Environment Influences on Pricing Decisions

Factors to consider Number of competitors Market shares, growth, and profitability of competitors Strengths and weaknesses of competitors Likely entry of new firms into the industry Degree of vertical integration of competitors Number of products sold by competitors Cost structure of competitors Historical reaction of competitors to price changes Going-rate pricing Pricing at competition Sealed-bid pricing Pricing below competition

Environmental Influences on Pricing Decisions

Currency Fluctuations Inflationary Environment Government Controls, Subsidies, Regulations Competitive Behavior Sourcing

2005 Prentice Hall

11-3

Global Pricing: Three Policy Alternatives

Extension Adaptation Geocentric

2005 Prentice Hall

11-4

Other Important Considerations in Pricing Decisions

Price Discrimination the practice of charging different customers different prices for the same product or service
Legal implications

Peak-Load Pricing the practice of charging a higher price for the same product or service when the demand for it approaches the physical limit of the capacity to produce that product or service
5

Environmental Influences on Pricing Decisions: Currency Fluctuations

1. 2. Exporting Weak Domestic Currency = Favorable Exchange Rate Strong Domestic Currency = Unfavorable Exchange Rate Market Holding Strategy Price Transparency

Currency Fluctuations

Return
2005 Prentice Hall 11-7

Inflationary Environment
Defined as a persistent upward change in price levels
Can be caused by an increase in the money supply Can be caused by currency devaluation

Essential requirement for pricing is the maintenance of operating margins

Return
2005 Prentice Hall 11-8

Environmental Influences on Pricing Decisions: Inflationary Environment

Russia: 1998
Defaulted on Foreign Debt Prices in stores rose 300%

Maintain Operating Margins

Price Adjustments Technologically Adept

Brazil: 1980s
Inflation 2,000 percent Shelf Pricing Inventory Mgmt Software Walmart
Zimbabwe: 2008 Inflation = 100,000% 25 million Zimbabwe Dollars = 1 US Dollar Above: 100 US Dollars exchanges for 20kg of local currency

 Inflation Deflation Inflation is defined as In contrast to the 'the rise in the general definition of inflation, price level of goods and deflation can be defined services in an as 'the fall in the economy'. During general price level of inflation, the purchasing good and services in an power of money economy'. The decreases, i.e., the real purchasing power of value of money money increases, i.e., decreases. A person the real value of money buys 'lesser' quantity of increases and an

Hungary went through the worst inflation ever recorded between the end of 1945 and July 1946. In 1944, the highest denomination was 1,000 peng. By the end of 1945, it was 10,000,000 peng. The highest denomination in mid-1946 was 100,000,000,000,000,000,000 peng. A special currency the adpeng or tax peng was created for tax and postal payments.[37] The value of the adpeng was adjusted each day, by radio announcement. On 1 January 1946 one adpeng equaled one peng. By late July, one adpeng equaled 2,000,000,000,000,000,000,000 or 21021 (2 sextillion) peng Start and End Date: Aug. 1945- Jul. 1946Peak Month and Rate of Inflation:Jul. 1946, 41.9 quintillion percent[40]

The Japanese government occupying the Philippines during the World War II issued fiat currencies for general circulation. The Japanesesponsored Second Philippine Republic government led by Jose P. Laurel at the same time outlawed possession of other currencies, most especially "guerilla money." The fiat money was dubbed "Mickey Mouse Money" because it is similar to play money and is next to worthless. Survivors of the war often tell tales of bringing suitcase or bayong (native bags made of woven coconut or buri leaf strips) overflowing with Japanese-issued bills. In the early times, 75 Mickey Mouse pesos could buy one duck egg.[44] In 1944, a box of matches cost more than 100 Mickey Mouse pesos.[45] In 1942, the highest denomination available was 10 pesos. Before the end of the war, because of inflation, the Japanese government was forced to issue 100, 500 and 1000 peso notes. Start and End Date: Jan. 1944- Dec. 1944Peak Month and Rate of Inflation: Jan. 1944, 60%[46]

 Hyperinflation in Zimbabwe was one of the few instances that resulted in the abandonment of the local currency. At independence in 1980, the Zimbabwe dollar (ZWD) was worth about USD 1.25. Afterwards, however, rampant inflation and the collapse of the economy severely devalued the currency. Start and End Date: Mar. 2007Mid-Nov. 2008Peak Month and Rate of Inflation:Mid-Nov. 2008, 7.96 billion percent[71]Examples of high inflation[edit]

Its no surprise that precious metals feature prominently in any discussion of high inflation; the value of paper money evaporates, but precious metals hold their value. Accordingly, investors should probably consider this sector.

