© 2005 Prentice Hall11-1 Chapter 11 Pricing Decisions.

© 2005 Prentice Hall 11-1

Chapter 11 Pricing Decisions


Pricing in the global market

Theoretical perfect competition – one price everywhere– Forex market, ICs, crude oil

Country differences in price reflect– Factor cost differences (e.g. labor costs)– Level of competition (e.g. airfares in the US and India)– Taxes (different sales tax structures)– Internet brings transparency to prices (e.g. music /

software sold on the net)– Life cycle stage (introductory stage products vs.

maturity products)


The price band & price points

Floor prices – set by product costs

Ceiling prices – set by competing products

– Available / discretionary income (“what the traffic can bear”)

– Perceptions of value

Optimum price– Maximize sales & profits


Global Pricing Objectives and Strategies

Managers must determine the pricing objectives– Financial objectives (e.g. profits, recovery of costs,

ROI, etc.)

– Non-financial objectives (e.g. capturing market share, increasing sales, etc.)

Basic pricing strategies to achieve those objectives– Market Skimming

– Penetration Pricing


Market Skimming and Financial Objectives

Market Skimming– Charging a premium

price– Introduction stage of

product life cycle– “make hay while the

sun shines”- Suitable for products which obsolete fast

– Innovations / Inventions

Sony Ad. for camcorders


Penetration Pricing and Non-Financial Objectives

Penetration Pricing– Charging a low price in

order to penetrate market quickly

– Appropriate to saturate market prior to imitation by competitors

1979 Sony Walkman


Some Creative Pricing Strategies

Companion Pricing– Two related products– “One cannot do without the other”– High switching costs– E.g. cellphone plans, razors and blades, computers and

software, video games and console, etc.Price Bundling– Two unrelated products– Offered at a price greater than the cost of the more

expensive one but less than the cost of both if sold separately


Companion Products

Products whose sale is dependent upon the sale of primary 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


US vs. Japanese approaches to pricing• Begin with perceptual mapping and product

definition• In the US:

– design, engineering, marketing and other costs are added on

– This constitutes the product cost

• In Japan– Planned selling price is determined and desired profit

is subtracted– Balance represents target cost for all design,

engineering, marketing and other activities


Rigid cost plus pricing

Price = costs of products + freight + insurance + local costs +…+ profitNo regard to country-specific conditions like market prices, govt. laws about dumping, pricing strategies, reflection of quality, incomes, etc.Generally used by first time exporters with little or no international experienceMay result in severe price escalation / over-pricing/under-pricing


Flexible Cost plus pricing

Flexible cost-plus pricing ensures that prices are competitive in the context of the particular market environment

Great attention to country-specific conditions

Used by experienced exporters

Can result in great profitability


Terms of the Sale

Obtain export license if required

Obtain currency permit

Pack goods for export

Transport goods to place of departure

Prepare a land bill of lading

Complete necessary customs export papers

Prepare customs or consular invoices

Arrange for ocean freight and preparation

Obtain marine insurance and certificate of the policy


Terms of the Sale

Incoterms– Ex-works – 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.

– Delivery duty paid – 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.


Incoterms

FAS (free alongside ship) named port of destination – seller places goods alongside the vessel or other mode of transport and pays all charges up to that point

FOB (free on board) – seller’s responsibility does not end until goods have actually been placed aboard ship

CIF (cost, insurance, freight) named port of destination – risk of loss or damage of goods is transferred to buyer once goods have passed the ship’s rail

CFR (cost and freight) – seller is not responsible at any point outside of factory

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Environmental Influences on Pricing Decisions

Currency Fluctuations

Inflationary Environment

Government Controls, Subsidies, Regulations

Competitive Behavior

Sourcing


Currency Fluctuations

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Pricing strategies accounting for currency fluctuations

Market holding strategy – using flexible pricing during unfavorable currency swings– Objective: maintain market share

– Risk: long term unviability

Marginal Cost pricing – pricing to cover variable costs of additional production in a weak currency country– Objective: aggressive market share capture

– Risk: Dumping allegations


Inflationary Environment

Defined as a persistent upward change in price levels– Can be caused by an increase in the money supply

– Can be caused by currency devaluation

– Can be caused by strong demand and weak supply of goods

Essential requirement for pricing is the maintenance of operating margins– Cover price increases of inputs

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Government Controls, Subsidies, and Regulations

The types of policies and regulations that affect pricing decisions are:– Dumping legislation– Price controls (e.g. DPCO in India)– Subsidies to local businesses

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Competitive Behavior

If competitors do not adjust their prices in response to rising costs it is difficult to adjust your pricing to maintain operating margins

If competitors are manufacturing or sourcing in a lower-cost country, it may be necessary to cut prices to stay competitive e.g. Levis in the US and abroad.

