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Learning objectives.

Components of pricing in International


marketing.
Pricing pitfalls directly related to International
marketing.
How to control pricing in parallel imports or grey
market.
Price escalation and how to minimize its effects.
Counter trading and its place in international
marketing practice.
The mechanics of price quotation.

Pricing policy.
The more company has control over the final selling price of the product the ,
better it is able to achieve its marketing objectives.
It is always not possible to control end price.

A. Pricing objectives. As an active means of


attaining marketing objectives.
Companies use this when trying to achieve certain
objectives, profit margin or targeted market share.

Pricing policy.
As a static element in a business decision.
Companies use this when their foreign marketing
is not a priority.
Usually associated with trying to get rid of excess
inventories.

B. Parallel Imports.
When a manufacturing country sells its product
to a specific country, and these products are
further sold to another unintended country.
Grey market situation can occur.

Pricing policy.
C. Exclusive Distribution.
Where manufacturers select preferred distributors
to sell its products at premium prices in order to
Maintain high profit margins, stock large
assortments, and to maintain the exclusive
quality image. They also contribute to parallel
imports.

Pricing policy
Approaches to International pricing.
Full cost v/s Variable cost.
Full cost is determined by combining total cost plus a
profit margin to every unit.
Every unit must bear the total cost including
international units sold.

Variable cost.
Variable cost is determined through the incremental
cost associated with producing goods for selling them
in international market. This can appear to be dumping.

Pricing policy
Approaches to International pricing.
Skimming v/s penetration pricing.
Skimming is used when market place is insensitive to
price. There fore premium price is charged.
Market places high value on items, because of its
unique feature, or no competition, or the product is
high on quality.
Penetration pricing is used to stimulate market growth,
therefore its prices are set low.

Price escalation.
Price escalation refers to added cost incurred
as a result of exporting, products, goods or
service from one country to another.
Several factors lead to high prices.

Price escalation.
1. Cost of Exporting.
Relates to situations in which
ultimate prices are raised by,
shipping costs, insurance,
packaging, longer channels of
distribution, larger middle man
margin, special taxes,
administrative costs and
exchange rate fluctuations.

Price escalation.
2. Taxes, Tariff and Administrative costs.

These costs results in higher price of the


product which is generally passed on to the
consumer.

3. Inflation. Inflation causes consumer

prices to escalate and consumer is faced


with rising prices that eventually excludes
many consumers from the market.

Price escalation.
4. Middle man and transportation costs.
Longer channel length, performance of
marketing functions and higher margins
may make it difficult to reduce prices.

5. Exchange Rate Fluctuations and Varying


Currency Values: Currency values swing
vis--vis other currency on a daily basis,
which make it necessary to increase
prices.

Price Escalation
The Lower Prices are at Home
New York

Paris

Tokyo

1.23

$ 7.07

$ 6.53

7.50

10.50

7.89

17.29

4.55

Levi 501 jeans

39.99

74.92

75.40

79.73

54.54

Ray-Ban sunglasses

45.00

88.50

81.23

134.49

89.39

Sony Walkman

59.95

74.98

86.00

211.34

110.00

Nike Air Jordans

125.00

134.99

157.71

172.91

154.24

Nikon camera

629.95

840.00

691.00

768.49

1,054.42

Madrid Stockholm Berlin

Rome

Aspirin
Movie

18-7

0.99

Los Angeles
Mariah Carey CD

Windows 98
Diapers

Irwin/McGraw-Hill

London
$

Mexico City
$

1.78

16.22

16.09

17.82

15.31

20.67

117.99

123.94

179.79

211.20

264.46

13.52

5.03

5.42

6.86

10.55

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.

Price escalation.
How to Lower the Effects of Price Escalation
1. Lower cost of goods through
Manufacturing overseas where labor costs are lower (China)
Eliminate features or product quality
Proctor Gambles strategy for selling toilet paper in Brazil

2. Lower tariffs through


Reclassification
Persuading foreign countrys government
Modification of product to fit in another class

3. Lower distribution costs through


Eliminate or reduction of middlemen
Especially where value-added taxes are imposed

Price escalation.
How to Lower the Effects of Price Escalation
4. Using Foreign Trade Zones
Imported goods stored or processed without imposing
tariffs or duties until items leave FTZ areas and is
imported into host country
FTZs can lower costs through:
Lower duties imposed
Lower labor costs in importing country
Lower ocean transportation costs with
unassembled goods (weight and volume are less)
Using local materials in final assembly

Pricing strategies.
Issues with different methods of pricing strategies:
1. Dumping
Defined as either products that are sold in international markets
below their production cost; or products priced lower in foreign
markets than sold in the companys domestic markets
WTO has set up penalties for dumping thru:
Countervailing duties
Minimum Access Volume (MAV)(restricts volume that can a
country can import)
2. Screwdriver Plants
Company sets up plants to assemble products in the importing
country where they sell the final products.

