Beruflich Dokumente
Kultur Dokumente
INTERNATIONAL
MARKETING
(5588)
MBA Executive
Pricing Issues in
International Marketing
ZAHID NAZIR
Roll # AB 523655
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PRICING - Introduction
Setting the right price is an important part of effective marketing. It is the only
part of the marketing mix that generates revenue (product, promotion and place
are all about marketing costs).
Price is also the marketing variable that can be changed most quickly, perhaps in
response to a competitor price change.
Put simply, price is the amount of money or goods for which a thing is bought or
sold.
The price of a product may be seen as a financial expression of the value of that
product.
Perceived benefits are often largely dependent on personal taste (e.g. spicy
versus sweet, or green versus blue). In order to obtain the maximum possible
value from the available market, businesses try to ‘segment’ the market – that is
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to divide up the market into groups of consumers whose preferences are broadly
similar – and to adapt their products to attract these customers.
For consumers, the PRICE of a product is the most obvious indicator of cost -
hence the need to get product pricing right.
Consider the factors affecting the demand for a product that are
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PRICING ISSUES IN INTERNATIONAL MARKETING
Introduction
Among the four marketing mix, product, distributing channels, promotion and
price, only price creates income and the other three generate costs. Price, besides
creating income, plays a major role as a strategic factor in developing competitive
advantage in the market. The amount of income and promotion of a company
regarding the positioning and finding a suitable position in the mind of customers
are related to suitable pricing. Decision making for pricing is not an easy task and
many factors are affecting in this decision. The reason for some companies which
are not so active for export pricing is that they have a good sale in internal market
because of their product character which has good internal market or in some
countries due to limiting import regulation. These companies are worried about
heir global competitive positions too, and need a prescription for their future
activity because they also feel that in the global marketing acting ethnocentric will
not be enough. Two main factors for this company to be considered are internal
market condition and the amount of authority granted to export managers for
declaring price to different customers. Below we will discuss kind of factors
affecting pricing and kinds of pricing and demonstrate a model which could be
important in export pricing for the global marketing pricing by considering the
amount of authority for pricing and the conditions of internal market.
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LITERATURE REVIEW
Any pricing system should address price floor, price ceiling and optimum prices in
each of national market in which the company operates. The pricing
consideration for marketing outside the home countries are the reflection of
quality in price, competitiveness, the kind of pricing objective i.e. penetration,
skimming holding, the type of discount, market segmentation, the pricing option
in case of costs increase or decrease, the logicalness of price by the host- country,
and its laws and the probable dumping.
Market Skimming
Penetration Pricing
Market Holding
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which is used mostly in recent years. Cost –plus pricing requires adding up all
costs required to get the product to destination, plus shipping and ancillary
charges, and a profit percentage. It is relatively easy to arrive at a quote,
assuming that accounting costs are available. This approach, however, ignores
demand and competitive conditions in target market. Therefore this approach is
either too high or too low in the light of market and competitive conditions.
Novice exporters do not care because they react to the market opportunities
rather than having proactive seeking for them. Price escalation is the increase in a
product’s price as transportation, duty, and distributor margins are added to the
factory price. Beginning exporters might use this approach to determine the CIF
price plus any inland charges as duty, inland transportation, distributor margins
etc.
There are several options when addressing the problem of price escalation
described earlier. Domestic manufacturers may be forced to switch to lower
income, lower wages countries for the sourcing of certain components or even
finished goods to keep costs and prices competitive. Some people believe low
wage approach a one- time advantage, and cannot be substitute for ongoing
creativity which causes value. Another option is to source 100 percent of a
finished product offshore near the local markets. In this case the manufacturer
can enter into one of the arrangements such as licensing, joint venture, or a
technology transfer agreement. In this case the manufacturer has presence in the
market and high costs of home land and transportation will no longer be an issue.
Another option is a through audit of the distribution structure in the target
market. A rationalization of the distribution structure can substantially reduce the
total markups required to achieve distribution in international market.
Rationalization may include selecting new intermediaries, assigning new
responsibilities to old intermediaries, or establishing direct marketing operations.
Exporters also encounter to dumping, which is sale of an imported product at a
price lower than that normally charged in a domestic market or country of origin.
Many countries have their own policies against dumping but the main point is
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how to prove a company is dumping and the time it take to get the losses from
this action.
INTERNAL FACTORS
1. Marketing Objectives
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later tutorial, for now it is important to understand that all marketing
decisions, including price, work to help achieve company objectives.
