International pricing a market perspective

Gary Marsh Teaching Company Associate, Sheffield University Management School, Sheffield, UK

Keywords

Pricing, International marketing, Competitive advantage

Introduction
``managing in a borderless world doesn't mean managing by averages'' (Ohmae, 1990, p. 24).

Abstract

Examines the factors that must be taken into account when determining the international pricing of a product, utilising specific examples from industry. Argues that specific country preferences require organisations to adapt pricing. Promotes a framework for analysing the micro environment and identifies ways in which organisations can use international pricing to gain a competitive advantage. Proposes the need for a predetermined management mentality and points out that until pricing is given the attention it deserves, and is respected as an essential element of international success, organisations will under-perform. Presents limitations and offers direction for further research.

Falling trade barriers between national markets, the rise of Newly Industrialised Countries and technological change are having profound effects upon the structure of international industries and imposing implications on the international business environment. Doole et al. (1994, p. 8) points out that ``the pressures of the international environment are now so great and the bases of competition within many markets are changing so fundamentally that the opportunities to survive with a purely domestic strategy are becoming limited''. It appears then that the dynamic and turbulent changes of the international environment present companies with a series of challenges for survival. The emergence of the European single market in particular, has prompted thought from academics and business men around the world to consider the extent of globalisation. Standardisation and adaptation are two streams of opinion on this issue, which lay at the core of international marketing. The thought of globalisation leading to standardisation is nurtured by Theodore Levitt of the Harvard Business School. Levitt (cited in Vernon-Wortzel and Wortzel, 1983, p. 307) suggests that technological advancements are driving standardisation. Organisations who are:
geared to this new reality benefit from enormous economies if scale in production, distribution, marketing and management.

Others (such as Govindarajan and Gupta, 1998, p. 3) argue that integration of the global world is far from complete and standardised products are not readily accepted. The more accepted opinion is forwarded by Ohmae (1990, p. 24):

When it comes to product strategy, managing in a borderless world doesn't mean managing by averages . . . it doesn't mean that the appeal of operating globally removes the obligation to localize products.

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He believes that market share is gained through aggressive low pricing supported by standardisation.
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In Japanese markets, perceived value is a principal influence on product success. The images of quality significantly outweigh the actual value of the product, as quality is predominantly associated with high prices. This is demonstrated by the domination of Mercedes and BMW in the foreign import market. Johnny Walker whisky marketed in Japan, also represented images of high status. In an attempt to gain market share from its main rival Chivas, it reduced its price. Japanese consumers perceived the reduction in price to be a reduction in quality and status, resulting in a drastic decline in sales (Adapted from Howard and Herbig, 1996, p. 6). In the light of this case, Levitt's intelligible idea of high quality, low priced products selling successfully throughout the world is difficult to concur in all situations. Specific country preferences require organisations to adapt their pricing. The state of commotion and competitive realities in today's international markets require competitive advantages to be identified and sustained to ensure survival. This paper seeks to discuss the factors that must be taken into account when determining the international pricing of a product. It also seeks to identify ways in which international pricing can be used to gain a competitive advantage.
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Determining the international pricing of a product

The obligation of international marketing strategy is to match the organisation with its environment. If the business environment extends internationally then national environments become significant in its development. In its home country, Heineken is positioned as an averaged price beer, which in restaurants and bars can be compared with the price of soft drinks and mineral water. Internationally, however, it uses a global positioning strategy of premium price and high quality (adapted from Weinstein, 1994, p. 4). Similarly, Kronenbourg and Stella Artois are premium priced, exclusive drinks in the UK, whereas in Belgium and France, they are low priced drinks. (Adapted from Dawes and Thornes, 1995, p. 82). Terpstra and Sarathy (1997, p. 715), suggest that there are several factors important in international pricing. Their framework sees firm-level, product-specific, market specific, and environmental factors each as influential factors of foreign price setting. The framework opens our minds to question and challenge certain issues, but it does not provide us with a sufficient framework for analysing the micro environment, which is ultimately responsible for determining the international pricing of a product. Price setting in international marketing is influenced on three levels the internal level, which takes into consideration objectives for return on investment, required sales volume and cost factors. The structure of the company is also a significant internal influence, for example, a company that has chosen an `umbrella' structure is unlikely to have central price control. The core element of international viability is the cost of producing and marketing the product, which inevitably has to be considered. This is considered in the case of exporting Australian wine to foreign countries:
high production and distribution costs associated with Australia's remote geographic location and distance from the major importing countries of Canada and the United Stated makes exporting success unlikely'' (Edwards and Spawton, 1990, p. 17).

cultural factors also influence pricing decisions. For example,

China's market has now entered the growth stage of its life cycle and market share in Chinese markets will be increasingly dependant on competitive pricing strategies (Wong and Maher, 1997, p. 51).

