10/21/2011

Chamila Perera

After this lecture you should be able to: Describe the drivers of foreign market pricing Explain the management of price escalation Explain the management of pricing in inflationary environments Discuss strategies for managing the effects of currency fluctuations Describe the use of transfer pricing Explain the implications of antidumping regulations Understand how to implement pricing coordination Describe countertrade

Product Promotion place

pricing

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http://www.exchange-rates.org/history/AUD/USD/G/30

Strong Australian dollar poses economic danger http://www.youtube.com/watch?v=M1AgBRnwYvk

Japanese Companies Fight Rising Yen Value http://www.youtube.com/watch?v=xNHsge_6hHM&feature=related

Proctor and Gamble selling small sachets of shampoo in developing markets due to low buying power

Louis Vuitton targets more broadly in developed countries like Japan than it does in developing countries (projecting premium image)

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Our range is worn by A list celebrities to the likes of Kim Kardashian, Selena Gomez and Katy Perry to name only a few. Now, as one might appreciate, the style counsel for these types of celebrities are not ones to pick run of the mill type clothing, and they do so on the basis to ensure that the styles are cutting edge, and only worn by a select

are priced such that they remain

few. Similarly these items inaccessible to the undesirable.

competition (nature and intensity)

customers (price sensitivity and segments)

channels
(distribution)

Government polices

company (costs and goals

OR

The organisation needs to decide what it want to accomplish through its international pricing strategy. Its goals might include maximising current profits, penetrating the market or projecting a premium image. Cost differentials between countries can lead to wide difference in price. Organisation costs figure prominently in the pricing decision.
company (costs and goals

Costs set the floor: the organisations want to set at least a

price that will cover all costs needed to make and sell its products.

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Cost-plus pricing

adding international costs and a markup to the domestic manufacturing cost

Dynamic incremental pricing

based on the international costs and that ignores domestic fixed costs

Could trigger accusations of dumping

company (costs and goals

Hindustan Lever spends a lot its R&D on developing new technologies to reduce manufacturing costs

Pacific Dunlap sent (2009) its manufacturing (Bonds, King Gee, and Hard Yakka) to Asia

Customer demand is also a function of buying power, tastes, habits, cultural norms and substitutes

Low price vs luxury image

customers (price sensitivity and segments)

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Number of competitors varies from country to country

differing degrees of intensity

Nature of competition

global versus local presence of counterfeit products strength of private labels

Competitive position

market leader at home/market follower abroad

PRICE OR NON PRICE COMPETITION?

competition (nature and intensity)

Direct

not possible in all countries due to the size of markets that makes direct representation extremely costly
channels
(distribution)

Indirect

length of channel can affect end price of products/services

Assortment of channel choices : personal computer industry Direct marketers Specialty stores General stores Manufacturers representatives Hewlett-Packard, IBM

Dell

Dick Smith, Office works

Harvey Norman

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Check this clip Here's an Idea-Amazon.com the Lowest Price Around http://www.youtube.com/watch?v=rSlz-NYC6-0 Briefly answer the following. Online business models often bring international retail marketers competitive advantages through minimising costs. This enables them to offer more attractive prices than competitors in the market. Can all online marketers gain this advantage? What are other key factors that determine attractive online pricing?

Taxation regulation

sales tax on cars in the EU

15% in Luxembourg - 213% in Denmark Even after the launch of the euro, car prices in the EU can still vary by up to 50 per cent.

recent reduction on tax on imported wines in Hong Kong allows for a reduction in end selling price
Government polices

competition (nature and intensity)

customers (price sensitivity and segments)

Tax and tariffs

Government polices

Shipping, insurance
company (costs and goals

channels
(distribution)

margins of intermediaries

The process of covering incremental costs (e.g. Shipping, insurance, tariffs, margins of intermediaries) that make the final foreign retail price higher than the domestic price

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TWO BROAD APPROACHES TO DEALING WITH PRICE ESCALATION Find ways to cut the export price Position the product as a premium brand

rearrange the distribution channel

i.e., Bypass Japanese Kairetsu through direct marketing

rearrange costly features (or make them optional)

i.e., offer the no-frills version of a Sony Vaio in Cambodia give the customer the option to upgrade

downsize the product make a smaller version of the product assemble or manufacture in foreign markets
i.e., BMW assemble cars in South Africa

adapt the product to escape tariffs or tax levies

i.e., RANG ROVER car or a truck?

