and bears all risks and expenses
from that point on.
Prepare customs or consular invoices
Delivery duty paid—seller agrees to deliver the
Arrange for ocean freight and preparation goods to the buyer at the place he or she names
Obtain marine insurance and certificate of in the country of import with all costs, including
the policy duties, paid.
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Environmental Influences on
Incoterms Pricing Decisions
FAS (free alongside ship) named port of
destination—seller places goods alongside the Currency fluctuations
vessel or other mode of transport and pays all
charges up to that point Inflationary environment
FOB (free on board)—seller’s responsibility does Government controls,
not end until goods have actually been placed
aboard ship subsidies, regulations
CIF (cost, insurance, freight) named port of
destination—risk of loss or damage of goods is Competitive behavior
transferred to buyer once goods have passed the
ship’s rail Sourcing
CFR (cost and freight)—seller is not responsible
at any point outside of factory

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Currency Fluctuations
U.S. Dollar versus Japanese
Yen

January 2000 January 2002 October 2008

$1 = ¥101 $1 = ¥130 $1 = ¥93
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 Foreign exchange Pressures
Pricing challenges IMPORTS EXPORTS

Stimulates DETERS
Currency exchange yInflationcontrolled yForeign products replace
ySome capital outflow domestic exports
fluctuations affect yBalance of Payments deficit
Strong yHome assets expensive
customer Currency yLower costs of production yUnderutilized domestic
purchasing power capability
yDomestic prices higher than
Use of a strong international prices
currency for DETERS Stimulates
pricing doesn’t Weak yHome assets cheap yBalance of payments surplus
Currency yStimulates inflations yDomestic products replace
eliminate the yDomestic costs of production foreign products
problem rise yFull capacity: export led boom
ySome capital inflow yAccumulation of wealth
Global Marketing - Schrage 11-19 ySales rise for import
Journal of Teaching in International Business, Vol. 6, 1995 20
11-20
JosephGlobal Marketing
W. Weiss - Schrage
and Alexander Zampieron WTP-11 Chris Schrage competing companies

Government Controls,
Inflationary Environment Subsidies, and Regulations
Defined as a persistent upward
change in price levels
Can be caused by an increase in the The types of policies and regulations
money supply that affect pricing decisions are
Can be caused by currency devaluation Dumping legislation
Essential requirement for pricing is Resale price maintenance legislation
the maintenance of operating margins Price ceilings
General reviews of price levels
Hyperinflation is a term used when
extremely rapid increases in costs
occur. 11-21 11-22
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Using Sourcing as a Strategic

Competitive Behavior Pricing Tool

If competitors do not adjust their Marketers of domestically manufactured

prices in response to rising costs, it is finished products may move to offshore
difficult to adjust your pricing to sourcing of certain components to keep
costs down and prices competitive.
maintain operating margins.
China is “the world’s workshop.”
If competitors are manufacturing or
Rationalize the distribution system—Toys
sourcing in a lower-cost country, it R Us bypasses traditional intermediaries in
may be necessary to cut prices to Japan to operate U.S.-style warehouse
stay competitive. stores.
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 Extension or Ethnocentric

Per-unit price of an item is the same

no matter where in the world the
buyer is located
Extensions Importer must absorb freight and
Adaption or import duties
or
Polycentric
Ethnocentric Fails to respond to each national
market

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Adaptation or Polycentric Geocentric

Intermediate course of action

Permits affiliate managers or
Recognizes that several factors are
independent distributors to establish
relevant to pricing decision
price as they feel is most desirable in
their circumstances Local costs
Income levels
Sensitive to market conditions but
Competition
creates potential for gray marketing
Local marketing strategy

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Gray Market Goods Gray Market Issues

Trademarked products are exported Dilution of exclusivity
from one country to another where Free riding
they are sold by unauthorized persons Damage to channel relationships
or organizations.
Undermining segmented pricing schemes
Occurs when product is in short
supply, when producers use skimming Reputation and legal liability
strategies in some markets, and when
goods are subject to substantial
markups
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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 U.S.
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
Global Marketing - Schrage
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
competitors within an industry that make
and market the same product conspire to
keep prices high
Vertical price fixing occurs when a
manufacturer conspires with
wholesalers/retailers to ensure certain
retail prices are maintained
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Transfer Pricing
Countertrade
Pricing of goods, services, and Countertrade occurs when payment is made
intangible property bought and sold in some form other than money
by operating units or divisions of a Options
company doing business with an Barter
affiliate in another jurisdiction Counter-purchase or parallel trading
Intra-corporate exchanges Offset
Cost-based transfer pricing Compensation trading or buyback
Market-based transfer pricing Switch trading
Negotiated transfer pricing
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Countertrade as a Share of World

Trade Value Why Countertrade?
50 49 Helps countries that don’t have
45
% sufficient foreign currency reserves.
40
35 However:
30
25 How do you determine value?
20
19
15 12
Difficulties in disposition of goods.
8
10
3
Costs of engagement.
5
0
1975 1985 1990 1992 2000 Est

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 Industrial Participation (IP)
Boeing Boeing Programs

145 countries
Reciprocal Business
Offset
Values
Leadership
Integrity Countertrade
Quality
Customer satisfaction

Indirect IP
People working together
A diverse and involved team
Direct IP
Good corporate citizenship
Work Packages
Enhancing shareholder value
Co-production
Mike Tom Imran

Export Development
Heckman Shields Alimohammed

Design/development

Technology Transfer
Core Competencies
Support
Detailed Customer knowledge and focus
Education & Training
Large-scale systems integration 11-38
Lean enterprise Global Marketing - Schrage

One of the best high

profile deals in the
public domain has
been Saudi oil for

Why IP Programs?
defence equipment.
Most small deals are
highly confidential
and never talked
about.
Barter
The Finns have
traded icebreakers to
the USSR in

Boeing involved exchange for oil.

Their pre-eminent
position today in
The least complex
Due to economical and
cruiseships may be
due, in part, to their
trading skill as well as
and oldest form of
their ability to build.

political pressures Customers demand- bilateral, non-

forcing lower defense monetary counter-
A toy manufacturer
wanted to sell his

To gain political and range to Eastern

budgets
Europe and agreed to

popular support for

take in part exchange
packaging and other
materials used in the
trade
IP may be the key expenditures
manufacturing
process
A direct exchange
discriminator in winning
Improve industrial Industrial boilers
of goods or services
contracts were sold to an

capacity & self- Eastern European

country where local
between two
Some countries now
assembly took

sufficiency place and payment

parties
was made by way

demand IP as a condition
of locally produced
footwear.

Establish the ability

of purchase
to evolve, maintain, Bartertrade,UK
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& modernize 11-39 www.bartertrade.co.uk
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