Both these levels are recognised to influence the international pricing of a product, and shape the micro environment, which must be considered as the major determinant of international pricing. For the purpose of this paper, in order to provide specific industry examples, the internal and macro environments are not discussed in isolation, but are seen as working through the micro determinant. A useful framework (Figure 1) for discussing the determinants of international pricing, is that of Diller and Bukhari (1994, p. 164). The factors relating to the micro environment are assembled into four classifications which coin the market determinants of international pricing. The discussions will take place under the proposed framework detailed below.

Competitive structure

The macro level incorporates elements such as government restrictions. Consider the pricing in the Australian wine industry an increase in tax to 20 per cent prompted producers to increase prices in an attempt to retain profitability (Edwards, 1990). The business cycle stage, exchange rate and

Carefully evaluating competitors pricing policies before setting prices is just as important in the international market as in the domestic market. The level of competition in the market is often strongly linked to the stage of the products life cycle in different countries. For instance, consider the carbonated soft drinks market in France reaching maturity in the lemonade, fruited carbonates and tonic sector[1]. The main driving force is competition from still iced teas and fruit juice drinks with their ``new age positioning''[1]. These impose new challenges for price setting with companies forced to resort to positioning on value for money. We also see prices under pressure in the French mustard market, an impact of the rapid growth of the low priced vinegar's market. The high prices demanded by mustards appears to be pushing customers away[2]. The emergence and continued growth of own branded labels in the French breakfast cereals market is altering the competitive structure of the industry. The market was created by Kellogg, the large US multinational. However, more recently, own labelled products have gained significant market share of 14 per cent in volume sales. In particular, close to a quarter of sales in the French muesli sales are from own branded products seen to be at the lower end of the price range[3]. As the growth continues, the flexibility, which companies such as Kellogg have in their pricing policies will decrease,

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presenting management with a series of implications placed on their pricing strategies. Heilwasser, a German bottled water company, markets its water product on a ``semi-medicinal basis''[4], which since 1995 has been losing market share. This is said to be linked to:

promotion of the healthy lifestyle qualities of mainstream mineral waters which differ little from higher price Heilwasser in terms of mineral content[4].

Competitor activity within an industry such as this can have profound effects on the products price.

said that due to the reducing average Prices, its volumes fell by 40 per cent[4]. Pricing structure also refers to the below the line pricing promotions, such as money off vouchers. This is prominent in the French mustard market[2]. In this particular market there is ``a high incidence of usage of belowthe-line promotions such as money-off offers'', which is an influential component of the lower average price of the market. The importance of special offers in price will always vary between countries.

Distribution structure

Price structure

As presented in the Heineken case, products can be positioned with a high price in one country and a low price in another. This can be attributed to the pricing structure of international markets, viewed here as a major determinant of the products pricing policy. Consider, the Bottled water market in Italy[5]. The market over the last decade has consistently increased in comparison to other soft drinks markets.
Italian consumption of bottled water now ranks among the highest in Europe . . . with average prices in Italy around 25 per cent lower than in neighboring countries[5].

The distribution structure of the international market will also determine the products price. Within each market, there will be different structures, which provide differing levels of supplier and buyer power influencing the flexibility of the pricing decision. For instance, the distribution structure of the frozen ready meal market in Germany is a major determinant on pricing.
Sales via discount outlets have tended to grow over the past few years and cut into sales via smaller supermarkets and traditional food retailers[6].

The demand decreased over the last two years for two reasons - firstly, the cool summer weather, and secondly, the industry has tended to use price to stimulate demand instead of other marketing techniques. It is now thought that as the market is reaching maturity and prices are extremely low, demand cannot be further stimulated by lower prices with a high level of market concentration supporting this. To highlight the importance of the markets average price, we look at the German company, Terme San Andrea in Italy. It is

This increasing trend towards discounters such as Aldi is a strong determinant of price, and certainly in many cases, a deterrent. Distributors in the Australian wine industry, which are predominantly speciality retail wine outlets and outlets at vineyards offer a high degree of customer service in order to captivate custom from the higher end of the economic scale. This is achieved through inviting the customer to sample the product, supported by superb product knowledge offered by staff. The market structure is a major determinant permitting the high pricing of products.