Competitive Behavior
If competitors do not adjust their prices in response to rising costs it is difficult to adjust your pricing to maintain operating margins If competitors are manufacturing or sourcing I a lower-cost country, it may be necessary to cut prices to stay competitive

Return
2005 Prentice Hall 11-13

Government Controls, Subsidies and Regulation Controls

1. Pricing Controls Proctor & Gamble vs Venezuela late 1980s Raw materials increased P&G only allowed a small price increase Escrow Accounts / Cash Deposits Putting money in a non-interest account in order to import products. Engineering firm, Cintec Intl vs Egypt Requred to deposit $25k for special tools to repair an ancient mosque.

2.

Government Controls, Subsidies and Regulation Contd

Subsidies
Govt monetary assistance paid to a firm for support or to encourage an activity that, otherwise, may not take place. Can distort trade markets US has up to $300 million in subsidies for the US cotton market vs the EUs $3 million Allows US grown cotton to be sold for far cheaper

Regulations
Affects price by regulating trade and competition practices within a company. German prohibiting price competition made entry unattractive to foreign markets. US & Germany signed Open Skies agreement. Allows Lufthansa to fly more routes in the US and opened German skies for competition Leads to a drop in price of flights in Germany.

 President Aquino said on Sunday the government is finalizing a P2-billion inputs subsidy for farmers and fishermen as part of its efforts to provide relief for vulnerable sectors amid high oil prices.

Competitive Behavior
Pricing is bound by costs and demand as well as competition. Raise prices in response to rising cost.

Lowering prices to stay competitive.

Sevens/Diesel > $100 $30<

Levis 501 foreign label > $80

Wrangler = $20

Private Labels < $35

Competitive Behavior
If competitors do not adjust their prices in response to rising costs it is difficult to adjust your pricing to maintain operating margins If competitors are manufacturing or sourcing I a lower-cost country, it may be necessary to cut prices to stay competitive

Return
2005 Prentice Hall 11-18

Sourcing as Strategy
1. Outsourcing
China as the Worlds Workshop Cheap labor Backlash Nike, Lead Paint

2. Change in Distribution Structure

Fewer distribution points Direct marketing Toys R Us in Japan

Using Sourcing as a Strategic Pricing Tool

Marketers of domestically manufactured finished products may move to offshore sourcing of certain components to keep costs down and prices competitive
Return
2005 Prentice Hall 11-22

Can you stay competitive while staying local?

Global Pricing: 3 Policy Alternatives

Ethnocentric (Extension)
Unit pricing remains the same, regardless of location Importer absorbs freight and import duties Advantage because extremely simple Disadvantage because it des not respond well to competitive and market conditions of the target country Mercedes forced to abandon Ethnocentric policy when Lexus offered similar quality for $20k less

Extension
Ethnocentric Per-unit price of an item is the same no matter where in the world the buyer is located Importer must absorb freight and import duties Fails to respond to each national market

Return
2005 Prentice Hall 11-24

Global Pricing: 3 Policy Alternatives

Polycentric (Adaptation)
Subsidiary managers or distributors can set price for their market Allows more competitive pricing Reacts quickly to currency fluctuations and changes in the market Allows pricing to be influenced by per capita income Ikea uses this policy to have low competitive prices in the US vs high prices in Italy to compete in the luxury market.

Adaptation
Polycentric Permits affiliate managers or independent distributors to establish price as they feel is most desirable in their circumstances Sensitive to market conditions but creates potential for gray marketing

Return
2005 Prentice Hall 11-26

Global Pricing: 3 Policy Alternatives

Geocentric
Pricing determined by local factors such as local cost, income levels, competition and the local market strategy. Local income levels are the most critical criteria Profit margins have to be adjusted in order to set a price appropriate for the local income level. The highly customizable nature of the Geocentric policy is best suited to global competitive marketing.