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Maximize Profits – Older products that appeal to a market that is no longer
growing may have a company objective requiring the price be set at a level
that optimizes profits. This is often the case when the marketer has little
incentive to introduce improvements to the product (e.g., demand for
product is declining) and will continue to sell the same product at a price
premium for as long as some in the market is willing to buy.
2. Marketing Strategy
It should be noted that not all companies view price as a key selling feature.
Some firms, for example those seeking to be viewed as market leaders in
product quality, will deemphasize price and concentrate on a strategy that
highlights non-price benefits (e.g., quality, durability, service, etc.). Such
non-price competition can help the company avoid potential price wars
that often break out between competitive firms that follow a market share
objective and use price as a key selling feature.
3. Costs
For many for-profit companies, the starting point for setting a product’s price
is to first determine how much it will cost to get the product to their
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customers. Obviously, whatever price customers pay must exceed the cost of
producing a good or delivering a service otherwise the company will lose
money.
When analyzing cost, the marketer will consider all costs needed to get the
product to market including those associated with production, marketing,
distribution and company administration (e.g., office expense). These costs can
be divided into two main categories:
Fixed Costs - Also referred to as overhead costs, these represent costs the
marketing organization incurs that are not affected by level of production
or sales. For example, for a manufacturer of writing instruments that has
just built a new production facility, whether they produce one pen or one
million they will still need to pay the monthly mortgage for the building.
From the marketing side, fixed costs may also exist in the form of
expenditure for fielding a sales force, carrying out an advertising campaign
and paying a service to host the company’s website. These costs are fixed
because there is a level of commitment to spending that is largely not
affected by production or sales levels.
Variable Costs – These costs are directly associated with the production
and sales of products and, consequently, may change as the level of
production or sales changes. Typically variable costs are evaluated on a per-
unit basis since the cost is directly associated with individual items. Most
variable costs involve costs of items that are either components of the
product (e.g., parts, packaging) or are directly associated with creating the
product (e.g., electricity to run an assembly line). However, there are also
marketing variable costs such as coupons, which are likely to cost the
company more as sales increase (i.e., customers using the coupon).
Variable costs, especially for tangible products, tend to decline as more
units are produced. This is due to the producing company’s ability to
purchase product components for lower prices since component suppliers
often provide discounted pricing for large quantity purchases.
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Determining individual unit cost can be a complicated process. While variable
costs are often determined on a per-unit basis, applying fixed costs to individual
products is less straightforward. For example, if a company manufactures five
different products in one manufacturing plant how would it distribute the plant’s
fixed costs (e.g., mortgage, production workers’ cost) over the five products? In
general, a company will assign fixed cost to individual products if the company
can clearly associate the cost with the product, such as assigning the cost of
operating production machines based on how much time it takes to produce each
item. Alternatively, if it is too difficult to associate to specific products the
company may simply divide the total fixed cost by production of each item and
assign it on percentage basis.
EXTERNAL FACTORS
1. Elasticity of Demand
Understanding how price changes impact the market requires the marketer
have a firm understanding of the concept economists call elasticity of
demand, which relates to how purchase quantity changes as prices change.
Elasticity is evaluated under the assumption that no other changes are
being made (i.e., “all things being equal”) and only price is adjusted. The
logic is to see how price by itself will affect overall demand. Obviously, the
chance of nothing else changing in the market but the price of one product
is often unrealistic. For example, competitors may react to the marketer’s
price change by changing the price on their product. Despite this, elasticity
analysis does serve as a useful tool for estimating market reaction.
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Elastic Demand – Products are considered to exist in a market that exhibits
elastic demand when a certain percentage change in price results in a larger
and opposite percentage change in demand. For example, if the price of a
product increases (decreases) by 10%, the demand for the product is likely
to decline (rise) by greater than 10%.
Inelastic Demand – Products are considered to exist in an inelastic market
when a certain percentage change in price results in a smaller and opposite
percentage change in demand. For example, if the price of a product
increases (decreases) by 10%, the demand for the product is likely to
decline (rise) by less than 10%.
Unitary Demand – This demand occurs when a percentage change in price
results in an equal and opposite percentage change in demand. For
example, if the price of a product increases (decreases) by 10%, the
demand for the product is likely to decline (rise) by 10%.
For elastic markets – increasing price lowers total revenue while decreasing
price increases total revenue.
For inelastic markets – increasing price raises total revenue while
decreasing price lowers total revenue.
For unitary markets – there is no change in revenue when price is changed.
