Lecture International marketing (14/e) - Chapter 18

International Marketi
ng
14th Edition
P h i l i p R. C a t e o r a
M a r y C. G i l l y
John L. Graham

Pricing
for
International Markets
Chapter 18
McGraw­Hill/Irwin
International Marketing 14/e

Copyright © 2009 by The McGraw­Hill Companies, Inc. All rights reserved.


What Should You Learn?
• 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
18-2

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
18-3


Pricing Policy
Pricing 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

18-4


Pricing Policy
Parallel 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

18-5


How Gray-Market Goods
End Up in U.S. Stores
Exhibit 18.1

18-6


Approaches to International Pricing

• Company policy relates to net price received
– Control over end prices
– Control over net prices

• Cost and market considerations
• Employ pricing as part of strategic mix
– Market-oriented pricing factors

18-7


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

18-8


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

18-9


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

18-10

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
18-11


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

18-12

Sample Causes and Effects
of Price Escalation

18-13


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
18-14


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
18-15


How Are Foreign
Trade Zones Used?
Exhibit 18.3

18-16


Leasing in International Markets
• Selling technique that alleviates high prices and
capital shortages
• Opens the door to a large segment of nominally
financed foreign firms
– Firms 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

18-17


Leasing in International Markets
• 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
• Leasing disadvantages
– Inflation may lead to heavy losses at end of contract period
– Currency devaluation, expropriation and political risks

18-18


Countertrade as a Pricing Tool
• A tool every international marketer must be
ready to employ
– Often gives company a competitive advantage

• Russia and PepsiCo
– Trading vodka and wine for soft drinks

• Countertrade – part of the market-pricing tool kit

18-19


Countertrade as a Pricing Tool
• Types of countertrade
–
–
–
–

Barter
Compensation deals
Counterpurchase or offset trade
Product buyback agreement

18-20


Countertrade as a Pricing Tool
• 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
18-21


Transfer Pricing Strategy
• Prices of goods transferred from a company’s
operations or sales units in one country to its
units elsewhere
– May be adjusted to enhance the ultimate profit of company

• Benefits
– Lowering duty costs
– Reducing income taxes in high-tax countries
– Facilitating dividend repatriation when dividend repatriation is
curtailed by government policy

18-22


Transfer Pricing Strategy
• Objectives
– Maximizing profits for corporation
– Facilitating parent-company control
– Providing all levels of management control over profitability

• 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
18-23


Price Quotations
• May include specific elements affecting the price
–
–
–
–
–

Credit
Sales terms
Transportation
Currency
Type of documentation required

• Should define quantity and quality

18-24


Administered Pricing
• Cartels
– Exist when various companies producing similar products or
services work together

►

To control markets for the types of goods and services they produce

– May use formal agreements
►
►
►
►
►

To set prices
Establish levels of production and sales for participating countries
Allocate market territories
Redistribute profits
May take over entire selling function

– Examples
►
►
►

OPEC
The Trans-Atlantic Conference Agreement
De Beers

18-25