Chapter 11 Pricing Decisions

1. Chapter 11 Pricing Decisions

2. 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)

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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.

14. 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

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

16. Currency Fluctuations Return

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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.

24. 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

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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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.

32. 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

33. 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)

34. 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)