2. Customer Expectations
Possibly the most obvious external factors that influence price settings are
the expectations of customers and channel partners. As we discussed,
when it comes to making a purchase decision customers assess the overall
“value” of a product much more than they assess the price. When deciding
on a price marketers need to conduct customer research to determine
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what “price points” are acceptable. Pricing beyond these price points could
discourage customers from purchasing.
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pricing decisions. For instance, in highly competitive industries, such as
gasoline or airline travel, competitors may respond quickly to competitors’
price adjustments thus reducing the effect of such changes.
Related Product Pricing - Products that offer new ways for solving
customer needs may look to pricing of products that customers are
currently using even though these other products may not appear to be
direct competitors. For example, a marketer of a new online golf instruction
service that allows customers to access golf instruction via their computer
may look at prices charged by local golf professionals for in-person
instruction to gauge where to set their price. While on the surface online
golf instruction may not be a direct competitor to a golf instructor,
marketers for the online service can use the cost of in-person instruction as
a reference point for setting price.
Primary Product Pricing - As we discussed in the Product Decisions tutorial,
marketers may sell products viewed as complementary to a primary
product. For example, Bluetooth headsets are considered complementary
to the primary product cell phones. The pricing of complementary products
may be affected by pricing changes made to the primary product since
customers may compare the price for complementary products based on
the primary product price. For example, companies that sell accessory
products for the Apple iPod may do so at a cost that is only 10% of the
purchase price of the iPod. However, if Apple were to dramatically drop the
price, for instance by 50%, the accessory at its present price would now be
20% of the of iPod price. This may be perceived by the market as a doubling
of the accessory’s price. To maintain its perceived value the accessory
marketer may need to respond to the iPod price drop by also lowering the
price of the accessory.
4. Government Regulations
Marketers must be aware of regulations that impact how price is set in the
markets in which their products are sold. These regulations are primarily
government enacted meaning that there may be legal ramifications if the
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rules are not followed. Price regulations can come from any level of
government and vary widely in their requirements. For instance, in some
industries, government regulation may set price ceilings (how high price
may be set) while in other industries there may be price floors (how low
price may be set). Additional areas of potential regulation include:
deceptive pricing, price discrimination, predatory pricing and price fixing.
Finally, when selling beyond their home market, marketers must recognize
that local regulations may make pricing decisions different for each market.
This is particularly a concern when selling to international markets where
failure to consider regulations can lead to severe penalties. Consequently
marketers must have a clear understanding of regulations in each market
they serve.
1. Currency Fluctuation
When currency fluctuation occurs, there are two options for pricing: one is
to fix the price of products in country target market. In this case, any
appreciation or depreciation of the value of the currency in the country of
production will lead to gain or losses for the seller. The other option is to fix
the price of products in home country currency. If it is done, any
appreciation or depreciation of the home country currency will result in
price increases or decreases for customers and no immediate
consequences for the seller. In actual practice, a manufacturer and its
distributor may work together to maintain Market share in international
market. Either party, or both, may choose to take a lower profit
percentage. In the long term contracts, both parties agree an exchange rate
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clause, which allows them to agree to supply and purchase at fixed prices in
each company’s national currency. In this case if the exchange rate
fluctuate within a specified range, say plus or minus of five percent, the
agreed price will not be changed, but if more than that, say plus or minus of
ten percent, then new discussion or negotiation for adjusting the prices
should be opened.
2. Inflation
Inflation, or a persistent upward change in price levels, is a worldwide
phenomenon. Inflation requires periodic adjustments. These adjustments
are caused 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 margins. LIFO costing method is prescribed
by some practitioners under conditions of rising prices.
3. Government Control
Government control can also limit the freedom to adjust prices, and the
maintenance of margins should be compromised. In a country that is
undergoing severe financial difficulties and is in the midst of a financial
crisis (e.g., a foreign exchange shortage caused in part runaway inflation),
government officials are under pressure to take some type of action.
Governmental actions in the case of hard financial problems include use of
broad or selective price controls, prior cash deposit requirements for
imports, customs duties for imports, value added tariffs, proliferation of
rules and regulations, and subsidization. All of these controls are against
exporting pricing when a company wants to export products to an
importing country which is under control of the government. In fact the
more control rendered by a government the more difficult to enter in that
country market. In this case the availability of this market is not so suitable.
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The other fact is the study of relationship between quality and price.
