Chapter 13 Global Pricing International Marketing 466 Fall 2003

Prof. Hasson

Global Pricing
Global pricing is critical and complex for global firms. Price is the only marketing mix instrument that creates revenues. All other elements entail costs!!. Thus, a companys global pricing policy: 1) May make or break its overseas expansion efforts. 2) Is inherently a highly cross-functional process based on inputs from the firms finance, accounting, manufacturing, tax and legal divisions. Predictably, the interests of one group (say marketing) may clash with the objectives of another group (say, finance). In Marketing 311 you learned price is : An indicator of value (price is often used by consumers to indicate value) Influences perception of quality and ultimately value to consumers Consumer value assessments are often comparative Pricing objectivesRole of price in meeting an organizations marketing and strategic plans: Profit Sales Market share Unit volume (this increases by employing sales incentives, such as lowering prices, rebates and offering lower interest ratescan reduce profit in short run) Survival

 Social responsibility (foregoes higher profits or sales due to pricing objectives) Global pricing concepts Elastic demand--small % decrease in price produces a larger % in quantity demanded (lots of substitutes--butter) TR increases when price decreases Inelastic demandsmall % decrease in price produces a smaller % in quantity demanded (no substitutes-heart surgery, gasoline) TR increases with price increases Multinationals also face the challenge of how to coordinate their pricing policy across different countries. A lack of coordination will create gray market or diverter situations. In gray markets, products marketed in low priced countries are shipped and resold by unauthorized channels in high-priced markets. These imports will compete with high priced equivalent products offered by legitimate distributors. Even within the same geographic area as the Pan-European market, wide cross-border price differences are quite common. See page 435 in Text: Maximum Price Differential in Eurozone % European Price Coordination Why these enormous price variations? Drivers are related to the 4Cs: Company (costs, company goals) Customers (price sensitivity, segments) Competition (nature, intensity) Channels Government policies

Objectives 1) Review pricing policies as they are affected by the differences in international marketing and especially parallel imports. 2) Explore fully the problem of price escalation and ways to lessen price escalation. 3) Examine foreign trade zones as an important means of controlling and possibly lessening some of the costs associated with price escalation. 4) Discuss countertrades as an important tool in international pricing

Global Pricing Objectives and Strategies

International Pricing approaches

Profit-BasedMarket Skimming Deliberate attempt to reach a market segment willing to pay a premium price. Maximize profit & seek quick payback. Consumer electronics, luxury goods marketers, HDTV Sales BasedPenetration pricing Using price as a competitive weapon to gain market share position. Quickly build market share. Product may need to be sold at a loss for a certain time. Cost-BasedFull cost vs. Variable cost (estimated future cost) Easy to arrive at quote but bad since ignores demand or market conditions price too high or too low Full cost = direct and indirect costsfull absorbtion Variable cost = selling costs covers variable costs or future costs

Gray Market Goods

With the continuing unification of the European Community, fluctuating exchange rates and the general globalization of markets, parallel imports are a growing problem. Example: Levi 501 Jeans To prevent parallel markets from developing when such marketing and pricing strategies are used, Companies must maintain strong control systems. These control systems are difficult to maintain

Discuss the causes and solutions of parallel imports and their effect on price. 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 manufacturers regular distribution system. This practice is lucrative when wide margins exist between prices for the same products in different countries. Conditions that can create the profitable opportunity for a parallel market.

Variations in the value of currencies between countries frequently lead to conditions that make parallel imports profitable. When the dollar was high relative to the West German mark, Cabbage Patch dolls were purchased from German distributors at what amounted to a discount and resold in the United States.

Purposefully restricting the supply of a product in a market is another practice that can cause abnormally high prices and thus make a parallel market lucrative. Global Pricing and Currency Movements Strategies under Varying Currency Conditions See Exhibit 13-3 and 13-4 Pricing policies that permit large price differentials between country markets. Japanese merchants have long maintained very high prices for consumer products sold within the Japanese market. As a result, prices for Japanese products sold in other countries are often lower than they are in Japan. The possibility of parallel market occurs whenever price differences are greater than the cost of transportation between two markets.

In Europe, because of differing taxes and competitive price structures, prices for the same product vary between countries . Perfume and designer brands like Gucci and Cartier are especially prone to gray markets..

Price Escalation. When products are moved across borders, additional costs are incurred. The challenge facing the international marketer is controlling
or eliminating such costs. See page 421 in Text Options to lower export price Attributed to: the extra cost of the physical movement of goods to tariffs and non-tariff barriers features of product

Pricing for Inflationary Environments Countertrade NATURE AND IMPORTANCE OF PRICE

What is PRICE?