Consumer behaviour

Figure 1 Determinants of international pricing

Greaves (1995, p. 30) states that ``It is not the cost of the materials that determines the products value, but rather the customers perception of that value''. In China, for instance, price is said to be ``a major determinant in most purchasing decisions for the vast majority of the population'' (Greaves, 1995, p. 30). The price is essentially determined by the amount the consumer is willing to pay for the product and their attitudes towards image and positioning. Germany's frozen ready meals market, for instance, has found that by reducing its prices, customers are lured to the market. Sales are also ``becoming progressively oriented towards larger packs''. Where consumers appear to be price driven, the organisation may find it imperative that they

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uphold a competitive price, while image then becomes an important associate. It is from this position that the paper seeks to demonstrate how international pricing can be used to gain a competitive advantage.

How can companies use international pricing to gain a competitive advantage?

Competitive advantage is acknowledged as a crucial ingredient for surviving today's unfaithful international environment. Indeed, Thompson and Coe (1997, p. 70) points out that:
companies are missing a strategic window of opportunity to utilise price, in carefully analysed situations, to build a competitive advantage.

The competitive advantage of Whirlpool Corporation is said to be built on its multi brand European portfolio:

markets will continue to steal large shares. With particular reference to the US automobile market, the price of Japanese cars was significantly lower than the markets average price enjoyed by Chrysler, General Motors and Ford. The cost leadership strategy supported by obvious cost advantages, are said to be ``the foundation of Japanese automaker competitive advantage in the eighties'' (Langlois, 1997, p. 55). The competitive advantage, in situations such as this is further stimulated, and increasingly difficult to imitate through utilisation of profits, which broaden the production line and increases market share with penetration of new models. These new models can again be strategically priced for their own competitive advantage or to support the global competitive advantage of the company.

Distribution structure

Our products, communication, pricing and competitive moves are based on this panEuropean positioning for our brand portfolio (Ronkainen and Menezes, 1996, p. 56).

Pricing is quite clearly an important tool in supporting a global competitive advantage in the case of Whirlpool. More specifically, how can it be utilised in gaining the competitive advantage? Diller's framework provides an opportunity to discuss various strategies which have and can be effective.

Competitive structure

The weak Lira makes it difficult for foreign car manufacturers to export to Italy, where Fiat is highly successful. The Italian producer has been more than willing to price forcefully in international markets, where market share continues to increase. Fiat believes that its ``competitive advantage lies in developing small cheap cars for the-fast growing markets of Asia and Latin America''. (Economist, 1995). Developing a ``cut price'' car in Asia, Latin America and North Africa, will enable them to reap benefits from economies of scale. It will deliver a absolute cost advantage, which firmly supports a cost leadership strategy in the growing market of developing countries, thus building barriers of entry.

Lexus, the saloon car manufacturer does not compete with other saloon manufacturers in a direct fashion. Companies such as Peugeot, Volkswagen and Rover are all competing in the same market spending extreme amounts of capital on both reactive and pro-active advertising, attempting to persuade the market that they have the superior product. Lexus, following a focused differentiation strategy, which markets at a considerably higher price has built a competitive advantage through offering a higher perceived value to the customer. This perceived added value, which is the basis for competitive advantage is further supported by Toyota's distribution structure.

Consumer behaviour

Price structure

The low price, high quality strategy of Japanese companies is widely acknowledged as the reason for their flourishing association with international markets. Unless competitors have the resources, and indeed, ability to hold a stance of cost leadership, Japanese companies in most

In the early 1980s, Swiss watch manufacturers SMH Ltd entered the Chinese watch market with the lowly priced Rado brand. Positioning itself in direct competition with subsidised domestic companies, whose costs were significantly lower, seriously limited the potential for achieving any success. Realising this effect and the Chinese consumer preference for foreign products over that of domestic suppliers, they launched lines which were considerably more expensive, focusing their strategy on the upper end of the market. Having withdrawn the cheaper lines, the image is positioned high and watches now trade for between $964 and $2,410 enjoying a competitive advantage (adapted from Greaves, 1995, p. 30). Watch producer Titan based in Bangalore, who produces watches based on Japanese technology, recently entered a number of European countries with its medium priced

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product. Potentially, market penetration of this kind will result in a competitive advantage. However, organisations should recognise the difficulty in sustaining this, the inevitability of price wars and the cost advantage the domestic producer has in the international market.