Ways to safeguard against inflation

modify components/ingredients

not all components maybe subject to the same level of inflation

source material from low cost suppliers

import from low inflation countries

shorten credit terms

juggle terms of payment

include escalator clauses in long-term contracts

to provide necessary protection

quote prices in a stable currency

Dollar or Euro

pursue rapid inventory turnovers

use of IT and JIT delivery to yield competitive advantage

draw lessons from other countries

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Action adapt the product line

Purpose to reduce exposure to a government imposed price freeze

to shift the organisations target segment shift target segments or markets launch new products or variants of existing products negotiate with the government navigate around by systematically launching new products or modifying existing ones. to negotiate for permission to adjust their prices. Lobbying can be done individually, but it is more likely to be successful if done industry wide. Given historical information on the occurrence of price controls and other economic variables, econometric models can be constructed to forecast the likelihood of price controls.

predict price controls

Exporters and importers are subject to the whims of currency movements. a strategic view of the problem should be undertaken Two major managerial pricing issues result from currency movements
the Pass-through issue. How much currency movements are reflected in changes to the price customers pay. the Pricing-to-market (PTM). Destination-specific adjustments of mark ups in response to exchange rate movements.

A weakening dollar allows Australian based organisations to lower the yen-price of Australian goods exported to Japan

This enables Australian exporters to steal market share away from the local Japanese competitors without sacrificing profit

A strong dollar will undermine the competitive position of Australian exporters

The retail price in yen goes up as a result Australian exporters might lose market share

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Source: Terry Clark, Masaaki Kotabe and Dan Rajaratnam (1999) Exchange Rate Pass-Through and International Pricing Strategy: A Conceptual Framework and Research Propositions Journal of International Business Studie... > Vol. 30, No. 2, 2nd Qtr ,Pge 249 of 249-268.

The extent of exchange rate pass-through in international pricing is affected By: the firm's pricing orientation performance orientation Distribution policy brand equity exchange rate uncertainty Competitive structure

http://www.youtube.com/watch?v=fS8n1kdl 5_8

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A quick question for you Should exporters pass through gains (or lose) they make from currency movements to their customers?

Figure 14.1 Exporter strategies under varying currency conditions

Currency quotation
Which currency should be used in international business transactions? which party should bear the risk? Sellers and buyers usually prefer a quote in their domestic currency. That way, the other party will have to bear currency risks.

Quoting a common currency could be a way of sharing the risk US dollar across countries with their own currency

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Transfer pricing
Prices charged for sales transactions among related entities of the same organization in different countries
Factors of Transfer pricing tax regimes local market conditions market imperfections joint venture partner morale of local country managers

International pricing and antidumping regulation

Dumping introducing a product to the market of another country at much less than the products normal value in the home market
to protect local producers against the encroachment of low-priced imports, government may levy countervailing duties or fines.

WTO helps regulating some of this behaviour Governments of countries can seek redress with WTO if they feel another country has dumped product in their market member countries must comply with WTO rulings

Price coordination
Price coordination is critical for global (or regional brands) that are marketed with no or very few crossborder variations
IF MARGINAL COST ARE ROUGHLY EQUIVALENT , ORGANISATIONS WOULD CHARGE RELATIVELY LOW PRICES IN HIGHLY PRICE SENSITIVE COUNTRIES AND HIGH PRICE IN PRICE INSENSITIVE MARKETS

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Price coordination : Similar price across markets depends on:

nature of customers Apple prices globally to cater for a global segment and avoid parallel imports amount of product differentiation identical products probably need to be priced identically nature of channels how much control over international distributors? nature of competition competing with the same rival in a given region market integration when markets integrate barriers to cross border movement of goods come down internal organisation government regulation

Activity 2

Quickly read Microsoft rethinks unified pricing strategy See whether you can find international pricing related theoretical concepts that we discussed so far in the lecture. Underline them. Will the proposed strategy work? What do you think?