Pricing strategies.
3. Transfer Pricing Strategy
Intra-company transfer of pricing
4. Administered Pricing
Attempt by companies within same industry to set
prices in international markets
Cartels
OPEC
Shipping Industry
Diamond cartel controlled by DeBeers
5. Government Influenced Pricing

Counter trade as a pricing tool.


Countertrade is a pricing tool that every international
marketer must be ready to employ
There are four distinct transactions in countertrading, which
include:

Counter trade as a pricing tool.


1.
2.
3.

4.

Barter: is the direct exchange of goods between two parties


in a transaction
Compensation deals: is the payment in goods and in cash
Counter-purchase or off-set trade: the seller agrees to sell
a product at a set price to a buyer and receives payment in
cash and may also buy goods from the buyer for the total
monetary amount involved in the first contract or for a set
percentage of that amount, which will be marketed by the
seller in its home market
Buy-back: This type of agreement is made the seller agrees
to accept as partial payment a certain portion of the output
that are produced from the plant or machinery that are sold
to the buyer

Transfer pricing strategy.


Prices of goods transferred from a companys
operations or sales units in one country to its
units elsewhere, which refers to intra
company pricing or transfer pricing, may be
adjusted to enhance the ultimate profit of the
company as a whole

Transfer pricing strategy.


Four arrangements for pricing goods for intra company transfer
are as follows:
1.
2.

3.
4.

Sales at the local manufacturing


cost plus a standard markup
Sales at the cost of the most
efficient producer in the company
plus a standard markup
Sales at negotiated prices
Arms-length sales using the same
prices as quoted to independent
customers

Benefits of transfer pricing.


Lowering duty costs by shipping goods
into high-tariff countries at minimal
transfer prices so that duty base and
duty are low
Reducing income taxes in high-tax
countries by overpricing goods
transferred to units in such countries;
profits are eliminated and shifted to
low-tax countries
Facilitating dividend repatriation when
dividend repatriation is curtailed by
government policy by inflating prices of
goods transferred

Different prices in different


distribution channels

in
Source: Presentation Zinocker, Simon, Kucher & Partner, dec.2006.

Big mac index

Having trouble keeping track of currency


fluctuations?

The Economist tracks the average price of a


McDonalds Big Mac across the globe to give
you a feel for whether a currency is under- or
over-valued.

Role of price in marketing exchanges.


Customer
Money
Time
Cognitive Activity
Behavior effort

Producer
Production
Promotion
Distribution
Market research

Value

Profit

Price willing to pay

Price willing to sell.

International pricing framework


Firm-level factors

Environmental
factors

Product factors

Market factors

Pricing strategies

Other
elements

Terms
Firm performance
Source: Hollensen, Global marketing, 4e, 2008.

Internal factors affecting international


pricing decisions.
Firm level Factors.

Product level Factors.

1.
2.
3.
4.
5.
6.

1.
2.
3.
4.
5.

Corporate and marketing strategy.


Competitive strategy.
Firm positioning.
Product layout.
Production layout.
Market entry modes.

Stages in PLC.
Place in product line.
Most important product features.
Product positioning.
Product cost structure.

External factors affecting international


pricing decisions.
Environmental Factors.

1.

2.
3.
4.

Government influences and


constraints.
Inflation.
Currency fluctuations.
Business cycle stage.

Market Factors.

1.
2.
3.
4.

5.

Customers perceptions.
Customers ability to pay.
Nature of competition.
Competitors objectives,
strategies, strengths and
weaknesses.
Grey market appeal.

Special issues in international pricing .


1.
2.
3.
4.
5.
6.
7.

Price escalation
Skimming
Market pricing
Penetration pricing
Experience curve pricing
Bundle pricing
Transfer pricing

What influences the height


of international prices?
1. Currency.
2. International
commercial terms.
3. Financial terms.
4. Terms of payment.

Price escalation.
Is a price-related phenomenon caused by the
summation of all cost factors in the
distribution channel including ex-works price,
shipping costs, tariffs, and distributor markup.

Skimming.
A price strategy involved charging a high price at
the top end of the market with the objective
of achieving the highest possible contribution
in a short time.

Market pricing.
When a price strategy involves charging a final
price based on competitive prices.

Penetration pricing.
When a price strategy involves charging a low
price with the objective of achieving the
highest possible sales.

Experience curve pricing.


