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Global Marketing Management

Global Pricing Decisions

MKTG 3215-001Spring 2012

Mrs. Tamara L. Cohen

Class # 25

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GROUP PROJECTS

REMEMBERHand in on your Presentation day :Final Report (hard copy & soft copy)Presentation (hard copy & soft copy)

Tuesday, April 24 South Korea

Vietnam

Thursday, April 26

Japan Brazil

Tuesday, May 1 Greece

Latvia

Thursday, May 10; 2 - 4:30 pm

China Jamaica

Each Groups Presentation should be 15 minutes long

+ 3 minutes question-and-answer.

Romania Spain

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Case #3 due April 17AIDS, Condoms, & Carnival

Requirements for each TEAM Case Write-up:

4 - 6 pages, typed & double-spaced Review on my web site:

Case Studies: How to write a great CASE STUDY

Pay attention to grading sheet.

Work with DIFFERENT partner from before.

Use headings

http://images.google.com/imgres?imgurl=http://www.schemamag.ca/archive2/images/347px-World_Aids_Day_Ribbon.png&imgrefurl=http://www.schemamag.ca/archive2/2007/12/&usg=__CjBkmNuPvYe7PCzMRL8prAMfz0Q=&h=599&w=347&sz=40&hl=en&start=5&tbnid=QePSzvsDdLwdkM:&tbnh=135&tbnw=78&prev=/images?q=AIDS+symbol&gbv=2&ndsp=20&hl=en&sa=N&ie=UTF-8http://images.google.com/imgres?imgurl=http://www.thewags.net/userimages/NewGovernmentLogo.jpg&imgrefurl=http://seaspray-itsawonderfullife.blogspot.com/2008/10/condom-new-government-symbol.html&usg=__nwk75BM-OjCpMhKopfMFvBugYHA=&h=265&w=271&sz=73&hl=en&start=6&tbnid=IovUV5tFYDYMrM:&tbnh=110&tbnw=113&prev=/images?q=condom+symbol&gbv=2&ndsp=20&hl=en&sa=N&ie=UTF-8http://images.google.com/imgres?imgurl=http://images.brisbanetimes.com.au/2009/02/23/393581/Rio-de-Janeiro-Carnival-23-600x400.jpg&imgrefurl=http://www.brisbanetimes.com.au/travel/travel-news/brazils-carnival-kicks-into-high-gear-20090223-8f20.html&usg=__IC6G6MAJXEaPn9-Mq9C6BKd0-JY=&h=484&w=600&sz=233&hl=en&start=50&tbnid=t4b-GdIAm-cBeM:&tbnh=109&tbnw=135&prev=/images?q=carnival+brazil&gbv=2&ndsp=20&hl=en&sa=N&start=40&ie=UTF-8

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KEY TERMS

Parallel Imports

Full-cost versus variable-cost

pricing Skimming

Penetration pricing

Countertrade

Transfer pricing

Cartels

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KEY CONCEPTS

Price escalation

causes

how it works how to bring it down

FTZs

Essential elements ofinternational price quotations

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PRICE WAR!Diaper Battles in Brazil

P& G launched Pampers Uni.

Brazilian economy taking off.

Trucked in more diapers fromArgentina.

Carrefourselling cheap

diapers from Mexico.

Kimberly-Clark arrived withfrom Argentina.

Strategic global alliance withUnilever as Brazil distributor.

+ strategic alliance with local co.

Prices + Market + Producers

Background - 1997 disposable diapers a luxury for most Brazilians

160 million people; average annual income < $4,000

most people used cloth diapers or nothing

< 5% market used disposables disposables expensive, bulky, leaky

http://images.google.com/imgres?imgurl=http://www.cultural-china.com/chinaWH/images/exbig_images/1ab6d90bfdfb3ef341f8a611e3bdd87f.jpg&imgrefurl=http://www.cultural-china.com/chinaWH/html/en/Scenery166bye640.html&usg=__8-c_JaNRa8YcqsL_miv6D1eNWHw=&h=352&w=470&sz=40&hl=en&start=15&tbnid=C3JErbQbHfvnPM:&tbnh=97&tbnw=129&prev=/images?q=hong+kong+disney&gbv=2&hl=en&sa=G&ie=UTF-8