Geocentric
Intermediate course of action Recognizes that several factors are relevant to pricing decision
Local costs Income levels Competition Local marketing strategy
Return
2005 Prentice Hall 11-28

Grey Market Goods

Trademarked goods exported from one country to another and then sold by unauthorized persons or organizations Parallel importing uses this tactic to take advantage of price differences between pricing in a firm utilizing polycentric policy. Apple is dealing with the iPhone grey market running rampant

Grey Market Goods

Consequences
Dilution of exclusivity Loss of sole distributorship Free riding If the manufacturer ignores complaints, retailers will quit pushing the product and cutback on customer service and education for the product Damage to channel relationships Manufacturer complaints and legal action Undermining segment pricing schemes Worldwide pricing strategy can be put off balance Reputation and liability Differences in quality can jeopardize a manufacturers reputation and dilute brand image.

Dumping
The sale of an imported product at a price lower than that normally charged in a domestic market or country of origin (GATT) GATT article IV allows countries to protect themselves from dumping Each country has their own definition and antidumping laws In the EU: European Commission In the US: US Commerce Department, International Trade Commission An unfair trade practice that results in injury, destruction, or prevention of the establishment of American industry

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 US 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
2005 Prentice Hall 11-32

Anti Dumping Laws - Example

Increasing US consumption From 5,000 to 1,900 fishers in FL

Today, 90% of shrimp consumption is imported Price dropped from $4.94 to $3.38 per lb in 3 years US Dept of Commerce imposed tariffs ranging from 26-350% on shrimp farms from Brazil, China, Ecuador, India, Thailand and Vietnam Legitimate???

Price Fixing
Two or more companies secretly set similar prices for their products in order to ensure high prices
Horizontal Price Fixing: Competitors that market and make the same product.
Vertical Price Fixing: Manufacturer conspires with channel members (wholesalers, retailers)
(1) establish or adhere to price discounts; (2) hold prices firm; (3) eliminate or reduce discounts; (4) adopt a standard formula for computing prices; (5) maintain certain price differentials between different types, sizes, or quantities of products; (6) adhere to a minimum fee or price schedule; (7) fix credit terms; or (8) not advertise prices.

A corporation or individual convicted of a Sherman Act violation may be ordered to make restitution to the victims for all overcharges. Victims of Price fixing conspiracies also may seek civil recovery of up to three times the amount of damages suffered

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 competitor within an industry that make and market the same product conspire to keep prices high Vertical price fixing occurs when a manufacture conspires with wholesalers/retailers to ensure certain retail prices are maintained

2005 Prentice Hall

11-35

Transfer Pricing
The pricing of goods, services, and intangible property bought and sold by operating units or divisions of the same company
Intercorporate exchanges
Market based transfer pricing Cost based transfer pricing Negotiated transfer pricing
US companies have about 23,000 overseas affiliates
25% of US exports represent transactions to one of those facilities

On one estimate, the total tax loss in the US from artificial transfer pricing was $53bn (in 2001)

Transfer Pricing
Pricing of goods, services, and intangible property bought and sold by operating units or divisions of a company doing business with an affiliate in another jurisdiction Intra-corporate exchanges/methods
Cost-based transfer pricing Market-based transfer pricing Negotiated transfer pricing

2005 Prentice Hall

11-37

Transfer pricing
Transfer Price is:
the internal price charged by one segment of a firm for a product or service supplied to another segment of the same firm
Such as:

Internal charge paid by final assembly division for components produced by other divisions Service fees to operating departments for telecommunications, maintenance, and services by support services departments

38

Effects of Transfer Prices

Performance measurement: Reallocate total company profits among business segments Influence decision making by purchasing, production, marketing, and investment managers Rewards and punishments: Compensation for divisional managers

Partitioning decision rights: Disputes over determining transfer prices

39

Countertrade
Countertrade occurs when payment is made in some form other than money Options Barter Counter-purchase Offset Compensation trading Cooperation agreements Switch trading