Conclusion
To conclude, management must make a commitment to broaden their comprehension of international markets. A long term view requires pro-active management who are prepared to operate in uncertain markets seeking to exploit the differences in consumers across international markets. As in the case of Heineken and many other companies, large price differentials are present across international markets, for very similar products. From a strategic perspective, the success and ultimate survival of the company lies in understanding the extent to which price differentials can be exploited. Diversity is quite clearly present and must be acknowledged and integrated into international pricing strategies. Used effectively, pricing can create opportunities within markets and resist potential threats. It is however, important to recognise that the pricing decision relies primarily on the company's ability to stringently follow, for example, its cost leadership strategy. To take advantage of an international setting, management must take account of price determinants as discussed in this paper and realise that inadequate planning will not permit a competitive advantage to be gained. Note that the discussions have by no means been exhaustive. The company should be highly coordinated and demonstrate vigorous decision making in determining its pricing strategy. Managing prices effectively requires a certain management mentality, which identifies and appreciates differences in markets and price as a strategic tool. This mentality is of paramount importance and will guide companies to standardise when it is feasible to do so and adapt, when necessary, pricing policies across international settings to meet the need of the market. The evidence presented shows that the possibilities for standardising pricing are indeed, very weak. The Johnny Walker whisky company is representative of many cases in which rash pricing decisions have led to poor performance and failure in international

markets. The company did not understand the Japanese market and based its pricing policy on an objective to increase market share. Having discussed the various markets and the differentials present, it should be clear that decisions should be based on a true understanding of the market and the company should use its experience within international markets to enhance the accuracy of the policy. It should be recognised that until pricing is given the attention it deserves and respected as an essential element of international success, companies such as Johnny Walker whisky will continue to under-perform.

Limitations and direction for further research

This paper does present various limitations. The paper may present a view which isolates pricing as working in isolation from the other elements of the marketing mix to achieve success. In fact, the components should be seen as working together to exploit the buying habits of the target market and to achieve a competitive advantage. For instance, factors discussed, which determine pricing were accompanied by examples predominantly representing a European perspective to international marketing. The author also recognises the possibility for adding value by discussing important factors and drawing competitive advantages from discussions presented. The paper only identifies ways of gaining a competitive advantage. This should be seen as a short term view and further research presenting a long term view of sustaining a competitive advantage is prompted.

Notes

1 Mintel International Group Ltd, Carbonated soft drinks: France, Mintel European Market Intelligence, (CD ROM). 2 Mintel International Group Ltd, Condiments: France, Mintel European Market Intelligence, (CD ROM). 3 Mintel International Group Ltd, Breakfast Cereals: France, Mintel European Market Intelligence, (CD ROM). 4 Mintel International Group Ltd, Bottled Water: Germany, Mintel European Market Intelligence, (CD ROM). 5 Mintel International Group Ltd, Bottled Water: Italy, Mintel European Market Intelligence, (CD ROM). 6 Mintel International Group Ltd, Frozen Ready Meals: Germany, Mintel European Market Intelligence, (CD ROM).

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Dawes, B. and Thornes, S. (1995), International Business A European Perspective, TransAtlantic and Publications, Inc., Philadelphia, PA. Diller, H. and Bukhari, I. (1994), ``Pricing conditions in the European Common Market'', European Management Journal, Vol. 12 No. 2. Doole, I., Lowe, R. and Phillips, C. (1994), International Marketing Strategy Analysis, Development and Implementation, International Thomson Business Press, London. Economist (1995), ``Gianni, come to mama/happy days at Fiat'', CD ROM, 28 Jan. Edwards, F. and Spawton, T. (1990), ``Pricing in the Australian wine industry'', Wine Marketing: An International Perspective, Vol. 24 No. 4. Govindarajan, V. and Gupta, A. (1988), ``Setting a course for the new global landscape. As business goes global'', Financial Times, 30th January, p. 3. Greaves, J. (1995), ``The right price'', Chinese Business Review. Howard, C. and Herbig, P. (1996), ``Japanese pricing policies'', Journal of Consumer Marketing, Vol. 13 No. 4, pp. 5-17.

References

Langlois, C. (1997), ``For profit or for market share? The price strategy of Japanese automakers on the U.S. market'', Journal of the Japanese and International Economies, Vol. 11. Ohmae, K. (1990), The Borderless World, Collins, London. Ronkainen, I.A. and Menezes, I. (1996), ``Implementing global marketing strategy: an interview with Whirlpool Corporation'', International Marketing Review, Vol. 13 No. 3, pp. 56-63. Terpstra, V. and Sarathy, R. (1997), International Marketing, 7th ed., The Dryden Press, Hinsdale, IL. Thompson, K. and Coe, B. (1997), ``Gaining sustainable competitive advantage through strategic pricing: selecting a perceived value price'', Pricing Strategy & Practice, Vol. 5, No 2. Vernon-Wortzel, H. and Wortzel, L. (1983), Global Strategic Management The Essentials, John Wiley & Sons, New York, NY. Weinstein, A. (1994), ``A primer for global markets'', Marketing News. Wong, Y. and Maher, T. (1997), ``New key success factors for China's growing market'', Business Horizons, Vol. 40. No. 3.

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