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Global Perspectivethe Price War

Setting right price for product /service = key to success or failuree.g. Hong Kong Disneyland opening-day price $32 (2005)

Price must reflect quality + value consumer

perceives in product (as always) Globalization of world markets intensifies

competition among multinational & home-based companies

Marketing managers responsibility = set &control actual price of goods in differentmarkets with different variables

Can use price for specific objective- profit, ROI, market

share, sales volume, liquidity

http://images.google.com/imgres?imgurl=http://www.cultural-china.com/chinaWH/images/exbig_images/1ab6d90bfdfb3ef341f8a611e3bdd87f.jpg&imgrefurl=http://www.cultural-china.com/chinaWH/html/en/Scenery166bye640.html&usg=__8-c_JaNRa8YcqsL_miv6D1eNWHw=&h=352&w=470&sz=40&hl=en&start=15&tbnid=C3JErbQbHfvnPM:&tbnh=97&tbnw=129&prev=/images?q=hong+kong+disney&gbv=2&hl=en&sa=G&ie=UTF-8http://images.google.com/imgres?imgurl=http://www.thewatchquote.com/mesIMG/imgStd/23082.jpg&imgrefurl=http://www.thewatchquote.com/Ballon-Bleu-de-Cartier-No_6172.htm&usg=__4UskYlSKWMX0iv9TDxEhO-70Ieg=&h=716&w=565&sz=60&hl=en&start=18&tbnid=O0jsAU-wR3LeiM:&tbnh=140&tbnw=110&prev=/images?q=cartier&gbv=2&hl=en&ie=UTF-8http://images.google.com/imgres?imgurl=http://allwomenstalk.com/wp-content/uploads/2007/11/gucci41.jpg&imgrefurl=http://clothing-store-online.blogspot.com/2007/11/winter-is-all-coming-for-those-ladies.html&usg=__rplhyHywURnHU1zSbmc1_4SR4zY=&h=400&w=400&sz=65&hl=en&start=5&tbnid=I91q-cG1505u3M:&tbnh=124&tbnw=124&prev=/images?q=gucci&gbv=2&hl=en&sa=G&ie=UTF-8

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Parallel Imports

Importers buy products from distributors inone country & sell in another country todistributors not part of manufacturersregular distribution system

1. whenever price differences > cost oftransportation between 2 markets

2. also caused by high tariffs

3. competitive price structures

4. exclusive distribution - protect high retail margins

Major problem for pharmaceutical cos

http://images.google.com/imgres?imgurl=http://www.thewatchquote.com/mesIMG/imgStd/23082.jpg&imgrefurl=http://www.thewatchquote.com/Ballon-Bleu-de-Cartier-No_6172.htm&usg=__4UskYlSKWMX0iv9TDxEhO-70Ieg=&h=716&w=565&sz=60&hl=en&start=18&tbnid=O0jsAU-wR3LeiM:&tbnh=140&tbnw=110&prev=/images?q=cartier&gbv=2&hl=en&ie=UTF-8http://images.google.com/imgres?imgurl=http://allwomenstalk.com/wp-content/uploads/2007/11/gucci41.jpg&imgrefurl=http://clothing-store-online.blogspot.com/2007/11/winter-is-all-coming-for-those-ladies.html&usg=__rplhyHywURnHU1zSbmc1_4SR4zY=&h=400&w=400&sz=65&hl=en&start=5&tbnid=I91q-cG1505u3M:&tbnh=124&tbnw=124&prev=/images?q=gucci&gbv=2&hl=en&sa=G&ie=UTF-8http://images.google.com/imgres?imgurl=http://www.theepochtimes.com/n2/images/stories/large/2008/07/23/3123223-Paxil.jpg&imgrefurl=http://www.theepochtimes.com/n2/health/book-review-mania-a-short-history-of-bipolar-disease-1582.html&usg=__neAdI4naQ2kCZEQJX9MomlnJAko=&h=1395&w=750&sz=64&hl=en&start=19&tbnid=oQlfSAWYY22ZtM:&tbnh=150&tbnw=81&prev=/images?q=paxil&gbv=2&hl=en&ie=UTF-8http://images.google.com/imgres?imgurl=http://3.bp.blogspot.com/_lewjsjzt0Ec/SMx7qwgRvVI/AAAAAAAACOY/UktzbHcEIdE/s400/chanel+perfume.jpg&imgrefurl=http://beautyinreallife.blogspot.com/2008/09/chanel-unveils-new-retail-environments.html&usg=__5B8nB6UEObhXGhcydFFG8ubvTg8=&h=400&w=400&sz=20&hl=en&start=27&tbnid=Q-SqE_c0c6xsbM:&tbnh=124&tbnw=124&prev=/images?q=chanel+perfume&gbv=2&ndsp=20&hl=en&sa=N&start=20&ie=UTF-8

