PRICING FOR

INTERNATIONAL MARKETS

Introduction
Global pricing is one of the most critical and complex issues that global firms face so it can give a break or a boost to companys revenue. Importance:
Price is the only marketing mix that generates revenue all other entail

costs. Local pricing v/s Global pricing Image consistency issue Lack of the coordination in the global market will give rise to gray market or parallel trade situation 5 Cs are main drivers of global pricing strategies of any company operating internationally: COMPANY,COST, CUSTOMER, COMPETITION and CHANNELS
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Global Pricing

Company
Growth Maximization/revenue maximization

Market penetration Projection of an image Companies objectives and goals are different in different market. For example. New Balance, the US based shoe maker sells its shoes in France as haute couture rather than athletic shoes and they price it at almost double of the price in US.

Costs
Costs are different in different markets because of various reasons like labor, raw material etc. Costs are very prominent in pricing decision of a firm because pricing is done to cover the cost involved. Two costs are there Fixed costs, Variable costs Export Pricing policies: Cost-Plus Pricing: adds international costs and a markup to the domestic manufacturing cost. Dynamic Incremental Pricing: Only incremental costs should be recuperated.

Customer
If costs set the floor for pricing , consumer willingness to pay sets a ceiling to the price. Consumers role in international pricing is derived by these reasons: Buying power Habits & Spending patterns Availability of substitutes
Option to tackle customers issue: Downsizing Niche player targeting upper end Sell older version at low prices Example: Proctor & Gamble downsized the packet size of Ariel in Egypt thereby lowering cash outlay for ordinary consumers.
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Competition
Competition plays an important role in pricing because we have different kinds of competition in different market:
Number of competitors:

Monopoly, Perfect competition Nature of competition: Global or local players, state owned or private owned Position of company in the competition: Price leaders or price takers Knockoff items / counterfeit products: Imitation products offered for sale

Channels
Distribution channels determine pricing in different ways depending upon: Length of channels: producer to consumer in how many steps Balance of power between manufacturer and retailers Unauthorized distribution channels in the grey markets
Example: US and Germany have direct marketers , supermarkets and specialty retails for personal computers where as in Britain prices are 50 % higher than in Germany with market dominated by Dixons , a retail chain that charges high margins.
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Global Pricing Strategies

Companies face many problems in setting their international prices.
Possible approaches include:

Charge a uniform price all around the world. Charge what consumers in each country will pay. Use a standard markup of costs everywhere.

International prices tend to be higher than domestic prices because

of price escalation.
Companies may become guilty of dumping a foreign subsidiary

charges less than its costs or less than it charges in its home market.

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Pricing Objectives

Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives

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Importance of Price
Revenue = Unit Price X Number of Units Sold Revenue pays for every activity. Whats left over is Profit.

To earn a profit, marketers must select a price that is not too high or too low, a price that equals the perceived value to target consumers
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Profit-Oriented Pricing Objectives

Profit-Oriented Pricing Objectives

Profit Maximization

Satisfactory Profits

Target Return on Investment

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Sales-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Market Share

Sales Maximization

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Cost Determinant of Price

Markup pricing
Methods Used to Set Prices

Key Stoning

Profit Maximization Pricing

Break-Even Pricing Introductory Price Point
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Markup Pricing
Markup Pricing
The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

Keystoning

The practice of marking up prices by 100%, or doubling the cost.

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Profit Maximization
Profit Maximization
A method of setting prices that occurs when marginal revenue equals marginal cost.

Marginal Revenue

The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

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Break-Even Pricing
Total Revenue
4,000

Variable Costs $

Total Costs Break-even point

2,000

Fixed costs

0
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1,000

2,000

3,000

4,000

5,000

6,000

Quantity

Special Pricing Tactics

Single-Price Tactic Flexible Pricing All goods offered at the same price Different customers pay different price

Leader Pricing

Sell product at near or below cost

Bait Pricing

Lure customers through false or misleading price advertising

Price Bundling

Combining two or more products in a single package Two separate charges to consume a single good
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Two-Part Pricing

EXPORT PRICING
Export Cost Factors

Export Pricing Strategy

Export Pricing Methods of Manufacturers

Export Cost Factors

Product modification cost Promotion cost Packaging cost After-sales service cost
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Export Pricing Strategy

High pricing strategy Unique or new products High profit margin Attracts competition Higher price at the beginning and lower price later Low pricing strategy To penetrate foreign markets To increase market share To dispose of excess or obsolete inventory To discourage new competition Cannot be a long-term strategy
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Moderate pricing strategy

Adequate profit margin Can meet competition and maintain market shares Should be long-term strategy

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Pricing Practices
Higher Home Market Prices Justified by:

Lower labor or raw material cost in the international market Strong local competition in the international market Lower buying power of host-country consumers

Lower Home Market Prices Justified by:

No cost advantages to producing overseas Few or no challenges from international competition Limited market potential International buyers can afford higher prices
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Different prices in different distribution channels

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

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Initiating and responding to price changes

Initiating price cuts implies the risk of
Low

Reactions to competitors price changes

Maintain

quality trap Cost inflation Over demand Reduction of discounts

price Maintain price and add value Reduce price Increase price and improve quality

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How to fight a price war?

