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

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

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
18-2

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
18-3

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

18-4

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

18-5

How Gray-Market Goods

End Up in U.S. Stores
Exhibit 18.1

18-6

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

18-7

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

18-8

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

18-9

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

18-10

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
18-11

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

18-12

Sample Causes and Effects

of Price Escalation
Exhibit 18.2

18-13

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
18-14

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
18-15

How Are Foreign

Trade Zones Used?
Exhibit 18.3

18-16

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

18-17

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

18-18

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

18-19

Countertrade as a Pricing Tool

Types of countertrade

Barter
Compensation deals
Counterpurchase or offset trade
Product buyback agreement

18-20

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
18-21

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

18-22

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
18-23

Price Quotations
May include specific elements affecting the price

Credit
Sales terms
Transportation
Currency
Type of documentation required

Should define quantity and quality

18-24

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

Examples

OPEC
The Trans-Atlantic Conference Agreement
De Beers

18-25

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

18-26

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

18-27

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

18-28