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How Gray-Market Goodsend up in U.S. stores

overstocked US

wholesaler

(NOT Kuehne& Nagel!)

http://images.google.com/imgres?imgurl=http://www.ramonvanekeren.nl/images/logo_tesco.jpg&imgrefurl=http://www.ramonvanekeren.nl/references.html&usg=__1_9vj1dcRvWqJCo6tarUH9uPLYU=&h=538&w=2000&sz=56&hl=en&start=1&tbnid=rco4P_gXrLzAXM:&tbnh=40&tbnw=150&prev=/images?q=tesco+logo&gbv=2&hl=en&sa=G&ie=UTF-8http://images.google.com/imgres?imgurl=http://www.hottogs.com/wp-content/uploads/2007/12/calvin-klein-logo.jpg&imgrefurl=http://www.hottogs.com/calvin-klein-adds-womens-performance-gear-line.htm&usg=__bMu04F3d09atqLwKW0eTcZgf8JI=&h=600&w=600&sz=26&hl=en&start=2&tbnid=E8t3nlx1-GnBSM:&tbnh=135&tbnw=135&prev=/images?q=calvin+klein+logo&gbv=2&hl=en&ie=UTF-8http://images.google.com/imgres?imgurl=http://www.pycomall.com/images/P/add.jpg&imgrefurl=http://www.pycomall.com/product.php?productid=17515&usg=__VvBqcDbryXW3QqywVuyZE_8OY3E=&h=400&w=400&sz=25&hl=en&start=14&tbnid=Zfj_mTM9vJEUzM:&tbnh=124&tbnw=124&prev=/images?q=adidas+logo&gbv=2&hl=en&sa=G&ie=UTF-8http://images.google.com/imgres?imgurl=http://www.showstudio.com/2008/09/02/nike_logo.jpg&imgrefurl=http://www.showstudio.com/forums/design/27977/10&usg=__ISBLbZr27AArhWRZtS_A3XHY7Nc=&h=400&w=400&sz=25&hl=en&start=1&tbnid=ywpwnYG7Cccy6M:&tbnh=124&tbnw=124&prev=/images?q=nike+logo&gbv=2&hl=en&ie=UTF-8

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Variable-cost pricing(= marginal cost pricing) firm concerned only with marginal or incremental

cost of producing goods to be sold in overseasmarkets

practical when high fixed costs + unused production capacity foreign sales are bonus

Full-cost pricing

company insists that no unit of similar product isdifferent from any other unit in terms of cost

each unit must bear full share of total fixed +variable costs

when company has high variable costs relative to fixed costs

Full-Cost vs Variable-Cost Pricing

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Skimming vs PenetrationPricing

Skimming

objective to reach segment of market that is relatively priceinsensitive - elastic

market is willing to pay premium price for value received maximize profit when product is new / unique

common in markets with 2 income levels: high & low (no middle)

J&J disposable diaper pricing policy in Brazil before P&G came

Unilever in India before P&G came

Penetration pricing policy

stimulate market & sales growth by deliberately offeringproducts at low prices

to acquire & hold market share as competitive maneuver

common in markets where middle class growing rapidly & company wants to

stimulate growth, even when no competition yet e.g. 2004 soap war in India: P&G vs Unilever

