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Global Pricing
Outline
Pricing Basics Global Pricing Issues Countertrade
Competition
Demand
Pricing Basics
The Role of Costs
A cost-plus formula Price escalation: The added costs in exporting mean that export prices tend to escalate over the domestic prices.
The experience curve shows how unit costs go down as successively more units of a product are produced Experience curve pricing has been adopted primarily by companies entering an existing market in the maturity stage, because of the need to be competitive.
BREAKEVEN
ACCUMULATED PRODUCTION = q
Pricing Basics
Competition The premium price differential refers to the degree to which the firm might be granted a higher price by the market because of the particular strengths of its product. Because of competition, prices in foreign market are sometimes lower than at home, contrary to the price escalation effect.
Demand
The strength of demand tends to vary with the PLC stage, the growth stage typically showing strongest demand. Demand and supply: Whether or not price can be high in a strong demand market, is also determined by the supply from competitors.
PRICE ESCALATION
Price escalation refers to the variation/increase in price across countries or over time. Reasons include Cost of exporting Taxes, tariffs and administrative costs Inflation/deflation Exchange rate fluctuations Varying currency values Middlemen and transportation costs
Manufacturing net Transport, c.i.f. Tariff (20 percent c.i.f. value) Importer pays Importer margin when sold to wholesaler (25 percent) on cost Wholesaler pays landed cost Wholesaler margin (331/3 percent on cost) Retailer pays Retail margin (50 percent on cost) Retail price
Notes: a. All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable. b. The exhibit assumes that all domestic transportation costs are absorbed by the middleman. c. Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown. * Turnover Tax
SOURCE: Norihiki Shirouzu, Luxury Prices for U.S. Goods No Longer Pass Muster in Japan, Wall Street Journal, February 8, 1996, p. B1; and Elizabeth Fleick, The Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell about Prices, Time International, December 13, 1999, p. 38.
DUMPING
PRICE COORDINATION, GRAY TRADE SKIMMING VS. PENETRATION PRICING POLYCENTRIC PRICING, GEOCENTRIC PRICING, ETHNOCENTRIC PRICING
Skimming price
Skimming price
Economy
Economy
Brand C
Brand C
Brand B
Brand B
This is the PREFERENCE VECTOR. This shows that the market wants high performance AND high economy (strong quality/price ratio)
Financial Issues
EXCHANGE RATES firms must be wary of devaluations; exchange rate fluctuations affect the performance of local subsidiaries HEDGING purchasing insurance against losses because of currency fluctuations, firms make use of forward contracts or swaps GOVERNMENT INTERVENTION various nations introduce stabilizing measures into financial systems via selective price controls and price discrimination laws
Transfer Pricing
TRANSFER PRICE the price paid for products shipped between units of the same organization when the shipment crosses national borders so that the correct duties & related fees can be paid Transfer prices should reflect the prices the subsidiary might encounter in the open market, also known as arms length prices
Transfer prices are also used to shift resources within a firm to offset inflation in country subsidiaries, to support a subsidiarys local competitive position, and in other cases for profit repatriation. This has resulted in accounting firms developing strict guideline for the transfer pricing process.
Countertrade
COUNTERTRADE transactions in which all or part of the payment is made in kind rather than cash. Examples are as follows:
Barter Compensation Deals Counterpurchases The direct exchange of goods/services between trading partners Involve payment both in goods and in cash; the inclusion of some amount of cash makes the deal more attractive to the seller. The most typical version of countertrade; two contracts are negotiated, one to sell the product (which constitutes the initial agreement) at an agreed cash price, and one to buy goods from the purchaser at an amount equal to the amount in the initial transaction. May take two forms; 1) seller agrees to accept some amount of output as full or partial payment, 2) seller agrees to buy back some output at a later date. The seller contracts to invest in local production or procurement to partially offset the sale price.
Product Buy-backs
Offset Deals
Bundled?
Unbundled
No firm-specific advantages
Price taker
Price maker
Gray Trade
Gray trade is the sales of genuine branded goods through unauthorized channels. Gray trade involves shipments from overseas plants that enter a market via entry points not easily controlled. Examples include shipments from the Asian manufacturers who produce for Western companies and whose products can be diverted to ports in one country before entering the market country. Gray trade is acute in trade areas where barriers have been recently dismantled & exchange rates fluctuate, creating big arbitrage opportunities and consumer tourism.
Economic controls
Informal coordination
Low
Centralization
Formalization
Ethnocentric Pricing
Geocentric Pricing
Polycentric Pricing
DM
k
PY $
DM P k
POLYCENTRIC PRICING $ Y Local prices, in local currency PROS: locally adapted CONS: not coordinated, more gray trade
International Marketing
Promotion Decisions
In markets with media limitations the percentage of the promotional budget allocated to sales promotions may have to be increased Product sampling
International Advertising
1. Perform marketing research
Increased need for more sophisticated advertising strategies Balance between standardization of advertising themes and customization Consumer cultures
Regional Segmentation
Pan-European communications media highlights need for more standardized promotional efforts Costs savings with a common theme in uniform promotional packaging and design
It can never be assumed that if it sells well in one country, it will sell in another
Legal Constraints
Comparative advertising Advertising of specific products Control of advertising on television Accessibility to broadcast media Limitations on length and number of commercials Internet services
Linguistic Limitations
Language is one of the major barriers to effective communication through advertising Translation challenges Low literacy in many countries Multiple languages within a country In-country testing with the target consumer group avoids problems caused by linguistic differences
Cultural Diversity
Knowledge of cultural diversity must encompass the total advertising project Existing perceptions based on tradition and heritages are often hard to overcome
Subcultures
Changing traditions
Compensation
Commonly 15 percent throughout the world Some companies moving to reward-by-results
Self-regulation
Government regulations
Direct Marketing
DIRECT MARKETING: an interactive marketing system that uses one or more advertising media to effect a measurable response and/or transaction at any location.
MAIL ORDER catalogs, sales offers through snail mail TELEMARKETING phone calls from companies to households DIRECT RESPONSE TV (DRTV) TV commercials with phone numbers to let viewers call for purchases.
E-Commerce Pros
E-COMMERCE: buying & selling of goods/services online, a.k.a. online marketing; the online marketplace is naturally global
PROS
Easy
and convenient for the customer Creates a natural on-to-one relationship between buyer and seller Fosters customer loyalty and increases customer retention rates Helps the company focus on providing customer value Lowers costs for buyers and sellers from the pre-purchase stage to the post-purchase stage Facilitates price comparisons
E-Commerce Cons
CONS Can reach only a certain segment, those with desktops and Internet access Cannot provide the full tactile experience with the product or the personal interaction in services E-commerce needs good electronic communication links Customers are put off by computers and technology Perceived risks involved can be great Without credit cards, e-commerce would be unthinkable
The Internet makes it easy to compare prices and entry barriers are low for new entrants.
Technology is diffused rapidly so new entrants can access state-of-the-art technology. Cost pressures inside the corporations force the use of low-cost suppliers.
1. ATTENTION get the customer to listen to you 2. INTEREST get the customer interested in what you have to say 3. DESIRE get the customer to desire what you are selling 4. CONVICTION get the buyer convinced that the offer is a good deal 5. ACTION get the customers signature on the contract
In foreign markets, these stages are still valid but the salesperson needs to adapt these stages to the local culture.
GREAT PRODUCT
APPEARANCE ENTHUSIASM SELF-CONFIDENCE GREAT CLOSER OF
TRANSACTION