Chapter 11
Pricing Decisions
© 2005 Prentice Hall
11-1
Pricing in the global market
Theoretical perfect competition – one price
everywhere
– Forex market, ICs, crude oil
Country differences in price reflect
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Factor cost differences (e.g. labor costs)
Level of competition (e.g. airfares in the US and India)
Taxes (different sales tax structures)
Internet brings transparency to prices (e.g. music /
software sold on the net)
– Life cycle stage (introductory stage products vs.
maturity products)
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The price band & price points
Floor prices
– set by product costs
Ceiling prices
– set by competing products
– Available / discretionary income (“what the traffic can
bear”)
– Perceptions of value
Optimum price
– Maximize sales & profits
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Global Pricing Objectives and
Strategies
Managers must determine the pricing objectives
– Financial objectives (e.g. profits, recovery of costs,
ROI, etc.)
– Non-financial objectives (e.g. capturing market share,
increasing sales, etc.)
Basic pricing strategies to achieve those objectives
– Market Skimming
– Penetration Pricing
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Market Skimming and Financial
Objectives
Market Skimming
– Charging a premium
price
– Introduction stage of
product life cycle
– “make hay while the
sun shines”- Suitable
for products which
obsolete fast
– Innovations /
Inventions
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Sony Ad. for camcorders
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Penetration Pricing and NonFinancial Objectives
Penetration Pricing
– Charging a low price in
order to penetrate
market quickly
– Appropriate to saturate
market prior to
imitation by
competitors
1979 Sony Walkman
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Some Creative Pricing Strategies
Companion Pricing
–
–
–
–
Two related products
“One cannot do without the other”
High switching costs
E.g. cellphone plans, razors and blades, computers and
software, video games and console, etc.
Price Bundling
– Two unrelated products
– Offered at a price greater than the cost of the more
expensive one but less than the cost of both if sold
separately
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Companion Products
Products whose sale is
dependent upon the sale of
primary product
– Video games are dependent
upon the sale of the game
Console
“If you make money on
the blades you can give
away the razors.”
X-Box Game System and Sports Game
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US vs. Japanese approaches to
pricing
• Begin with perceptual mapping and product
definition
• In the US:
– design, engineering, marketing and other costs are
added on
– This constitutes the product cost
• In Japan
– Planned selling price is determined and desired profit is
subtracted
– Balance represents target cost for all design,
engineering, marketing and other activities
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Rigid cost plus pricing
Price = costs of products + freight + insurance +
local costs +…+ profit
No regard to country-specific conditions like
market prices, govt. laws about dumping, pricing
strategies, reflection of quality, incomes, etc.
Generally used by first time exporters with little or
no international experience
May result in severe price escalation / overpricing/under-pricing
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Flexible Cost plus pricing
Flexible cost-plus pricing ensures that
prices are competitive in the context of the
particular market environment
Great attention to country-specific
conditions
Used by experienced exporters
Can result in great profitability
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Terms of the Sale
Obtain export license if required
Obtain currency permit
Pack goods for export
Transport goods to place of departure
Prepare a land bill of lading
Complete necessary customs export papers
Prepare customs or consular invoices
Arrange for ocean freight and preparation
Obtain marine insurance and certificate of the policy
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Terms of the Sale
Incoterms
– Ex-works – seller places goods at the disposal of the
buyer at the time specified in the contract; buyer takes
delivery at the premises of the seller and bears all risks
and expenses from that point on.
– Delivery duty paid – seller agrees to deliver the goods
to the buyer at the place he or she names in the country
of import with all costs, including duties, paid.
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Incoterms
FAS (free alongside ship) named port of destination –
seller places goods alongside the vessel or other mode of
transport and pays all charges up to that point
FOB (free on board) – seller’s responsibility does not end
until goods have actually been placed aboard ship
CIF (cost, insurance, freight) named port of destination –
risk of loss or damage of goods is transferred to buyer once
goods have passed the ship’s rail
CFR (cost and freight) – seller is not responsible at any
point outside of factory
Return
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Environmental Influences on Pricing
Decisions
Currency Fluctuations
Inflationary Environment
Government Controls, Subsidies,
Regulations
Competitive Behavior
Sourcing
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Currency Fluctuations
Return
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Pricing strategies accounting for
currency fluctuations
Market holding strategy – using flexible pricing
during unfavorable currency swings
– Objective: maintain market share
– Risk: long term unviability
Marginal Cost pricing – pricing to cover variable
costs of additional production in a weak currency
country
– Objective: aggressive market share capture
– Risk: Dumping allegations
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Inflationary Environment
Defined as a persistent upward change in price
levels
– Can be caused by an increase in the money supply
– Can be caused by currency devaluation
– Can be caused by strong demand and weak supply of
goods
Essential requirement for pricing is the
maintenance of operating margins
– Cover price increases of inputs
Return
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Government Controls, Subsidies,
and Regulations
The types of policies and regulations that
affect pricing decisions are:
– Dumping legislation
– Price controls (e.g. DPCO in India)
– Subsidies to local businesses
Return
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Competitive Behavior
If competitors do not adjust their prices in
response to rising costs it is difficult to
adjust your pricing to maintain operating
margins
If competitors are manufacturing or
sourcing in a lower-cost country, it may be
necessary to cut prices to stay competitive
e.g. Levis in the US and abroad.