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P&Gvs

HindustanLever

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Price Escalation

= added cost due to exportinge.g. costs of shipping, insurance, packing, tariffs, longer distribution channels,

middlemen margins, special taxes, admin. costs, exchange rate variations

Inflation in countries with rapid inflation or exchange variation, selling

price must be related to cost of goods sold and cost of replacingitems

Deflation essential for company to keep prices low and raise brand value

to win trust of consumers

Exchange rate fluctuations dont know future value of currency

transactions increasingly being written in terms of suppliers

national currency

P i E l i

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MORE Price Escalation Varying currency values

changing values of countrys currency relative to other

currencies

currency exports & currency exports

cost-plus pricing

Middlemen channel diversity - especially small retailers

underdeveloped marketing & distribution channel

infrastructures - extra costs of warehousing & handling smallshipments; also extra costs of financing middlemen cant bear

Transportation costs freight, packing, insurance, handling (CIF / FOB)

import tariffs usually based on landed cost

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How to Bring Down Price Escalation

1. Lower cost of goods manufacture in 3rd country

eliminate costly functional features

lower product quality

2. Lower tariffs reclassify products into different & lower customs

classification e.g. $2.7m Faberg egg art ($0) or jewelry ($700,000)

modify product to qualify for lower tariff rate

require assembly or further processing repackage

3. Lowering distribution costs shorter channels some countries +VAT as pass through channels reduce or eliminate middlemen - tricky

M W

http://images.google.com/imgres?imgurl=http://bp2.blogger.com/_-5tY0KAm1CM/SEDAyqYGRNI/AAAAAAAAASE/aMzafhzkvAg/s320/louis+vuitton+bag.jpg&imgrefurl=http://tushnet.blogspot.com/2008/05/louis-vuitton-loses-verily.html&usg=__8LtbG9uQW231iacWE0SqMWtmWaU=&h=271&w=279&sz=22&hl=en&start=8&um=1&tbnid=QP2UVPRWk5iyZM:&tbnh=111&tbnw=114&prev=/images?q=Louis+Vuitton+bags&gbv=2&hl=en&um=1&ie=UTF-8http://images.google.com/imgres?imgurl=http://lequipedefrancais.files.wordpress.com/2009/04/faberge-egg.jpg&imgrefurl=http://lequipedefrancais.wordpress.com/2009/04/&usg=__tvwlOZUWpKI0oKvZL6eVHw_EQnI=&h=409&w=357&sz=28&hl=en&start=4&um=1&tbnid=PEi9FZ4FP6oh8M:&tbnh=125&tbnw=109&prev=/images?q=faberge+egg&gbv=2&hl=en&sa=G&um=1&ie=UTF-8http://images.google.com/imgres?imgurl=http://bp2.blogger.com/_-5tY0KAm1CM/SEDAyqYGRNI/AAAAAAAAASE/aMzafhzkvAg/s320/louis+vuitton+bag.jpg&imgrefurl=http://tushnet.blogspot.com/2008/05/louis-vuitton-loses-verily.html&usg=__8LtbG9uQW231iacWE0SqMWtmWaU=&h=271&w=279&sz=22&hl=en&start=8&um=1&tbnid=QP2UVPRWk5iyZM:&tbnh=111&tbnw=114&prev=/images?q=Louis+Vuitton+bags&gbv=2&hl=en&um=1&ie=UTF-8

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More Ways to

Bring Down Price Escalation

4. Use Foreign Trade Zones (FTZs)= free ports tax-free enclave not considered part of country postpones payment of duties and tariffs if finished goods not imported into US from FTZ then no

US tariffs apply

5. Dumping use of marginal (variable) cost pricing sell goods in foreign country below price of same goods

in home market

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FTZ # 9

Hawaii

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How Are Foreign Trade Zones Used?

350,000 people employed in FTZs in US

> 60% of merchandise received in FTZs is domestic

total value of merchandise moving through FTZs in US >$500 billion annually

exports from FTZs > $31 billion annually and growing

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Countertrade as a Pricing Tool

Global marketer must know: Which markets will requirecountertrade?

Types ofCountertrade

1. Barter- direct exchange of goods in transaction; saves forex reserves

2. Compensation deals - part payment in goods, part in cash

3. Counter-purchase / offset trade - contract #1: selleragrees to sell at set price, payment in cash; contingent on contract #2:original seller agrees to buy goods from buyer for total money in 1st

contract or for set %. This is most common type of Countertrade. Morecommon among weak countries.