NONPRICE RESPONSES Reveal your strategic capabilities and intentions Compete on quality Offer to match competitors prices, offer everyday low pricing, or reveal your cost advantage. Increase product differentiation by adding features to a product, or build awareness of existing features and their benefits. Emphasize the performance risks in lowpriced options. Form strategic partnerships by offering cooperative or exclusive deals with suppliers, resellers, or providers of related services.

Co-opt contributors

PRICE RESPONSES Use complex price actions Offer bundled prices, two-part pricing, quantity discounts, price promotions, or loyalty programs for products. Introduce flanking brands that compete in customer segments that are being challenged by competitors. Adjust the products regular price in response to a competitors price change or another potential entry into the market.
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Introduce new products Deploy simple price actions

Export Pricing Methods of Manufacturer

Marginal Cost Pricing Method Assumes that indirect fixed costs are fully recovered from domestic sales Cost for manufacturing additional unit for export and exporting cost Includes direct cost of material, labor only General & Administrative expenses not included Cost-plus pricing method Adding exporting costs to domestic production cost Include G & A expenses Too high to compete in international market U.S. manufacturers should convert cost-plus pricing to marginal cost pricing method in determining an export price
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International pricing framework

Firm-level factors

Environmental factors
Market factors

Product factors

Pricing strategies

Other elements

Terms Firm performance

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Factors Affecting International Pricing

Inflation

Exchange Rate Fluctuations

Parallel Imports

Price Escalation

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Factors Affecting International Pricing

Inflation

Eliminates consumers purchasing power Delayed payment will erode profit

Strategy Careful price quotations and supply contracts Increase brand value Retain and win trust of customers
Exchange Rate Fluctuations

Strategy Review entire operation system Adjust cost structure Increase brand value Check mode of operation in foreign markets
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Strategies Under Varying Currency Conditions

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Global Pricing and Currency Movements

Given sometimes dramatic exchange rate movements, setting prices in a floating exchange rate world poses a tremendous challenge.

How much of an exchange rate gain (loss) should be passed through our customers?
Customers price sensitivity amount of competition in the export market

In what currency should we quote our prices?

Depends on the balance of power between supplier and the customer Some companies adopt a single currency

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 Parallel Imports Distributors in one country sell in another country Not illegal Overstocking Distributor bankrupt Exclusive distributors, luxury products, upscale retailers, margin Drugs/medicine Canada USA

Strategy

Self-certify the product! Language, packaging For sale in specific country only Warranty/repair not transferable between countries

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 Price Escalation
To cover the incremental costs (shipping, insurance, tariffs, etc), the final foreign retail price will often be much higher than the domestic retail price. This is known as price escalation.

A direct result of products moving across borders Manufacturers Importers Distributor Jobber Consumer Import duty , VAT, GST Operating costs Additional transportation costs Two distributors: high lot and low lot Insurance, packaging, country of origin, other admin. costs

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Pricing in Inflationary Environments

There are several alternative ways to safeguard against inflation Modify components, ingredients, parts and/or packaging materials Source materials form low-cost suppliers Shorten credit terms Include escalator clauses in long-term contracts Quote Prices in a stable currency Pursue rapid inventory turnovers Draw lessons from other countries

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Transfer pricing
Price of goods transferred between a companys units in

different countries. Benefits of transfer price manipulation: Lower tariffs due to low transfer price. Reduce income in high tax regions due to high transfer price.

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Transfer Pricing

Home Country

Foreign Country

Taxes

Taxes

Tariffs

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Bases for transfer pricing

At cost

set at a the level of production cost, subsidiary makes profit Arms length charged the same price as any other buyer, parent makes profit Cost Plus profits split between parent and subsidiary

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Anti dumping regulation

Dumping: imports are being sold at an unfairprice Protectionism

To minimize risk exposure to antidumping actions, exporters might pursue any of these strategies: Trading-up (low-value to high-value products) Service Enhancement: differentiate your product by adding support services to the core product Distribution and Communication: strategic alliances Set up units in foreign country
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Price Coordination
When developing a global pricing strategy, one of the thorniest issues is how much coordination should exist between prices charged in different countries
Nature

of customers: With global customers price coordination is must. For ex. In Europe, Microsoft sets prices that differ by not more than 5% between countries

Amount of product differentiation: less differentiation , the

larger the need for price coordination.

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 Nature of Channels: distribution channels can be viewed

as intermediate customers.
Nature of competition: Global competition demands a

cohesive strategic approach for the entire marketing mix strategy, including pricing.
Government regulation

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Countertrade
Countertrade is an umbrella term used to describe unconventional trade-financing transactions that involve some form of noncash compensation.
Barter: Exchange of goods or services Switch trading: Practice in which one company sells to another its

obligation to make a purchase in a given country Counter purchase: Sale of goods and services to a country by a company that promises to make a future purchase of a specific product from the country Buyback: occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant's output as partial payment for the contract
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Motives Behind Countertrade

Gain access to new or difficult markets Overcome exchange rate controls or lack of hard currency Overcome low country credit worthiness Increase sales volume Generate long-term customer goodwill

Shortcomings of Countertrade No in-house use for goods offered by customers Timely and costly negotiations Uncertainty and lack of information on future prices Transaction costs
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