Return
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Using Sourcing as a Strategic
Pricing Tool
Marketers of
domestically
manufactured finished
products may move to
offshore sourcing of
certain components to
keep costs down and
prices competitive
Can you stay competitive
while staying local?
Return
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Recommend a pricing strategy
Givenchy introduces a new high fashion
product (e.g. formal gowns) in the US.
Typical PLC is about a year. Competition in
the fashion industry is intense
Pfizer introduces a new patented drug
– In US
– In India. Govt. regulates drug prices
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Recommend a pricing strategy
Toyota introduces a new economy sub-compact car in
Indonesia. The car is manufactured in Japan. The
Indonesian Rupaiah is weak and inflation is high
Ford pioneers the introduction of a fuel cell car
– In the US. Gas prices are rising. GM, Chrysler, Toyota and Honda
are poised to introduce their models
– In India. Gas is expensive. Car is manufactured in the US. The
dollar is strong; the rupee is weak but is becoming stronger. Indian
incomes are rising. There is no competition on the horizon.
– In Saudi Arabia. Gas is cheap and plentiful.
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Recommend a pricing strategy
Boeing introduces the 7E7 to
– Air France
– Singapore Airlines
– Delta Airlines
Motorola introduces the Razr (cell phone)
– In US
– In India
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Global Pricing: Three Policy
Alternatives
Extension
Adaptation
Geocentric
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Extension
Ethnocentric
Per-unit price of an item is the same no
matter where in the world the buyer is
located (e.g. Mattel toys, Mercedes cars)
Importer must absorb freight and import
duties
Fails to respond to each national market
Return
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Adaptation
Polycentric
Permits affiliate managers or independent
distributors to establish price as they feel is
most desirable in their circumstances
Sensitive to market conditions but creates
potential for arbitraging
E.g. prices of books, drugs, etc.
Return
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Geocentric
Intermediate course of action
Recognizes that several factors are relevant to
pricing decision
– Local costs (lower costs may justify lower prices)
– Income levels (high income levels may justify higher
prices)
– Competition
– Local marketing strategy
May standardize a price band within which
regions / countries may vary prices according to
local conditions
Return
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Gray Market Goods
Trademarked products are exported from
one country to another where they are sold
by unauthorized persons or organizations
Occurs when product is in short supply,
when producers use skimming strategies in
some markets, and when goods are subject
to substantial mark-ups
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Dumping
Sale of an imported product at a price lower than
that normally charged in a domestic market or
country of origin.
Occurs when imports sold in the US market are
priced at either levels that represent less than the
cost of production plus an 8% profit margin or at
levels below those prevailing in the producing
countries
To prove, both price discrimination and injury
must be shown
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Price Fixing
Representatives of two or more companies
secretly set similar prices for their products
– Illegal act because it is anticompetitive
Horizontal price fixing occurs when competitors
within an industry that make and market the same
product conspire to keep prices high e.g. ADM
and enzyme used in animal feed.
Vertical price fixing occurs when a manufacture
conspires with wholesalers/retailers to ensure
certain retail prices are maintained. E.g. DeBeers
industrial diamonds.
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Transfer Pricing
Pricing of goods, services, and intangible property
bought and sold by operating units or divisions of
a company doing business with an affiliate in
another jurisdiction
Cross-border exchanges constitute a sale
Intra-corporate exchanges
– Cost-based transfer pricing
– Market-based transfer pricing
– Negotiated transfer pricing
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Countertrade
Countertrade occurs when payment is made in some form
other than money e.g. when hard currency is scarce.
Options
– Barter (e.g. Pepsico and Stolichnaya imports from
USSR in exchange for concentrate)
– Counter-purchase (money exchange involved but
transaction not complete unless a separate purchase is
also made – e.g. Rockwell / Zimbabwe)
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Countertrade
– Offset (LDCs request exporters to buy the
LDCs products in an effort to regain scarce
forex e.g. Boeing and China)
– Compensation trading (also called buyback –
e.g. supplier building a plant in exchange for
buying back a certain percentage of its output
for several years, as payment for the plant)
– Switch trading (third party steps in to take
unwanted goods at a fee)
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