Global Pricing

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Global Pricing

• Chapter 11

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What Causes Price Escalation ?????
New York
London Paris Tokyo
Mexico City
Aspirin 0.99 1.23 7.08
6.53 1.78 Cup of coffee 1.25 1.50 2.10 2.80
0.91 Movie 7.50 10.50 7.89 17.29 4.55 Compact
disk 12.99 14.99 23.16 22.09 13.91 Levi 501
jeans 39.99 74.92 75.40 79.73 54.54 Ray-Ban
sunglasses 45.00 88.50 81.23 134.49 89.39 Sony
Walkman 59.95 74.98 86.00 211.34 110.00 Nike Air
Jordans 125.00 134.99 157.71 172.91 154.24 Gucci
men's loafers 275.00 292.50 271.99 605.19 157.27
Nikon camera 629.95 840.00 691.00 768.49
1,054.42
SOURCE "Tourists and Bargains Galore," Fortune,
June 13, 1994, p. 12.
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Why do prices vary?

• Currency fluctuations
• Affects both costs and revenues
• Inflation
• Late 1980s, in Brazil inflation was 2000
• Retailers had to change their prices several
  times during the week
• Government controls
• Dumping, ___________
• Competitive behavior

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Pricing concepts

• Law of one price in global markets applies only
  to some products
• 777, crude oil
• Many other products experience price dispersion
  due to competition, affordability, regulation,
  differences occur in national markets
• CDs, beer, cigarettes
• Internet and integration (i.e., EU/euro) lower
  this trend

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Boundaries for Market Price

• Product ________ establish the price floor
• Prices for comparable ________ products create
  the price ceiling

Price Ceiling Optimum Price Price Floor
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Pricing Strategies for New Products

• Market _____________
• Charging a ________ price
• Often companies seeking competitive advantage by
  pursuing differentiation strategies or
  positioning their products in the premium
  category.
• May occur at the ___________ stage of product
  life cycle
• Both production capacity and competition limited.
• High price set for innovators and adopters
• As competition increases and product ages, mfrs
  cut prices.
• Examples VCRs, DVDs, etc.

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Pricing Strategies for New Products (cont.)

• ___________ Pricing
• Charging a _____ price in order to penetrate
  market quickly
• Appropriate to saturate market prior to imitation
  by competitors
• Successful examples Sony Walkman, Fuji film
• Cautionary note Not likely with first time
  exporter where product is sold at loss for some
  length of time. Many companies cannot absorb
  those kinds of losses.

1979 Sony Walkman
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Skimming or Penetration Pricing in US?
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Companion Products Pricing

• Products whose sale is dependent upon the sale of
  _________ product
• Video games are dependent upon the sale of the
  game Console
• If you make money on the blades you can give
  away the razors.

X-Box Game System and Sports Game
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Considerations for Setting Price

• Does the price reflect the products quality?
• Should firm pursue market penetration, market
  skimming, or some other pricing objective?
• Fit with product strategy, and
• Should prices differ with market segment?
• Is the price competitive given local market
  conditions?
• Is the price reasonable or exploitative?

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Considerations for Setting Price (cont.)

• What types of discounts or allowances should be
  offered to international customers?
• What pricing options are available if the firms
  costs increase or decrease? Is demand in the
  international market elastic or inelastic?
• Do the foreign countrys dumping laws pose a
  problem?

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Terms of Sale

• Every commercial transaction is based on a terms
  of sale trade terms in contract specify the
  exact point at which the ownership of merchandise
  is transferred and which party pays which costs.
• Contract must specify
• Who obtains the export license, transport the
  goods, pays insurance, prepares customs papers,
  arranges freight, etc. and who pays for these
  activities

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Terms of Sale (cont.)

• ___________ A codification of terms maintained
  by the International Chamber of Commerce (ICC).
  This is used in foreign trade contracts to define
  which parties incur the costs and at what
  specific point the costs are incurred.
  Dictionary of International Business Terms
• Therefore, Incoterms in your transaction contract
  have a direct impact on your costs, and
  therefore, your price. If you quote a price
  (ex-factory), it will be entirely different than
  if you quote a price (CIF).
• Your textbook gives a small sample of commonly
  used Incoterms. Note according to Dictionary of
  International Business Terms, the textbook
  Incoterm definitions are not entirely correct as
  written.

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Incoterms

• Because of possible textbook errors, just
  remember that your price quote will need to take
  into account your agreed-to responsibility of
  shipping and insuring the product. As a minimum,
  know the following Incoterms that apply to all
  modes of transportation
• _________ A sellers price quote for goods at
  the factory. Seller places goods at the disposal
  of the buyer at the time specified in the
  contract buyer takes delivery at the premises of
  the seller and bears all risks and expenses from
  that point on.
• ___________ seller agrees to deliver the goods
  to the buyer at the place he or she names in the
  country of import with all costs, including
  duties, paid.

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Price Escalation

• See Tables 11-2, 11-3

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Environmental Influences on Pricing Decisions

• Currency Fluctuations
• Inflationary Environment
• Government Controls, Subsidies, Regulations
• Competitive Behavior
• Sourcing

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Pricing Policy Alternatives

• Extension
• Adaptation
• Geocentric

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Extension Pricing

• Ethnocentric
• Per-unit price of an item is the same no matter
  where in the world the buyer is located
• Importer must absorb freight and import duties
• Fails to respond to each national market

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Adaptation Pricing

• Polycentric
• Permits affiliate managers or independent
  distributors to establish price as they feel is
  most desirable in their circumstances
• Sensitive to market conditions but creates
  potential for gray marketing

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Geocentric Pricing

• Intermediate course of action
• Recognizes that several factors are relevant to
  pricing decision
• Local costs
• Income levels
• Competition
• Local marketing strategy
• But that price coordination with headquarters is
  necessary.

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Gray Market Goods

• Trademarked products are exported from one
  country to another where they are sold by
  ____________ persons or organizations
• AKA parallel imports

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Parallel Imports - What causes them?

• Variations in value of _________ b/w countries
• Purposely ____________ supply of a product in a
  market
• Pricing policies that permit large price
  __________ - e.g. Japanese Domestic pricing vs.
  foreign -gt Cannon Cameras
• Price differences greater than the cost of
  _________ between countries

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Dumping

• Sale of an imported product at a price lower than
  that normally charged in a domestic market or
  country of origin.
• Occurs when imports sold in the US market are
  priced at either levels that represent less than
  the cost of production plus an 8 profit margin
  or at levels below those prevailing in the
  producing countries
• To prove, both price ________ and ________ must
  be shown

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Transfer Pricing (Legal)

• Pricing of goods, services, and intangible
  property bought and sold by _______ units or
  divisions of a company doing business with an
  ________ in another jurisdiction
• Intra-corporate exchanges
• Cost-based transfer pricing
• Market-based transfer pricing
• Negotiated transfer pricing

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Countertrade (Legal)

• Countertrade occurs when payment is made in some
  form other than ___________
• Options
• Barter
• Counterpurchase (two separate contracts)
• Offset (South African government purchased F-16
  from British aerospace)
• Compensation trading (Egypt-Swiss Company)

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Study Guide

• Correct pricing is obviously critical to firm
  performance. A good basic marketing textbook
  goes into additional detail on basic pricing
  strategies. For international marketing, you
  must be aware of those foreign transaction
  costs you incur that may add to or alter your
  product price.
• Concentrate on the slides and their corresponding
  sections in the book. Skip Tax regulations on
  Pg.388-389.