When price changes are based on the idea
that total unit costs of a product in real terms
can be reduced by a certain percentage with
each doubling of cumulative production.

Bundle pricing.
When price strategy is based on grouping
products and services in a system-solution
product in order to overcome possible
customer price concerns.

Global pricing contract.


When a customer requires one global price
per product from the supplier for all its foreign
SBUs and subsidiaries.

Transfer pricing.
When prices are charged for intra company
movement of goods and services. It may be
based on market price if the same service is to
be procured.

Different terms of payment.

Source: Hollensen, Global marketing, 4e, 2008.

The process for handling letters of credit

Source: Hollensen, Global marketing, 4e, 2008.

Export financing

Commercial banks
Export credit insurance
Factoring
Forfeiting
Bonding

Leasing
Counter-trade
Barter
Compensation deal
Buy-back agreement

Strategic alternatives in
international pricing

1. Standardization
2. Differentiation

1.
2.

Skimming
Penetration

Structural factors of standardized versus differentiated


pricing

Source: Hollensen, Global marketing, 4e, 2008.

Case study: Gillette


1. Evaluate the price-level of Gillettes Fusion
2. Discuss whether it is possible for Gillette to standardize pricing
across borders for their new 5-blade, Fusion.
3. Which factors would favour price standardization and which
factors would favour price differentiation?

Initiating and responding to price


changes
Initiating price cuts implies the risk of
Low quality trap
Fragile market share trap
Shallow pocket trap
Initiating price increases
Cost inflation
Anticipatory pricing
Over demand
Delayed quotation pricing
Escalator clauses
Unbundling
Reduction of discounts

Reactions to competitors price changes


Maintain price
Maintain price and add value
Reduce price
Increase price and improve quality
Launch a low-price fighter line

How to fight a price war?


NONPRICE RESPONSES
Reveal your strategic
capabilities and intentions

Offer to match competitors prices, offer everyday low


pricing, or reveal your cost advantage.

Compete on quality

Increase product differentiation by adding features to a


product, or build awareness of existing features and their
benefits. Emphasize the performance risks in low-priced
options.

Co-opt contributors

Form strategic partnerships by offering cooperative or


exclusive deals with suppliers, resellers, or providers of
related services.

PRICE RESPONSES
Use complex price actions

Offer bundled prices, two-part pricing, quantity discounts,


price promotions, or loyalty programs for products.

Introduce new products

Introduce flanking brands that compete in customer


segments that are being challenged by competitors.

Deploy simple price


actions

Adjust the products regular price in response to a


competitors price change or another potential entry into
the market.

Source: Rao, Bergen, Davis (2000). How to fight a price war, Harvard business review, pp. 107-116.

When do negotiations take place?


Small children
In private life (family & marriage)
As consumers
Business
Especially international business
Politics

Negotiating internationally
Cultural background of the negotiating parties is
different.
Thus, successful negotiations require:
Knowledge of the other partys culture
Respect
Flexibility
Some examples of cultural shocks when negotiating
from the Arab World, China etc.

Negotiating internationally
Gap analysis in a cross cultural negotiation

Importance of mastering Cross


Cultural Dimension.
We underestimate CCD
Mastering CCD as the most important step in internationalization
Cultural sensitivity as a precondition for good int. negotiations
Think like locals when in a local environment
Ignorance can impede transfer of knowledge in cross-cultural teams
Foreign knowledge accepted only when foreigners are emotionally
accepted
To master CCD, strengthen informal contacts before negotiations

Cross-cultural negotiations

Positions vs. interests

Positions are WHAT I say I want


Wants needs
Interests are WHY I want it, motivations and aspirations
Look behind positions for interests
Listening more important than talking
Paraphrasing
Ask WHY, WHY NOT, WHAT IS WRONG WITH
Put yourself in their shoes

Negotiating tactics

Extreme demands
Tactic of slices
Best offer tactic
Good guys, bad guys tactics

1. Western - individualistic

Problem-oriented
Linear thinking and problem solving
Ignore history, tradition and interpersonal relationships
Impatient.
Individualistic:
Protestant culture
Status achieved not inherited
Authority as a function of position and can be challenged

2. Eastern high context

What is not allowed in int. negotiations

Ethnocentrism
Stereotypes
Discussing religion, racial problems, local
politics
Violating racial or religious rules
Negotiation without an interpreter
Not knowing at all local language

Some suggestions for good negotiations

Be on time!
Prepare for negotiations!
Study the opponents negotiation style!
Try to negotiate at your place or a neutral place!
Never let the other side know when your deadline is or
that you are in a hurry!
Think strategic!
Mix and mingle!
Be considerate and sensitive to
other sides culture and rituals!
Be patient!