Increasingly, purchasers demand global-pricing contracts (GPCs) from their suppliers. Before engaging in a GPC with a purchaser, it is important for companies to do their homework: Select customer who want more than just the lowest price Align the suppliers organisation with the customers Hire global account manger who can handle diversity. Reward those global-account managers and local sales representatives who make the relationship work Allow for some pricing flexibility Building information systems to monitor the key variables (e.g. cost variations, competitive situation)

http://www.youtube.com/watch?v=RQ8QsqdJq0c http://www.youtube.com/watch?v=Qf4jtatsGoY&NR=1

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The trading of products without direct monetary payments Countertrade is an umbrella term used to describe unconventional trade-financing transactions that involve some form of non-cash compensation
Pepsis US$ 3 billion arrangement with the former Soviet Union to swap Pepsi for profits in Stolichnaya vodka and ocean freighters and tankers

15% of world trade! (some say its about30 %-50 %) Barter - Direct exchange of goods Compensation deal - cash and products Buyback - buy completed products from the supply of components Offset - cash but spent in the customer country Other parties - Trading houses

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Simple barter Clearing agreement

Swapping one product for another without the use of money. (seldom use these days) Two governments agree to import a set of specified value of goods from one another over a given period. Indonesia provides paper, and galvanised sheets in exchange for 30 000 barrels a day of Iranian crude oil A form of clearing agreement but a third party is involved. The surplus credits are sold to specialised traders at a discount. The third party then uses the credit to buy from good from the deficit country. Specially in trade of technology, turnkey plants or machinery. The seller provides the equipment and agrees to be paid (partly or fully) by the output of the equipment. The most popular form. Two parallel contracts are set up. Each party agrees to buy a specified amount of goods from the other for hard currency over set period. Products are unrelated. The seller agress to offset the purchase price by sourcing from the importers country or transferring technology to the other partys country . Common in Defence contracts .

Switch trading Bayback

(compensati on)

Counterpurchase Offset

Motives

Shortcomings
No in-house use for goods offered by customers timely and costly negotiations uncertainty and lack of information on future prices Transaction cost

gain access to new or difficult markets (necessary evil) Overcome exchange rate controls or lack of hard currency overcome low country credit worthiness Increase sales volume Generate long-term customer goodwill

The drivers of foreign market pricing The management of price escalation The management of pricing in inflationary environments

Strategies for managing the effects of currency fluctuations

The use of transfer pricing The implications of antidumping regulations How to implement pricing coordination Coountertrade

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(1) ________________ is the only marketing mix instrument that creates revenues.
a. Product

b. Price c. Place d. Promotion

(2) All of the following are drivers that govern global pricing decisions EXCEPT:

A. Company B. Customers C. Controls D. Competition

(3) In the international marketplace, _________________ pricing adds international costs and a mark-up to the domestic manufacturing cost.
A. Dynamic incremental pricing B. Export price C. Import price D. Cost-plus price

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(4) One of the risks of dynamic incremental pricing (in the case where the export list price is far below the domestic price) that _____________ can be triggered in the export market.
a. High profit potential b. Dumping charges or accusations c. Falling profits d. Falling quality

(5) ________________ is a function of buying power, tastes, habits, cultural norms and substitutes.
a. Customer needs b. Customer demand c. Competition d. Company costs

(6) Countries with low per-capita income are more __________ than in developed countries.
a. Promotion sensitive b. Price sensitive c. Need sensitive d. Demand sensitive

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(7) Once brand loyalty has been established, price will play less of a role as a purchase criterion, and the firm may be able to institute a ________________ strategy.
a. Demand-based b. Premium pricing c. Elastic pricing d. Promotion-related pricing

(8) There are two ways to deal with the price escalation phenomenon. One of these methods is to cut the export price. The other is to:
a. Change the promotion strategy b. Position the product as a (super) premium brand c. Position the product as a lower quality brand d. Reduce retailer margins.

(9) Which of the following would be a good option to follow if lowering the export price were the firms objective? a. Rearrange the distribution channel b. Change the promotion c. Change the warranty provisions d. Give more of the product in the package as an incentive to purchase

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(10) How can Australian exporters minimise the effects of price escalation in foreign markets?

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