4. Product buyback agreement - when sale involvesgoods/services that produce other goods/services. Drawback whengoods bought back are in competition with own similar goods.

http://images.google.com/imgres?imgurl=http://www.abcpk.org.pk/images/Pepsi%2520Cola.jpg&imgrefurl=http://www.abcpk.org.pk/listofmember.htm&usg=__LylmVjvfN1aoObOCQj-zvFoCB28=&h=137&w=138&sz=5&hl=en&start=126&um=1&tbnid=Rfqbi_xZT19sdM:&tbnh=92&tbnw=93&prev=/images?q=pepsi+cola+international&gbv=2&ndsp=20&hl=en&sa=N&start=120&um=1&ie=UTF-8

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Pepsis famous barter deal with Russia

Deal that ultimately brought Pepsi to Russian market inearly 70s hinged on famous barter agreement brokeredby Kendall: Pepsi concentrate for Stolichnaya vodka.

By 1990, barter trade reached $3 billion with Pepsi trading its

product not only for vodka but also for ocean going freightersand tankers which were earmarked to be sold as scrap. Bythis point, Pepsi Co was not just selling syrup but wasexpanding in fast food business via its Pizza Hut franchise.

Pepsi was not able to maintain exclusivity in Russia. WithSoviet collapse, Coca-Cola introduced to Russian market and

captured significant market share eventually overtaking Pepsiin 2005.

1959landmark event when Pepsi legendDonald M. Kendall, then head of Pepsi-Cola

International, first introduced brand toRussians, including then-Soviet PremierNikita Khrushchev at American NationalExhibition in Moscow.

Ch ll f C d

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Challenges ofCountertradeProblems:1. determining market price for goods on offer

2. finding markets for bartered merchandise

barter houses Europe; Citibank countertrade dept; 3M Global Trading

Internet

Universal Currency would replace natl currencies: (e-$)

IRTAInternational Reciprocal Trade Associationoperate e-$ clearinghouse; all goods & services housed in single data base

Proactive countertrade strategy instead of reactive strategy

effective for exchange-poor countries & countries in financial crisisQuestions before agreement:

1. Ready market for bartered goods?

2. Quality of bartered goods consistent & acceptable?

3. Need expert for negotiations?

4. Contract price sufficient to cover cost of barter + desired revenue?

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Transfer Pricing Strategy

= price of goods transferred from companys operations

or sales units in one country to its units elsewhere

Benefits

1. enhance ultimate profit of company

2. lower duty costs

3. reduce income taxes in high-tax countries

4. facilitate dividend repatriation when dividendrepatriation is curtailed by government policy

5. facilitate parent-company control

Arms-length sales = using same prices as quoted toindependent customers

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Google usedTransfer Pricing

to cut its taxes by$3.1 billion

in the last 3 years

US ave. corporate tax rate = 39.25%

Google effective tax rate = 2.4%

Google moves most foreign profits throughIreland & Netherlands to Bermuda.(Double Irish & Dutch Sandwich)

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2009: US Treasury Department proposed taxes onsome intra-company transfers, to raise $86.5

billion in new revenue over the next decade.High Tax Countries1. USA 39.25%

2. France 34.42%

3. Belgium 33.99%

4. Canada 33.5%

Low Tax Countries

1. Ireland 12.5%2. Iceland 15%

3. Hong Kong 17%

4. Singapore 9% or 17%

Tax Havens = no / low tax

British Virgin Islands

Bermuda Channel Islands

Cayman Islands

Panama Turks & Caicos

Delaware, USA

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International Price QuotationsEssential Ingredients

1. PRICE

2. Credit

3. Sales terms

4. Transportation

5. Currency

6. Type of documentation required

7. Define quantity (units of measurement)

8. Define quality (agreed quality standards)

Ad i i t d P i i

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Administered Pricing= attempt to establish prices for entire market competitor cooperation / governments / international agreement goal to reduce or eliminate price competition

governments try to lessen effects of destructive competition

C A R T E L S

= companies producing similar products or servicework together to control their markets

may use formal agreements set prices

establish levels of production & sales

allocate market territories

redistribute profits

may take over entire selling function

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C A R T E L S

OPEC Organization of Petroleum Exporting Countries controls price of oil early 1970s OPEC supplied industrial world with 2/3 of its oil,

quadrupled price, causing major world recession

Trans-Atlantic Conference Agreement controls shipping

set rates on 70% of cargo between US & northern Europe

De Beers controls diamond market

mines worlds diamonds + takes in another throughcontracts with other mines + outside buying office buys up

last to protect prices

All th t litt

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All that glitters

1890 - De Beers cartel created by

founder Cecil John Rhodes 1938 - De Beers hired NY advertis-ing company to market idea that thelarger the diamond on an engage-ment ring, the greater the love

1960s - similar campaign in Japan createddiamond ring tradition

2004 - new diamond anniversary campaign

2009 - new campaign only thing strongerthan diamond is love itself

Perceived need to own a diamondappears, if anything, to be increasing.