Recent four country international study found that there is a weak relation
between price and quality. The authors concluded that the lack of strong
price- quality relationship appears to be an international phenomenon
(Faulds, 1994, 7:25). Consumers with limited information rely more on
product style and appearance and less on technical quality as measured by
testing organizations. Still some marketers believe that this relation is
strong and has the major role in product value. The recent following model
Created by a group of marketing lecturers from southern England based in
Chi Chester, described in http://marketingteacher.com (2007) shows strong
relationship between price and quality which offers four strategy of
economy, when the price and quality are both low, penetration, when the
price low yet the quality is high to get more market share or penetrate in a
new market, skimming, when the price is high but the quality is high and
the goods are not supplied by too many competitors, and premium, when
the price and quality are both high and there is a uniqueness about the
product or service.
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The knowledge of customer about the technology of new product and the
amount of his or her awareness can play a major role in pricing. As much as the
knowledge of a customer about the product is low, the producer can use this
margin to skim the market or get a better premium from this market.
TRANSFER PRICING
Transfer pricing refers the pricing of goods and services bought and sold by
operating units or divisions of a single company. In other word, transfer pricing
concerns intra corporate exchanges- transactions between buyers and sellers that
have the same corporate parent. For example Toyota subsidiaries sell to, and buy
from each other. This happens when the company expands and profit centers are
shaped in the corporate financial picture.
Some companies using cost- based approach may arrive at transfer prices that
reflect variable and fixed manufacturing costs only. Alternatively, transfer prices
may be based on full costs, including overhead costs from marketing, R&D, and
other functional areas. The way costs are defined may have an impact on tariffs
and duties sales to affiliates and subsidiaries by global companies. Cost plus
pricing is also based by costs but different approach. In this approach, profit must
be shown for any product or service at every stage of movement through the
corporate system. It may be set at certain percentage of fixed costs such as 15
percent of cost. It is unrelated to competitive and demand conditions but many
exporters use it.
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Market Based Transfer Pricing
Negotiated Prices
Corporate costs and profits are also affected by import duties. The higher the
duty rate, the more desirable is a low transfer price. The high duty creates an
increase to reduce transfer prices to minimize the customs duty.
The companies also may use three policies on worldwide pricing: extension /
ethnocentric, adaptation/poly centric and invention/ geocentric.
Extension / Ethnocentric
In the extension / ethnocentric policy, the price of an item is the same around the
world and the importer absorb freight an import duties. Empirically in this policy,
no information on competitive or market condition is required and does not
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respond to the every market neither it maximize the company profits in each
national market nor globally. Its only advantage is to simply entering a market if it
suit to their price which the exporter has no information about it.
Adaptation / Polycentric
In the adaptation / polycentric policy the exporter tries to match the price with
any individual local market. This policy, in practice, permits subsidiary or affiliate
manager to establish any price they feel is most desirable in their circumstances.
This policy may cause product arbitrage, because of different prices in different
location and enterprising business managers may use it and foster a grey market
for the company’s product. It may also weaken the corporate strategies of the
central company because all local market managers have the freedom to set the
price for their markets. Different prices for different places may have another
disadvantage, because it may send a signal to the rest of the world that is
contrary to company interests. A price move anywhere in the world is known
instantly all over the world specially by using the world wide webs in the internet
by companies which makes the customers aware of the competitive price
information.
Invention / Geocentric
The third and the best policy to international pricing is termed invention/
geocentric. Using this approach a company neither fixes a single price nor remains
apart from subsidiary price decisions, but instead strikes intermediate positions.
There are unique market factors, like local costs, income levels, competition, and
local marketing strategies that should be recognized in arriving at pricing
decisions. The reason we perceive it as the best policy is that local costs plus a
return on invested capital and personnel fix the price floor for the long term. This
approach lends itself to global competitive strategy. A global competitor will take
in to account global markets and global competitors in establishing prices. Prices
will support global strategy objectives rather than the objectives of maximizing
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performance in a single country. This policy forces the exporter to consider the
said aspects of any market globally and focusing the company’s strategy as well.
In the study of Samli and Jacobs (1994), for the pricing practices of U.S.
multinational firms, they concluded that 70 percent of the firms standardized
their prices, where as 30 percent used variable pricing in world market. They said,
it would appear that the companies should consider renewing the pricing policies.
CONCLUSION
Pricing is one the marketing mix and reflects costs and competitive factors. The
maximum absolute price for a product does not exist, yet for each market, the
price should be fixed concerning the customer attitude. The goal of most
marketing strategies is to determine a price which could be accountable for
customer perception. Meanwhile it should not cause too much costs for the
company. A company usually fixes prices regarding the value that a customer
concerns for the product, and covers costs and provide a profit margin.
References:
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