Download Pricing

International Pricing
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Factors
affecting
pricing:
Company and
product
Market
Environmental
Confirm impact
of corporate
strategies on
pricing policy
Dealing with
international
pricing
problems
Selection of
most
appropriate
pricing option
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 Company
 Market
and Product Factors
Factors
 Environmental
Factors
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 Standardisation
 Adaptation
 Invention
– Ethnocentric
– Polycentric
-Geocentric
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 achieve
predetermined ROI
 market stabilisation
 pursue market share
 reflect differentiation
 early cash recovery
 prevent new entrants
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 Based



Cost Plus
Target
Range
 Based


on cost/profit
on competition
Customary
Percentage/quartile
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 Based



on demand
Skimming
Penetration
Perceived value/psychological
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Global Pricing: Important
Concepts
Rigid Cost-Plus Pricing and Flexible Cost-Plus Pricing
Dynamic Incremental Pricing
Price Corridor
Dumping
Parallel Imports and Grey Markets
Transfer Pricing
Principle of Arm`s Length
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Environmental Influences on
Pricing Decisions (1)
Currency Fluctuations
Two positions:


Fix prices in country target markets
Fix prices in home-country currency
Pricing should be consistent with the company`s marketing
strategy
Inflation
Inflation is a persistent upward change in price levels
Inflation requires periodic price adjustments
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Environmental Influences on
Pricing Decisions (2)
Government Controls and Subsidies
In countries, which are undergoing severe financial
difficulties, governments may restrict price increases or
prescribe fixed prices
Competitive Behaviour and Market Demand
Pricing decisions are also dependent on the nature of demand
and competitive action
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Rigid Cost-Plus Pricing
Adding up all the costs required to get the product to
where it is sold
All costs incurred in getting a product to an international
market are taken into account
Cost-Plus Pricing sometimes ignores competitive
conditions
Rigid cost-plus pricing is mostly used by companies
new to foreign business
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Flexible Cost-Plus Pricing
Flexible cost-plus pricing is based on the same principle
as rigid-cost plus pricing
However: Prices may vary, if the market situation
requires (e.g. the nature of the customer, the size of the
order or the intensity of local competition)
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Dynamic Incremental Pricing
Price setting practice which is based on the idea that
fixed costs occur regardless of whether the company is
successful or not
The goal is to regain at least variable costs and
international marketing and promotion costs in export
ventures
This strategy is also known as penetration pricing
Penetration pricing means that the product may be sold
at a loss for a certain time to gain market share
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 Transportation
costs
 Taxes, tariffs, admin costs
 Intermediary margins & costs
 Inflation
 Exchange rate fluctuations/Varying currency
values
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Price Escalation – An Illustration
Escalation of Costs Through Exporting
Manufacturer’s price
Sea freight and insurance
Landed cost (CIF) (cost, insurance, freight)
Import tariff: 8 per cent on CIF value
CIF plus tariff
17.5 per cent VAT
Distributor purchase price
Distributor mark-up (15 per cent)
Retailer purchase price
Retail margin 40 per cent
Consumer purchase price
Export
Domestic
price (£) price (£)
10.00
10.00
1.20
11.20
0.90
12.10
2.12
1.75
14.32
11.75
2.15
1.75
16.47
13.50
10.98
9.00
27.45
22.50
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 Lower




production costs
Economies of scale
Learning curve benefits
Relocate production facility
Adapt product
 Reclassify
to lower tariffs
 Reduce distribution costs
 Use FTZs
 Carefully manage currency fluctuations
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 Benefits

provide access to finance abroad


At lower interest rates
good currency management


of quoting in a foreign currency
Leading to potential of gaining additional profit
customers prefer quotes in own currency

Allowing competitive comparison
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





Compete on price
Introduce new products with
additional features
Source / manufacture in the
domestic country
Fully exploit export
opportunities
Obtain payment in cash
Use full cost approach for
existing markets / marginal
costs for new, more
competitive, markets




Repatriate foreign earned
income quickly
Reduce expenditure and buy
services (advertising,
transport, etc) locally
Minimise overseas borrowing
Invoice in domestic currency
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




Compete on non-price
factors (quality, delivery,
service)
Improve productivity and
reduce costs
Prioritise strong currency
countries for exports
Use counter-trade for weak
currency countries
Reduce profit margins and
use marginal costs for
pricing