"When you get engaged, you get a diamond."

DIAMONDS i

http://images.google.com/imgres?imgurl=http://members.tripod.com/~Bond_MI6/Diamonds/diamondlogo.jpg&imgrefurl=http://members.tripod.com/~Bond_MI6/Diamonds/diamonds.html&usg=__c79pOvvpyHWMn-z4FpOSha0tG5c=&h=252&w=600&sz=6&hl=en&start=17&tbnid=RtQnFYMRBbzmbM:&tbnh=57&tbnw=135&prev=/images?q=diamonds+are+forever&gbv=2&hl=en&ie=UTF-8

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DIAMONDS inmainstream popular culture

http://images.google.com/imgres?imgurl=http://ecx.images-amazon.com/images/I/619sJX0XjsL._SL500_AA280_.jpg&imgrefurl=http://www.amazon.com/Diamonds-Girls-Best-Friend-Swing/dp/B000V9CH0Q&usg=__KACCgHrawg9kPwWYn2BaQNaB7aA=&h=280&w=280&sz=29&hl=en&start=26&tbnid=oyjmJ4A_ZpiiqM:&tbnh=114&tbnw=114&prev=/images?q=diamonds+are+a+girl%2527s+best+friend&gbv=2&ndsp=20&hl=en&sa=N&start=20&ie=UTF-8http://images.google.com/imgres?imgurl=http://www.nattawat.org/stuff/images/movies/007%2520-%2520%255B1971%255D%2520Diamonds%2520Are%2520Forever/poster.jpg&imgrefurl=http://directlinks-solution.blogspot.com/2008_07_06_archive.html&usg=__eczRhvZiGsX_pY1bn_5XCP3KFlE=&h=500&w=345&sz=54&hl=en&start=47&tbnid=_f15DZT6nD-NNM:&tbnh=130&tbnw=90&prev=/images?q=diamonds+are+forever&gbv=2&ndsp=20&hl=en&sa=N&start=40&ie=UTF-8http://images.google.com/imgres?imgurl=http://www.blogcdn.com/www.luxist.com/media/2009/09/sc00k3515fyg-2.jpg&imgrefurl=http://www.luxist.com/2009/09/03/will-the-next-big-idea-from-de-beers-drive-shoppers-to-stores/&usg=__66KHvsoENenL6FBTFBwFTMozPYU=&h=250&w=250&sz=15&hl=en&start=37&tbnid=-UfHC3bRvjD3rM:&tbnh=111&tbnw=111&prev=/images?q=de+beers+diamonds+advertisements&gbv=2&ndsp=20&hl=en&sa=N&start=20&ie=UTF-8

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Administered Pricing by Government

establish margins set prices and floors or ceilings

restrict price changes

compete in market

grant subsidies act as purchasing monopsony or selling monopoly

Governments of producing and

consuming countries play ever-increasing role in establishinginternational prices for commoditiese.g. coffee, cocoa, sugar, wheat - world prices

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Pricing is complex and tricky. Work within established marketingobjectives and company policy, with enough flexibility fortactical price movement.

Important concepts: control costs that lead to price escalation Internet facilitates perfect information and arbitrage countertrade tool especially in developing countries

knowledge of local (host country) regulations transfer pricing (= intracompany pricing), not only to optimizecorporate profit, but also to enhance pricing in host country

Foreign Trade Zones (FTZs) = regions or ports that are holdingareas for imported goods before quotas or customs duties

applied

Keys to success in

Global Pricing Decisions

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Next class: Case # 3: AIDS, Condoms & Carnival

Preparation: Course Pack #13Prepare for class discussion

& (optional) hand in

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