International Marketing

Pricing for International Markets

teora & Ghauri, International Marketing, European Edition, 1999 McGraw-Hill

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Skimming vs Penetration Strategies in Marketing

Promotion
high low

high

Rapid-skimming strategy

Slow-skimming strategy

Price
low Rapid-penetration strategy Slow-penetration strategy

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Factors Influencing International Pricing

Pricing objective

Price escalation

Competition

International pricing

Pricing controls

Target customer

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Factors Influencing Price Escalation

Inflation Exchange rate fluctuations

Taxes, tariffs and administrative costs

Price escalation

Varying currency controls Middleman costs

Transportation costs

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Pricing Strategies Under Varying Currency Conditions

When domestic currency is weak ... Stress price benefits When domestic currency is strong ... Engage in non-price competition by improving quality, delivery and after-sales service Improve productivity and engage in vigorous cost reduction Shift sourcing and manufacturing overseas

Expand product line and add more costly features Shift sourcing and manufacturing to domestic market

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Pricing Strategies Under Varying Currency Conditions

When domestic currency is weak ... Exploit export opportunities in all markets Conduct conventional cash-forgoods trade Use full-costing approach, but use marginal-cost pricing to penetrate new/competitive markets When domestic currency is strong ... Give priority to exports to relatively strong-currency countries Deal in countertrade with weakcurrency countries Trim profit margins and use marginal-cost pricing

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Pricing Strategies Under Varying Currency Conditions

When domestic currency is weak ... Speed repatriation of foreignearned income and collections Minimize expenditures in local, host country currency Buy needed services (advertising, insurance, transportation, etc) in domestic market When domestic currency is strong ... Keep the foreign-earned income in host country, slow collections Maximize expenditures in local, host country currency Buy needed services abroad and pay for them in local currencies

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Pricing Strategies Under Varying Currency Conditions

When domestic currency is weak ... Minimize local borrowing When domestic currency is strong ... Borrow money needed for expansion in local market Bill foreign customers in their own currency

Bill foreign customers in domestic currency

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Sample Causes and Effects of Price Escalation

Consider four sample cases 1. Domestic manufacture and sale 2. Foreign sales assuming a wholesaler importing directly 3. Foreign sales assuming an importer is used 4. As 3 but with 10% cumulative turnover tax Assumptions a) Same channels are used in all examples b) Constant net price is received by the manufacturer c) All domestic transportation costs are absorbed by the various middlemen and reflected in their margins d) Foreign middlemen have the same margins as the domestic middlemen
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Sample Causes and Effects of Price Escalation

1 Domestic sales Manufacturing net Transport CIF Tariff (20% of CIF value) Importer pays Turnover tax (10%) Importer margin (25% on cost) Wholesaler pays landed cost Turnover tax (10%) 5.00 5.00 2 3 4 Wholesaler Importer Importer + importing turnover tax 5.00 1.10 1.22 7.32 2.44 9.76 4.88 14.64 5.00 1.10 1.22 7.32 1.83 9.15 3.05 12.20 6.10 18.30 5.00 1.10 1.22 7.32 0.73 1.83 9.88 0.99 3.29 14.16 1.42 7.08 22.66
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Wholesaler margin (33.3% on cost) 1.67 Retailer pays 6.67 Turnover tax (10%) Retail margin (50% on cost) Retail price 3.34 10.01

Prices on selected goods and services

1.5 litre bottle of Coca Cola Big Mac VW Golf GLa Unleaded petrol per litre Dry cleaning mans shirt Underground or bus ticket Pair of Levi 501 jeans Compaq Pressario computerb 1 day car rental c 1 hour of translation Belgium France Germany 2.05 1.05 1.89 2.86 13,553 0.93 3.68 1.32 71 1,316 154 89 3.08 16,317 1.03 4.67 1.20 83 1,348 110 104 2.67 13,999 0.87 2.43 2.10 81 917 103 78 Italy 1.65 2.48 17,056 0.94 2.75 0.83 69 1,208 243 55 Spain 1.14 2.38 17,356 0.73 2.92 0.82 70 1,267 113 39

The Gaps that the Euro Could Close

All prices in 1998 US$ a Two door model b Model 4504 in Spain, 2240 elsewhere c Mercedes C-class without insurance
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Parallel Importing
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The concept of parallel importing. Because of different prices that can exist in different country markets, a product sold in one country may be exported to another and undercut the prices charged in that country.