2005 Prentice Hall

11-41

Countertrade

Definition Direct exchange of goods and services

Example GE traded turbine generator with Romania against chemicals and metals

Barter

Countertrade

Counter Purchase Each delivery is paid for in

cash

Rockwell Intl sold a press to Zimbabwe for $8 million but had to buy $8 million ferrochrome and nickel

Offset

Importing government seeks Lockheed Martin Corp. sold F-16 The exchanging of goods or services that to recover hard currency Fighters to the United Arab Emirates for spentfor, in whole or $6.4 billion. with In returnother they invested $160 are paid part, million in UAE Offset Group goods or services Two separate contracts in which the supplier agrees to give for hard currency and on the other buys the output A third party steps into a countertrade an accepts to buy part of the goods or services Aluswiss built a plant in Egypt and agreed to buy back some of the aluminum as part of the compensation

Compensation Trading

Switch Trading

Switch traders or switch trading houses exist usually in Vienna, Amsterdam, Hamburg or London

International Pricing Strategies

Company Internal Factors Market Factors
Income Levels Competition Customers Culture

Environmental Factors
Foreign Exchange Rates Inflation Rates Price Controls Regulations

Analytic Dimensions

Profitability Transports Costs Tariffs Taxes Production Costs Channel Costs

DecisionMaking

Market-by-Market Pricing

International Pricing Strategies

Uniform Pricing

Managerial Issues

Financing International Transaction Risks Customer-Arranged vs. Supplier-Arranged

Source of Financing Commercial Banks Governments Non-cash Transactions: Counter-trading

11-43
Source: Jeannet & Hennessey, 2001

DecisionMaking

Transfer Pricing Foreign Currencies Parallel Imports/Grey Markets Export Price Escalation 2005 Prentice Hall Global Pricing Strategies

A General Pricing Model

McGraw-Hill/Irwin

2009 The McGraw-Hill Companies, All Rights Reserved

A General Pricing Model

Set Pricing Objectives
Pricing process begins with a clear statement of the pricing objectives Guide pricing strategy and should be designed to support overall marketing strategy Efforts to set prices must be coordinated with other functional areas

McGraw-Hill/Irwin

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A General Pricing Model

Evaluate Product Price Relationships
Priced relatively high Offers value in the form of high quality, special features, or prestige Priced at about average Offers value in the form of good quality for a reasonable price Priced relatively low Offers value in the form of acceptable quality at a low price Value pricing Setting prices so that targeted customers will perceive products to offer greater value than competitive offerings

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A General Pricing Model

Analyze Profit Potential
Quantity discounts Discounts for purchasing large number of units Promotional allowances Form of price reductions in exchange for the channel member performing various promotional activities Slotting allowances Payment to retailers to get them to stock items on their shelves

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A General Pricing Model

Set Initial Price Structure
Considers price to various channel members, as well as the recommended price to final consumers or organizational buyers

Change Price as Needed

Channel members may bargain for greater margins Competitors may lower their prices Costs may increase with inflation In the long term, price structures tend to increase for most products as production and marketing costs increase
McGraw-Hill/Irwin 2009 The McGraw-Hill Companies, All Rights Reserved

Eight Tips for Improving a Companys Pricing Strategy

Base pricing strategies on sound research in order to understand relevant price factors Continuously monitor pricing decisions because they often help define company image Remember that consumers have trouble recognizing subtle price differences Remember that consumers evaluate prices comparatively
They often use a sense of what they think the item should cost as a benchmark

McGraw-Hill/Irwin

2009 The McGraw-Hill Companies, All Rights Reserved

Eight Tips for Improving a Companys Pricing Strategy

Recognize that buyers typically have a range of acceptable prices defined by upper and lower limits Understand the importance of relative price to buyers the relationship between a price and your competitors price Understand the importance of price information and it effects on differentiating products within a product line Recognize that price elasticity vary it is easier to lose customers to price increases than gain them from price decreases
McGraw-Hill/Irwin 2009 The McGraw-Hill Companies, All Rights Reserved