Keep the foreign earned
income in the local country
Maximise expenditures in
local country currency
Buy services abroad in local
currencies
Borrow money for expansion
in local markets
Invoice foreign customers in
their own currency
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 Bases




of Transfer:
At cost
At cost plus
Most efficient producer + mark-up
At arm’s length
 Strategic




Use:
Create and maintain barriers to entry
Avoid domestic tax liabilities
Avoid foreign tax
Manage levels of market involvement
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Transfer Pricing
Pricing transactions between buyers and sellers that
belong to the same corporation
The approach used will vary with the nature of the firm:
Cost-Based Transfer Pricing
Market-Based Transfer Pricing
Negotiated Transfer Pricing
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Tax Regulations and Transfer Prices
Companies sometimes use transfer prices to shift profits
from high-tax to low-tax countries
The principle of arm`s length is a way of establishing a
transfer price between company units. The price shall
amount to what two independent, unrelated entities
would negotiate
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Authentic items sold through unauthorised
distribution channels, as a result of:
 Price
segmentation
 Exchange
rate fluctuations
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Grey Markets and Parallel
Imports
Distribution of trademarked products in a country
through channels unauthorised by the trademark owner
Grey marketers take advantage of price differences
between markets by re-importing branded merchandise
from low-price to high-price markets
Parallel Imports reduce or cannibalise sales by
authorised channel members in high-price countries
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SOURCE: Assmus and Weiss (1995)
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 Seek
government intervention or legal
protection
 Refusal to issue warranties in certain markets
 Buying out grey marketer
 Price coordination strategies
 Adaptation for different markets
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A
sale that encompasses more than an
exchange for money (Czinkota & Ronkainen,
2004)
 Barter
 Compensation trading
 Counter-purchase
 Offset
 Switch deals
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ADVANTAGES
 Reduces financial risk
 Allows covert
reduction of prices
 Gain entry to new
markets
 Provide stability for
long-term sales
 Can ensure quality of
an international
transaction
DISADVANTAGES
 Time consuming &
complicated
 Compensation goods
often unattractive &
hard to dispose of
 Difficult to evaluate
in terms of
profitability
 Can create new
competitors
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Standardisation vs. Differentiation in
International Pricing
It is an important question whether prices should be
standardised across markets or differentiated between
international markets
Companies do not act consistently
Cross-subsidisation: a company uses financial resources
from one area to compete in another area
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Influences on Prices Standardisation
vs. Differentiation
Reduction of Trade
Barriers
Competitive
Situation
Decreasing
TransportationCosts
Optimal Prices!
Price Nivellation?
Future Developments
External Drivers
Customer Preferences
Cost Situation
External Drivers
Factors Driving
Price Standardisation
Active Retailers/Grey
Markets/Global Sourcing
Inflation/Exchange Rates
ImprovedCommunication
and Information Flow
Regulations/
Tariffs and Duties
Increasing Brand
Globalisation/
Standardisation
Company-Related
Drivers
Market-Related Drivers
Factors Driving
Price Differentiation
Source: Hermann Simon and Robert J. Dolan, Profit durch Power Pricing, Campus, Frankfurt,
1997: p. 168.
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An International Price
Corridor
Unfavourable
Scenario
Recommended
Scenario
International
Prices
International
Prices
highest
highest
Future International
Price Corridor
lowest
lowest
today
Time
tomorrow
today
Time
tomorrow
Source: Hermann Simon and Robert J. Dolan, Profit durch Power Pricing, Campus, Frankfurt,
1997: p. 176.
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Decision Making Framework
for International Pricing
Estimate the price of the product„landed“ in the foreign market by considering
internationalcustomer costs(documentation, freight, insurance, etc.)
Estimate the price the importer
/distributorwill charge
by considering tariffs and intermediary profits
Estimate target price range forend users; estimate
floor, ceiling, and expected prices
Assess company sales potential at given prices
Examine corporate goals and preference for pricing strategy
Select suitable pricing strategy
: rigid cost-plus; flexiblecost-plus; dynamic incremental
Check consistency with current price setting
across product lines, customers, and markets
Implementation:select tactics, distribution prices, and end users prices
Monitormarket performance and make adjustments as necessary
Source: S. Tamer Cavusgil, “Pricing for Global Markets”, Columbia Journal of World Business, Winter 1996: p. 73.
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Dumping
A company exports a product at a price lower than the
price it normally charges in its own home market
Dumping is an important global pricing issue, because it
is sometimes regarded as unfair competition
Organisations like the WTO or OECD have issued
guidelines how to treat these problematic situations
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