Parallel Importing
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Pricing is one of the most complicated decision areas encountered by international marketers. Rather than deal with one set of market conditions, one group of competitors, one set of cost factors etc, and one set of government regulations, international marketers must take all of these factors into account, not only for each country in which they are operating, but often for each market or market segment within an country.

Parallel Importing
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It should be noted that international marketing firms often use market orientated differential pricing. That is they charge different prices to different international markets according to demand, ability to pay, competition and the ability to separate markets. If the product or service in question is more or less the same then it is a form of price discrimination.

Parallel Importing
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This point about separation is especially important and should be emphasised. Markets need to be separated by geographic distance, agreement or by law otherwise it might be possible for traders to buy in the cheaper market and resell in the higher priced market and make a profit. This is easier to do for products than services for obvious reasons.

Parallel Importing
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Parallel importing is lucrative when wide margins exist between prices for the same products in different countries. Variations in the value of currencies between countries lead to conditions that make parallel importing profitable. Restricting supply in one market can push up prices and make parallel importing lucrative.

Parallel Importing
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Restrictions brought about by import quotas and high tariffs can lead to parallel imports and make imports attractive. Students should use specific examples of the above to illustrate the points made. Parallel imports (grey market) upset price levels and results from ineffective management of prices and lack of control of supplies.

Parallel Importing
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Firms charge different prices to different international markets according to demand, ability to pay, competition and the ability to separate markets. If the product or service in question is more or less the same then it is a form of price discrimination.

Parallel Importing
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This point about separation is especially important and should be emphasised. Markets need to be separated by geographic distance, agreement or by law otherwise it might be possible for traders to buy in the cheaper market and resell in the higher priced market and make a profit. This is easier to do for products than services for obvious reasons.

Parallel Importing
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Parallel importing is lucrative when wide margins exist between prices for the same products in different countries. Variations in the value of currencies between countries lead to conditions that make parallel importing profitable.

Parallel Importing
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Restricting supply in one market can push up prices and make parallel importing lucrative. Restrictions brought about by import quotas and high tariffs can lead to parallel imports and make imports attractive. Students should use specific examples of the above to illustrate the points made. Parallel imports (grey market) upset price levels and results from ineffective management of prices and lack of control of supplies.

Parallel Importing
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To solve problems of these kind companies can turn to the law to prevent the practice e.g. Levi Strauss and Tesco in the UK. However prevention is better than cure. Deliberate restriction of supply in one market (often done at Christmas by certain firms e.g. toys) should be avoided if parallel importing from else where is likely because of the black market demand.

Parallel Importing
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Generally companies should employ strong control systems especially the control of supply to cheaper priced markets as excess supply is the primary cause of the practice.

Parallel Importing
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Good students will comment on whether firms are really that bother about parallel importing. As long as they are selling their product many seem to turn a blind eye to the practice although they are officially against the practice.

Counter-trade as a form of pricing in international markets

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What is it? Counter-trade is a form of elaborate swap which enables trade to take place on a profitable basis for all of the parties involved without involving money or involving some money and some swap of the product or service involved. The swap scenarios are not straightforward in fact they can be sophisticated and complicated. Students need to know what counter-trades are and what are the main forms of counter-trade.

Counter-trading
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As we have seen from previous lectures, much of the world can be described as emerging or developing markets from an international marketing point of view. Many countries in the Second and Third world have firms that want to trade with the west and the rest of the world but various factors prevent them from doing so. Some countries do not have enough foreign exchange to finance trade. Some countries, such as Russia, have non convertible currencies that others find difficult to accept.

Importance of counter-trades
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Counter-trade transactions are on the increase. Some estimates put counter-trade as much as 30% of world trade. Hence a significant amount of international marketing transactions now involve some form of counter-trade agreement. This is especially so in the former communist countries. Also emerging markets where the availability of acceptable hard currency is poor.

Importance.continued
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The percentage of world-wide counter-trade transactions is predicted to increase dramatically over the next 20 years. Counter-trade is involved with 50% of all international trade with Eastern European and developing countries. Pricing in the international arena requires detailed knowledge and a wide range of pricing skills on the part of the marketing firm. A knowledge of counter-trade in all its manifestations should form a vital and intrinsic part of any training strategy covering international pricing.