Define PRICE: AS THE MONEY OR OTHER CONSIDERATION, INCLUDING OTHER PRODUCTS AND SERVICES, EXCHANGED FOR THE OWNERSHIP OR USE OF A PRODUCT OR SERVICE.
THE PRACTICE OF EXCHANGING GOODS AND SERVICES FOR OTHER GOODS AND SERVICES RATHER THAN FOR MONEY IS CALLED BARTER. ALTHOUGH MONEY IS EXCHANGED FOR MOST PRODUCTS AND SERVICES, THE AMOUNT EXCHANGED IS NOT ALWAYS THE SAME AS THE LIST OR QUOTED PRICE NOR IS THE AMOUNT ALWAYS CALLED THE PRICE. Tuition, Fare, Fee

2. PRICE AS AN INDICATOR OF VALUE PRICE IS OFTEN USED BY THE CONSUMER TO INDICATE VALUE THE RATIO OF PERCEIVED BENEFITS TO PRICE (VALUE = PERCEIVED

BENEFITS/PRICE) Equation shows for a given price, as perceived benefits increase, value increases. VALUE PRICINGIncreasing product and service benefits while maintaining or increasing price.
PRICE CAN ALSO INFLUENCE THE PERCEPTION OF QUALITY, AND ULTIMATELY VALUE, TO CONSUMERS. CONSUMER VALUE ASSESSMENTS ARE OFTEN COMPARATIVE.

3. PRICE IN THE MARKETING MIX

PRICING HAS A DIRECT EFFECT ON A FIRM'S PROFITS by definition of the PROFIT EQUATION:

PROFIT = TOTAL REVENUE - TOTAL COST.

Pricing Decisions influence both total revenue and total costs

1) Price AFFECTS QUANTITY SOLD = Total revenue 2) THE QUANTITY SOLD AFFECTS A FIRM'S COSTS BECAUSE OF EFFICIENCY OF PRODUCTION SIX STEPS IN SETTING PRICE: Importance of price in Marketing mix leads us to look
at understanding the six steps involved in the process of setting prices

II. STEP 1: IDENTIFYING PRICING CONSTRAINTS AND OBJECTIVES 1. IDENTIFYING PRICING CONSTRAINTS
In Marketing Research as with Pricing, WHEN DEFINING A Pricing Problem IT IS IMPORTANT TO CONSIDER BOTH OBJECTIVES AND CONSTRAINTS THAT NARROW THE RANGE OF ALTERNATIVES AVAILABLE TO SOLVE THE PROBLEM. PRICING CONSTRAINTS--DEFINED AS FACTORS LIMITing THE LATITUDE OF PRICES A FIRM MAY SET SUCH FACTORS INCLUDE:

 DEMAND FOR THE PRODUCT CLASS, PRODUCT, AND BRAND. NEWNESS OF THE PRODUCT: STAGE IN THE PRODUCT LIFE CYCLE. SINGLE PRODUCT VERSUS A PRODUCT LINE. COST OF PRODUCING AND MARKETING THE PRODUCT. COST OF CHANGING PRICES AND TIME PERIOD THEY APPLY. TYPE OF COMPETITIVE MARKETS: See14-3 p368 COMPETITORS' PRICES. IDENTIFYING PRICING OBJECTIVES.
PRICING OBJECTIVES ARE EXPECTATIONS THAT DEFINES THE ROLE OF PRICE IN AN ORGANIZATION'S MARKETING AND STRATEGIC PLANS.

FIVE BROAD OBJECTIVES that tie into THE ORGANIZATION'S PRICING POLICIES:

PROFIT
OBJECTIVES SUCH AS MANAGING LONG-RUN PROFITS, MAXIMIZING CURRENT PROFITS, AND TARGET RETURN OBJECTIVES ARE USUALLY MEASURED IN TERMS OF RETURN ON INVESTMENT OR RETURN ON ASSETS.

SALES

A FIRM'S PRICING OBJECTIVES MAY BE TO INCREASE EITHER SALES REVENUE OR UNIT SALES.

MARKET SHARE
THIS IS THE RATIO OF THE FIRM'S SALES REVENUE OR UNIT SALES TO THOSE OF THE INDUSTRY.

UNIT VOLUME.

THIS INCREASES BY employing sales incentives, such as lowering prices, giving rebates, or offering lower interest rates---CAN REDUCE PROFIT in short run.

SURVIVAL
MORE IMPORTANT OBJECTIVE THAN PROFITS, SALES, AND MARKET SHARE.

SOCIAL RESPONSIBILITY