Pricing for International Markets Chapter 18
Learning Objectives • 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
Global Perspective –the Price War • Setting the right price for a product or service • Key to success or failure • An offering’s 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 manager’s responsibility • To set and control the actual price of goods in different markets in which different sets of variables are to be found
Pricing PolicyPricing 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
Pricing PolicyParallel 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 manufacturer’s regular distribution system • Occur whenever price differences are greater than cost of transportation between two markets • Major problem for pharmaceutical companies • Exclusive distribution .
How Gray-Market Goods End Up in U.S. Stores Exhibit 18.1
Approaches to International Pricing • Company policy relates to net price received • Control over end prices • Control over net prices • Cost and market considerations are important, a company cannot sell below cost of production and unacceptable price in marketplace. • Employ pricing as part of strategic mix • Market-oriented pricing factors includes cultural differences in various countries.
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
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
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 buyer’s location
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 company’s national currency
Price Escalation • Varying currency values • Changing values of a country’s currency relative to other currencies • Cost-plus pricing • Middleman and transportation costs • Channel diversity • Underdeveloped marketing and distribution channel infrastructures
Sample Causes and Effects of Price Escalation Exhibit 18.2
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
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
How Are Foreign Trade Zones Used? Exhibit 18.3
Countertrade as a Pricing Tool • A tool every international marketer must be ready to employ • Often gives company a competitive advantage • Russia and PepsiCo • PepsiCo use countertrade to compete with Coca- cola. • Trading vodka (Russia) and wine (Romania) for soft drinks. This arrangement was profitable for Russia, Romania and PepsiCo. Pepsi use countertrade to expand its bottling plants and dominates cola market in Russia. • Countertrade – part of the market-pricing tool kit
Countertrade as a Pricing Tool • Types of countertrade • Barter - is the direct exchange of goods between two parties in a transaction. • For example, the Malaysian government bought 20 diesel-electric locomotives from General Electric. Officials of the government said that GE will be paid with palm oil to be supplied by a plantation company. The company will supply about 200,000 metric tons of palm oil over a period of 30 months. • Compensation deals - deals involve payment in goods and in cash. • A seller delivers lathes to a buyer in Venezuela and receives 70 percent of the payment in exchangeable currency and 30 percent in tanned hides and wool. • In an actual deal, General Motors Corporation sold $12 million worth of locomotives and diesel engines to Yugoslavia and took cash and $4 million in Yugoslavian cutting tools as payment.
Countertrade as a Pricing Tool • Counter purchase or offset trade • or offset trade,most frequently used type of countertrade. For this trade, the seller agrees to sell a product at a set price to a buyer and receives payment in cash. However, two contracts are negotiated. • The first contract is contingent on a second contract that is an agreement by the original seller to buy goods from the buyer for the total monetary amount involved in the first contract or for a set percentage of that amount. More flexible because 6 to 12 months longer for completion of second contract. • Product buyback agreement • This type of agreement is made when the sale involves goods or services that produce other goods and services, that is, production plant, production equipment, or technology. • The buyback agreement usually involves one of two situations: The seller agrees to accept as partial payment a certain portion of the output, or the seller receives full price initially but agrees to buy back a certain portion of the output.
Countertrade as a Pricing Tool • Problems of countertrading • Determining the value of and potential demand for the goods offered • Requires time and financial strain due to longer tied up. • Barter houses –specialize in trading goods through barter arrangements most found in Europe. • The Internet and countertrading • Important venue for countertrade activities. Barter houses have Internet auction sites. • Proactive countertrade strategy • Included as part of an overall market strategy • Effective for exchange-poor countries
Price Quotations • In quoting price, a contract may include specific elements affecting the price • Credit • Sales terms • Transportation • Currency • Type of documentation required • Should define quantity and quality. • Quantity -important because different country use different units of measurements. • Quality – complete agreement on quality standard.
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
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 smart sense of market strategy