Counter-trade pricing
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Some experts such as Sam Okoroafo suggest firms need a defined, pre prepared counter-trade strategy as an intrinsic part of overall marketing strategy. Many firms view the possibility of a counter-trade arrangement as a sort of afterthought. Many firms are caught by surprise when confronted with a countertrade proposal and seem ill prepared and confused.

Counter-trade pricing
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Majority of firms have what might be described as a reactive counter trade strategy. They resort to countertrade arrangements only as a last resort when they believe it is the only way they are going to make a sale. Even where firms are more proactive and include the possibility of counter-trade as part of their main stream marketing strategic optionsevidence suggests they use it to react to sales demand rather than using it as an aggressive marketing tool for expansion.

Successful Counter-trades
Successful counter-trade transactions means that the marketing firm must be able to: 1. Establish the market value of the goods involved. 2. Find a market for the bartered goods once received and realise the right price to make the counter-trade worthwhile. Many counter-trades are unprofitable because the marketing firm has not fulfilled one or both of the above criteria. Basically unsuccessful counter-trading is the result of poor planning.

Counter-trades
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Barter
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Compensation deals Counterpurchase Buy back

Proactive vs reactive strategies

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Barter
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The direct exchange of goods between two parties in a transaction. The seller must know the market conditions and the price that can be realistically realised for the items offered in counter-trade.

Compensation deals
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Involves payment in both goods and cash. Often the transaction involves a certain amount of the value in hard convertible currency and the rest in goods. An advantage of a compensation deal for the seller over a straight barter is that a proportion of the invoice value is in hard cash. The rest of the value can be realised when the bartered proportion of goods is sold. If the seller goes through an agent or other third party, in order to dispose of the bartered goods it can push the price of the deal up and make it unattractive.

Counter-purchase
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Sometimes known as offset-trades. Seller receives payment in cash but also signs a second contract to purchase a certain amount of goods from the buyer also in cash. This might be for exactly the same amount as the first deal therefore completely offsetting the cash handed over for the first transaction, or it might only be for a proportion of the value of the first transaction. The second contract takes place sometime after the first deal giving the original seller time to find a buyer for the goods contracted for the second deal. Often used when trading with economically weak countries.

Buy back agreements

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Made when the sale of goods and services can produce something else, for example machine tools or manufacturing plant. Seller often paid cash but also signs a contract to buy goods that have been produced by the buyer up to all or part of the value received in the initial deal. Goods may be produced on the machines etc. sold e.g. oil drilling equipment buy back oil. There are variations on this but this is the basic idea.

What you need to know!!!

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You should know the principles of counter-tradingcounter-trades include four distinct transactions: barter, compensation deals, counter purchase and buy-backs. You should appreciate that counter-trading is becoming increasingly important as a way of carrying out international marketing transactions. This is particularly so in the case of Western firms doing business with developing countries and communist and former communist countries. Counter-trading too important to be considered as an afterthought in the international marketers pricing tool kit.

Small firms lack marketing sophistication

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The literature would suggest that marketing sophistication in small firms is less than with larger firms (Cox, 1993). Robinson and Pearce (1984) conclude that many small firms view marketing as essentially operational. (Mendelson, 1991) states that marketing in small firms is often carried out, if at all, by 'top management' rather than specialists, resulting in an operational approach and are often restricted to the sales function.

Marketing largely intuitive in small firms Other writers including Chisnall, (1987) and Weinranch et al, (1991) have found that generally speaking small firms tend to suffer from inadequate marketing. Scase and Goffee (1980) concluded that marketing in smaller firms is largely intuitive in nature.

Importance of price
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Although price is of obvious importance in influencing the purchasing behaviour of customers, it appears to be treated very often as a 'residual' variable in the marketing mix of many smaller firms.

Simplistic approach
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Although a great deal of time and effort is often vested in the development of new products and services by the management of smaller firms, when it comes to price often a very simplistic, 'rule of thumb' methods, such as cost plus is adopted in the pricing of those products and services.

Price needs to be given more importance

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The likelihood that such a simplistic approach will result in an optimum or even satisfactory price is obviously very low. Price then is a crucial element in any firms competitive marketing strategy, although it would seem that pricing decisions in many cases are conducted in a somewhat arbitrary manner, and many managers seem to treat pricing as being of less significance than others factors (Shipley, 1981).

Managers find pricing decisions difficult.

