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Pricing for International Markets

McGraw-Hill/IrwinInternational Marketing, 13/e

© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter

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Chapter 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

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Global PerspectiveThe Price War

• Setting the right price for a product or service can be the key to success or failure

• An offering’s price must reflect the quality and value the consumer perceives in the product

• As the globalization of world markets continues, competition intensifies among multinational and home-based companies

• The marketing manager’s responsibility is to set and control the actual price of goods in different markets in which different sets of variables are to be found

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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

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Pricing PolicyParallel Imports

• Occurs whenever price differences are greater than the cost of transportation between two markets

• Major problem for pharmaceutical companies• Exclusive distribution

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.

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How Gray-Market Goods End up in U.S. Stores

• Insert Exhibit 18.1

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Approaches to International PricingFull-Cost versus Variable-Cost Pricing

• Variable-cost pricing – the firm is concerned only with the marginal or incremental cost of producing goods to be sold in overseas markets.

• When the have high fixed costs and unused prod capacity• Full-cost pricing – companies insist that no unit of a similar

product is different from any other unit in terms of cost and that each unit must bear its full share of the total fixed and variable cost

• Prices are set on a cost plus basis, that is , total costs plus a profit margin.

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Approaches to International PricingSkimming versus Penetration Pricing

• Skimming – a company uses when the objective is to reach a segment of the market that is relatively price insensitive and thus 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.

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Price Escalation

• Costs of exporting- Price escalation

• Taxes, tariffs, and administrative costs- Tariff – fee charged when goods are brought into a country from

another country- Administrative costs include export and import licenses, other

documents, and the physical arrangements for getting the product from port of entry to the buyer’s location

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Price Escalation (continued)

• 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

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Price Escalation (continued)

• 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

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Sample Causes and Effects of Price Escalation

• Insert Exhibit 18.3

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Approaches to Lessening Price Escalation

• Lowering cost of goods• Lowering tariffs• Lowering distribution costs• Using foreign trade zones to lessen price escalation• Dumping

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Leasing in International Markets

• Opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash

• Can ease the problems of selling new, experimental equipment because less risk is involved for the users

• Helps guarantee better maintenance and service on overseas equipment

• Helps to sell other companies in that country• Revenue tends to be more stable over a period of time than direct

sales would be

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Countertrade as a Pricing Tool

• Why purchasers impose countertrade:- To preserve hard currency- To improve balance of trade- To gain access to new markets- To upgrade manufacturing capabilities- To maintain prices of export goods- To force reinvestment of proceeds from weapons deals

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Countertrade as a Pricing Tool (continued)

• Types of countertrade- Barter- Compensation deals- Counterpurchase or offset trade- Product buyback agreement

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Countertrade as a Pricing Tool (continued)

• Problems of countertrading- Determining the value of and potential demand for the goods offered- Barter houses

• The Internet and countertrading- Electronic trade dollars- Universal Currency/IRTA

• Proactive countertrade strategy- Included as part of an overall market strategy- Effective for exchange-poor countries

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Transfer Pricing Strategy

• Benefits:- Lowering duty costs- Reducing income taxes in high-tax countries- Facilitating dividend repatriation when dividend repatriation is

curtailed by government policy• Arrangements for pricing goods for intracompany transfer:

- 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

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Price Quotations

• May include specific elements affecting the price:- Credit- Sales terms- Transportation- Currency- Type of documentation required

• Should define quantity and quality

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Administered Pricing

• Cartels- Exists when various companies producing similar products or

services work together to control markets for the types of goods and services they produce

- Example: OPEC• Government-influenced pricing

- Establish margins- Set prices and floors or ceilings- Restrict price changes- Compete in the market- Grant subsidies- Act as a purchasing monopoly or selling monopoly

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Summary

• Pricing is one of the most complicated decisions areas encountered by international marketers.

• International marketers must take many factors into account, not only for each country, but often for each market within a country.

• Market prices at the consumer level are much more difficult to control in international than in domestic marketing.

• Controlling costs that lead to price escalation when exporting products from one country to another is one of the most challenging pricing tasks facing the exporter.

• Countertrading is an important tool to include 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, and a shrewd sense of market strategy.