International Marketing
Chapters 18
Pricing for International Markets
Introduction
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Pricing strategy forms another cornerstone of a global marketing
program–it represents one of the most critical and complex issues in
global marketing (due to economic, financial, and mathematical
implications)
Price is the only marketing mix element that generates revenues. All
other elements entail costs
Need to devote special care in pricing products as a manager’s
fiduciary responsibility is to market products at a profit and increase
shareholder wealth
A company’s global pricing policy may make or break its overseas
expansion efforts (due to foreign exchange complications)
Firms also face significant challenges in coordinating (standardizing
or adapting) their pricing strategies across various countries they
operate in
This chapter reviews the plethora of international pricing strategy
issues
Price Escalation
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Price escalation refers to the added costs incurred as a result of
exporting products from one country to another
There are several factors that lead to higher prices:
1.
Costs of Exporting: the term relates to
situations in which ultimate prices are
raised by shipping costs, insurance,
packing, tariffs, longer channels of
distribution, larger middlemen margins,
special taxes, administrative costs, and
exchange rate fluctuations
Price Escalation (contd ..)
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3.
Taxes, Tariffs, and Administrative
Costs: These costs results in higher
prices, which are generally passed on to
the buyer of the product
Inflation: Inflation causes consumer prices
to escalate and the consumer is faced with
rising prices that eventually exclude many
consumers from the market
Price Escalation (contd ..)
4.
Middleman and Transportation
Costs: Longer channel length,
performance of marketing functions
and higher margins may make it
necessary to increase prices
5.
Exchange Rate Fluctuations and
Varying Currency Values: Currency
values swing vis-à-vis other currencies
on a daily basis, which may make it
necessary to increase prices
Approaches to Lessening Price Escalation
Methods used to reduce costs and, thus, lower price escalation include:
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Lowering Cost of Goods: Firms can lower costs by
eliminating costly features in products or by manufacturing
products in countries where labor costs are cheaper
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Lowering Tariffs: Firms can lower prices by categorizing
products in classifications where the tariffs are lower
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Lowering Distribution Costs: Firms can design channels
that are shorter, have fewer middlemen, and by reducing or
eliminating middleman markup
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Using Foreign Trade Zones: Firms can manufacture
products in free trade zones where the incentive offered is
the elimination of local taxes, which keep prices down
Export Strategies Under Varying
Currency Conditions
When Domestic Currency is
WEAK...
When Domestic Currency is
STRONG...
Stress, price benefits
Engage in nonprice competition by
improving quality, delivery, and aftersale service
Expand product line and add more
costly features
Improve productivity and engage in
vigorous cost reduction
Shift sourcing and manufacturing to
domestic market
Shift sourcing and manufacturing
overseas
Exploit export opportunities in all
markets
Give priority to exports to relatively
strong-currency countries
Conduct conventional cash-forgoods trade
Deal in countertrade with weakcurrency countries
Use full-costing approach, but use
marginal-cost pricing to penetrate
new/competitive markets
Trim profit margins and use marginalcost pricing
SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"
Business Horizons, May-June 1988, figure 2, p. 58.
Export Strategies Under Varying
Currency Conditions
When Domestic Currency is
WEAK...
When Domestic Currency is
STRONG...
Speed repatriation of foreign-earned
income and collections
Keep the foreign-earned income in
host country, slow collections
Minimize expenditures in local, host
country currency
Maximize expenditures in local, host
country currency
Buy needed services (advertising,
insurance, transportation, etc.) in
domestic market
Buy needed services abroad and pay
for them in local currencies
Minimize local borrowing
Borrow money needed for expansion
in local market
Bill foreign customers in domestic
currency
Bill foreign customers in their own
currency
SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"
Business Horizons, May-June 1988, figure 2, p. 58.
Parallel Importation or Gray Markets
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On account of competition, firms may have to charge
different prices from country to country
In international marketing, this causes a vexing
problem: Parallel Importation or Gray Markets
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
manufacturer’s regular distribution system
The possibility of a parallel market occurs whenever
price differences are greater than the cost of
transportation between two markets
Parallel Importation or Gray Markets
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For example, the ulcer drug Losec sells for only $18 in
Spain but goes for $39 in Germany; and the heart
drug Plavix costs $55 in France and sells for $79 in
London
Thus, it is possible for an intermediary to buy products
in countries where it is less expensive and divert it to
countries where the price is higher and make a profit
Exclusive distribution, a practice often used by
companies to maintain high retail margins encourage
retailers to stock large assortments, or to maintain the
exclusive-quality image of a product, can create a
favorable condition for parallel importing
Effects of Parallel Importation
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Parallel imports can do long-term damage in the
market for trademarked products
Customers who unknowingly buy unauthorized
imports have no assurance of the quality of the item
they buy, of warranty support, or of authorized service
or replacement parts
If a product fails, the consumer blames the owner of
the trademark, and the quality image of the product is
sullied
Companies can restrict the gray market by policing
distribution channels
In some countries firms get help from the legal system
Gray-Market Process
Dumping
Economists define dumping
differently
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One approach classifies
international shipments as
dumped if the products are
sold below their cost of
production
The other approach
characterizes dumping as
selling goods in a foreign
market below the price of
the same goods in the home
market
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World Trade Organization
(WTO) rules allow for the
imposition of a duty when
goods are dumped
A countervailing duty or
minimum access volume
(MAV), which restricts the
amount a country will
import, may be imposed on
foreign goods benefiting
from subsidies whether in
production, export, or
transportation
Countertrade as a Pricing Tool
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Countertrade is a pricing tool that every international marketer
must be ready to employ
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There are four distinct transactions in countertrading, which
include:
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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
Proactive Countertrade Strategy
Answering the following questions is suggested before entering
into a countertrade agreement:
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4.
Is there a ready market for the goods
bartered?
Is the quality of the goods offered
consistent and acceptable?
Is an expert needed to handle the
negotiations?
Is the contract price sufficient to cover
the cost of barter and net the desired
revenue?
Other Approaches to International Pricing
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There are several approaches to pricing in international
markets, which include:
1.
Full-Cost Pricing: no unit of a similar product is different from any other
unit in terms of cost, which must bear its full share of the total fixed and
variable cost.
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Prices are often set on a cost-plus basis, i.e., total costs plus a
profit margin
2.
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Variable-Cost Pricing: firms regard foreign sales as bonus sales and assume
that any return over their variable cost makes a contribution to net profit
This is a practical approach to pricing when a company has
high fixed costs and unused production capacity
Other Approaches to International Pricing
3.
Skimming Pricing: This is used to reach a segment of the
market that is relatively price insensitive and thus willing to pay
a premium price for a product
4.
Penetration Pricing: This is used to stimulate market growth
and capture market share by deliberately offering products at
low prices
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It is used to acquire and hold share of
market
Transfer Pricing Strategy
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Prices of goods transferred from a company’s operations or
sales units in one country to its units elsewhere, which refers to
intracompany pricing or transfer pricing, may be adjusted to
enhance the ultimate profit of the company as a whole
Four arrangements for pricing goods for intracompany transfer are as follows:
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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
Arm’s-length sales using the same prices as
quoted to independent customers
Benefits of Transfer Pricing Strategy
1. Lowering duty costs by shipping goods
into high-tariff countries at minimal
transfer prices so that duty base and
duty are low
2. 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
3. Facilitating dividend repatriation when
dividend repatriation is curtailed by
government policy by inflating prices
of goods transferred