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It might be that in general, managers do not price particularly well and find such decisions stressful to make (Tellis, 1986). In fact, there is evidence to support this in a survey conducted by Heyman, (1984) which indicated that pricing decisions were among the most stressful if not the most stressful decision making area for many managers (see also Lancaster and Massingham, 1993).

Pricing decisions can be difficult!!

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One of the reasons why pricing may be such a stressful area for marketing management, could be, at least in part, attributed to the fact that pricing involves a lot of uncertainty (Shaw, 1973). Pricing as we have said is a very important area but it is also a very complex area of decision making.

Approaches to price
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Accountants approach often cost plus based Economists approach where MR=MC, OK in theory but difficult to apply although marginal costing is used in many industries e.g. hotel industry. Marking approach take market conditions and the psychology of pricing into consideration Many smaller firms used the simplest methods. Especially cost plus methods. If they have an accountant on board then they might used marginal costing and marginal pricing

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Small Business
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Evidence from the literature that many small firms use some form of cost plus formula This is because it is simple and administratively convenient. It is also a little unimaginative and formulistic It is not very creative and entrepreneurial

Cost-oriented Pricing
Full Cost Pricing Direct Costs (per unit) 2 Fixed Costs 200,000 Expected Sales 100,000 Costs per Unit Direct Costs 2 Fixed Costs (200K/100K) 2 Full Costs 4 Mark-up (10%) 0.4 Price (costs + mark-up) 4.4 Direct (Marginal) Cost Pricing Costs are taken into account only when they are directly attributable to the production of a particular product. Fixed costs or overheads are not included in the marginal cost. Marginal cost for the example given: Fixed Costs 200,000 Expected Sales 100,000 Marginal Cost 2 Mark-up (10%) 0.2 Marginal Price 2.2

More sophisticated approaches

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Management in many small firms more sophisticated They understand the concept of break even May have had some training on say a business course May have bought books on the subject May have been given start your own business literature from the banks or other advisors.

Determining the break even point

Total revenue

Money ()

Break even point

Total cost Profits Total variable costs

Losses

Fixed costs

Units of Production

Demand and supply

q

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Even the management of smaller firms have an intuitive appreciation of the laws of demand and supply Many think the cheaper is better in that the cheaper you are the more you will sell and the more attractive your product or service will be to customers As you know this is not always the case Price is also a communication tool and the price you charge says something about your firm and the products and services you offer

The demand curve

Price
P1 P2

Q1

Q2

Quantity
2

Times of recession
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In times of economic slowdown firm often panic Small firms do not have a lot of capital to fall back on to weather the storm Forced to keep customers and full order book so that they can continue to raise credit from the bank Have a payroll to meet Have to keep income coming in at almost any price so to speak Often revert to pricing methods that do not make rational business sense May make sense to the small firm.

Crisis Pricing defined

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Crisis pricing has two components, the first concerns the actual decision and the second the form that decision takes. Crisis pricing is where a firm will price so low that it is at best likely to make zero net margins and probably a negative net margin.

New product launch strategy

Promotion
High Low
Slow skimming

High

Rapid skimming

Price
Low
Rapid penetration Slow penetration

Adoption of innovations by segments: calculators

Sales

S4 Schoolchildren S3 General public S2 Commercial

S1 Engineer/scientists

Time
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Other marketing orientated pricing

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Small firms should not just concentrate on price Should use price as a communications tool Price quality relationship Try to be more creative Try and be more entrepreneurial Many other marketing orientated pricing method they can use

Marketing orientated pricing methods.

q q q q q q q q q

Charm pricing Price lining Second degree price discrimination Loss leader Promotional pricing Strategic pricing Positively high pricing Positively low pricing Remember pricing to the trade as well as to individuals/ customers.

Economic value to the customer (EVC)

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Entrepreneurial firm may be able to charge MORE than the accepted market leader. Under certain conditions may STILL be able to offer superior value to the customer in the long run and still charge a higher price than the accepted market leader. Will need sales staff who understand the principle of EVC. Will need technical knowledge of the product/ service and be able to talk convincingly about EVC Perhaps more suitable approach to industrial products and services.

Pricing using EVC analysis

40 000 Added value Life-cycle cost Purchase price Start-up costs 200 000 50 000 30 000 20 000 Postpurchase costs 200 000 80 000 30 000 EVC = 90 000

120 000

100 000

120 000

Reference product

New product X

New product Y
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