Chapter 11 Pricing Decisions

Chapter 11 Pricing Decisions

Pricing in the global market • Theoretical perfect competition – one price everywhere • Forex market, ICs, crude oil • Country differences in price reflect • 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)

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

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

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 Sony Ad. for camcorders

Penetration Pricing and Non-Financial 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

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

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

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

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 / over-pricing/under-pricing

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

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

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.

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

Environmental Influences on Pricing Decisions • Currency Fluctuations • Inflationary Environment • Government Controls, Subsidies, Regulations • Competitive Behavior • Sourcing

Currency Fluctuations Return

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

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

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

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

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

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

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.

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

Global Pricing: Three Policy Alternatives • Extension • Adaptation • Geocentric

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

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

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

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

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

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.

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

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)

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)

Chapter 11 Pricing Decisions