International Marketing

14th Edition P h i l i p R. C a t e o r a M a r y C. G i l l y John L. Graham

Pricing for International Markets

Chapter 18
McGraw-Hill/Irwin International Marketing 14/e

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

What Should You Learn?

Components of pricing as competitive tools in international marketing The pricing pitfalls directly related to international marketing

How to control pricing in parallel imports or gray markets

Price escalation and how to minimize its effect

Countertrading and its place in international marketing practices

The mechanics of price quotations
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Global Perspective the Price War

Setting the right price for a product or service
Key to success or failure

An offerings price
Must reflect the quality and value the consumer perceives in the product

Globalization of world markets

Intensifies competition among multinational and home-based companies

The marketing managers responsibility

To set and control the actual price of goods in different markets in which different sets of variables are to be found
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Pricing Policy Pricing Objectives

Pricing as an active instrument of accomplishing marketing objectives
The company uses price to achieve a specific objective

Pricing as a static element in a business decision

Exports only excess inventory Places a low priority on foreign business Views its export sales as passive contributions to sales volume

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Pricing Policy Parallel Imports

Parallel imports
Develop when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturers regular distribution system

Occur whenever price differences are greater than cost of transportation between two markets . Major problem for pharmaceutical companies Exclusive distribution

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How Gray-Market Goods End Up in U.S. Stores

Exhibit 18.1

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Approaches to International Pricing

Company policy relates to net price received
Control over end prices Control over net prices

Cost and market considerations

Employ pricing as part of strategic mix

Market-oriented pricing factors

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Full-Cost Versus Variable-Cost Pricing

Variable-cost pricing
Firm is concerned only with the marginal or incremental cost of producing goods to be sold in overseas markets

Full-cost pricing
Companies insist that no unit of a similar product is different from any other unit in terms of cost Each unit must bear full share of the total fixed and variable cost

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Skimming Versus Penetration Pricing

Skimming
Used by a company when the objective is to reach a segment of the market that is relatively price insensitive Market is willing to pay a premium price for the value received

Penetration pricing policy

Used to stimulate market and sales growth by deliberately offering products at low prices

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Price Escalation
Costs of exporting
Price escalation

Taxes, tariffs, and administrative costs

Taxes include tariffs Tariff fee charged when goods are brought into a country from another country Administrative costs

Include export and import licenses Other documents Physical arrangements for getting the product from port of entry to the buyers location

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Price Escalation
Inflation
In countries with rapid inflation or exchange variation, the selling price must be related to the cost of goods sold and the cost of replacing the items

Deflation
In a deflationary market, it is essential for a company to keep prices low and raise brand value to win the trust of consumers

Exchange rate fluctuations

No one is quite sure of the future value of currency Transactions are increasingly being written in terms of the vendor companys national currency
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Price Escalation
Varying currency values
Changing values of a countrys currency relative to other currencies Cost-plus pricing

Middleman and transportation costs

Channel diversity Underdeveloped marketing and distribution channel infrastructures

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Sample Causes and Effects of Price Escalation

Exhibit 18.2

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Approaches to Lessening Price Escalation

Lowering cost of goods
Manufacturing in a third country Eliminating costly functional features Lowering overall product quality

Lowering tariffs
Reclassifying products into a different, and lower customs classification Modify product to qualify for a lower tariff rate within classification Requiring assembly or further processing Repackaging
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Approaches to Lessening Price Escalation

Lowering distribution costs
Shorter channels Reducing or eliminating middlemen

Using foreign trade zones to lessen price escalation

Establish free trade zones (FTZs) or free ports

Tax-free enclave not considered part of country Postpones payment of duties and tariffs

Dumping
Use of marginal (variable) cost pricing Selling goods in foreign country below the price of the same goods in the home market
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How Are Foreign Trade Zones Used?

Exhibit 18.3

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Leasing in International Markets

Selling technique that alleviates high prices and capital shortages Opens the door to a large segment of nominally financed foreign firms
Firms can be sold on a lease option but might be unable to buy for cash

Can ease the problems of selling new, experimental equipment

Because less risk is involved for the users

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Leasing in International Markets

Helps guarantee better maintenance and service on overseas equipment Helps to sell other companies in that country Revenue tends to be more stable over a period of time than direct sales Leasing disadvantages
Inflation may lead to heavy losses at end of contract period Currency devaluation, expropriation and political risks

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Countertrade as a Pricing Tool

A tool every international marketer must be ready to employ
Often gives company a competitive advantage

Russia and PepsiCo

Trading vodka and wine for soft drinks

Countertrade part of the market-pricing tool kit

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Countertrade as a Pricing Tool

Types of countertrade
Barter Compensation deals Counterpurchase or offset trade Product buyback agreement

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Countertrade as a Pricing Tool

Problems of countertrading
Determining the value of and potential demand for the goods offered Barter houses

The Internet and countertrading

Electronic trade dollars Universal Currency/IRTA

Proactive countertrade strategy

Included as part of an overall market strategy Effective for exchange-poor countries

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Transfer Pricing Strategy

Prices of goods transferred from a companys operations or sales units in one country to its units elsewhere
May be adjusted to enhance the ultimate profit of company

Benefits
Lowering duty costs Reducing income taxes in high-tax countries Facilitating dividend repatriation when dividend repatriation is curtailed by government policy

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Transfer Pricing Strategy

Objectives
Maximizing profits for corporation Facilitating parent-company control Providing all levels of management control over profitability

Arrangements for pricing goods for intracompany transfer

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
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Price Quotations
May include specific elements affecting the price
Credit Sales terms Transportation Currency Type of documentation required

Should define quantity and quality

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Administered Pricing
Cartels
Exist when various companies producing similar products or services work together

To control markets for the types of goods and services they produce

May use formal agreements

To set prices Establish levels of production and sales for participating countries Allocate market territories Redistribute profits May take over entire selling function
OPEC The Trans-Atlantic Conference Agreement De Beers
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Examples

Administered Pricing
Government-influenced pricing
Establishes margins Sets prices and floors or ceilings Restricts price changes Competes in the market Grants subsidies Acts as a purchasing monopsony or selling monopoly

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Summary
Pricing is one of the most complicated decisions areas encountered by international marketers International marketers must take many factors into account
For each country For each market within a country

Market prices at consumer level are much more difficult to control in international than in domestic marketing

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Summary
Controlling costs that lead to price escalation when exporting products is:
One of the most challenging pricing tasks facing the exporter

Countertrading is an important tool in pricing policy Pricing in the international marketplace

Requires a combination of intimate knowledge of market costs and regulations An awareness of possible countertrade deals, Infinite patience for detail A shrewd sense of market strategy
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