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Using Sourcing as a Strategic Pricing Tool

Marketers of domestically manufactured finished products may move to offshore sourcing of certain components to keep costs down and prices competitive

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Can you stay competitive while staying local?


Recommend a pricing strategy

Givenchy introduces a new high fashion product (e.g. formal gowns) in the US. Typical PLC is about a year. Competition in the fashion industry is intense

Pfizer introduces a new patented drug– In US– In India. Govt. regulates drug prices



Toyota introduces a new economy sub-compact car in Indonesia. The car is manufactured in Japan. The Indonesian Rupaiah is weak and inflation is highFord pioneers the introduction of a fuel cell car – In the US. Gas prices are rising. GM, Chrysler, Toyota and Honda

are poised to introduce their models– In India. Gas is expensive. Car is manufactured in the US. The

dollar is strong; the rupee is weak but is becoming stronger. Indian incomes are rising. There is no competition on the horizon.

– In Saudi Arabia. Gas is cheap and plentiful.



Boeing introduces the 7E7 to – Air France– Singapore Airlines– Delta Airlines

Motorola introduces the Razr (cell phone)– In US– In India


Global Pricing: Three Policy Alternatives

Extension

Adaptation

Geocentric


Extension

Ethnocentric

Per-unit price of an item is the same no matter where in the world the buyer is located (e.g. Mattel toys, Mercedes cars)

Importer must absorb freight and import duties

Fails to respond to each national market

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Adaptation

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 arbitraging

E.g. prices of books, drugs, etc.

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Geocentric

Intermediate course of actionRecognizes that several factors are relevant to pricing decision– Local costs (lower costs may justify lower prices)– Income levels (high income levels may justify higher

prices)– Competition– Local marketing strategy

May standardize a price band within which regions / countries may vary prices according to local conditions

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Gray Market Goods

Trademarked products are exported from one country to another where they are sold by unauthorized persons or organizations

Occurs when product is in short supply, when producers use skimming strategies in some markets, and when goods are subject to substantial mark-ups


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 countriesTo prove, both price discrimination and injury must be shown


Price Fixing

Representatives of two or more companies secretly set similar prices for their products– Illegal act because it is anticompetitive

Horizontal price fixing occurs when competitors within an industry that make and market the same product conspire to keep prices high e.g. ADM and enzyme used in animal feed.Vertical price fixing occurs when a manufacture conspires with wholesalers/retailers to ensure certain retail prices are maintained. E.g. DeBeers industrial diamonds.


Transfer Pricing

Pricing of goods, services, and intangible property bought and sold by operating units or divisions of a company doing business with an affiliate in another jurisdictionCross-border exchanges constitute a saleIntra-corporate exchanges– Cost-based transfer pricing– Market-based transfer pricing– Negotiated transfer pricing


Countertrade

Countertrade occurs when payment is made in some form other than money e.g. when hard currency is scarce.

Options

– Barter (e.g. Pepsico and Stolichnaya imports from USSR in exchange for concentrate)

– Counter-purchase (money exchange involved but transaction not complete unless a separate purchase is also made – e.g. Rockwell / Zimbabwe)


Countertrade

– Offset (LDCs request exporters to buy the LDCs products in an effort to regain scarce forex e.g. Boeing and China)

– Compensation trading (also called buyback – e.g. supplier building a plant in exchange for buying back a certain percentage of its output for several years, as payment for the plant)

– Switch trading (third party steps in to take unwanted goods at a fee)

© 2005 Prentice Hall11-1 Chapter 11 Pricing Decisions.

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