IMS-Unit-06 (Global Pricing Strategies)

07/06/10 1

By :

Prof. Amit Kumar

07/06/10 2

IILM-GSM

Global Marketing Management Global Pricing Strategies

07/05/10 3

Contents

• International Pricing Compared to Domestic Pricing• International Pricing Objectives/ Strategies• International Pricing Framework• Pricing Approaches for International Markets

Cost-based Pricing Full-cost Pricing Marginal cost pricing Market-based Pricing

• Countertrade as a Pricing Tool• Terms of Payment in International Marketing

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International Pricing Compared to Domestic Pricing

In International markets, however, pricing decisions are much

more complex, because they are affected by a number ofadditional external factors, such as

• Fluctuation in Exchange Rates• Accelerating Inflation in Certain Countries• Use of alternative payment methods such as leasing,

barter and counter-trade

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International Pricing Objectives

In order to determine the price of a new product in the

international market, the objectives are as:

1. Maximum Current Profit

2. Maximum Market share

3. Maximum Market Skimming

4. Product-Quality Leadership

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SKIMMIMG

PENETRATION PRICING

High price

Low price

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International Pricing Framework

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INTERNAL EXTERNAL

Firm-Level Factors• Corporate & marketing objectives• Competitive strategy• Firm positioning• Product development• Production location• Market entry modes

Environmental Factor• Government influences and constraints: import control, taxes, price control• Inflation• Currency fluctuation• Business cycle stage

Product Factors• Stage in PLC• Place in product line• Important product features• Product positioning• Product cost structure (manufacturing, experience effects, etc)

Market Factors• Customers’ perceptions • Customers’ ability to pay• Nature of competition• Competitors’ objectives, strategies and relative SW• Grey market appeal

Pricing Strategies• Pricing level (first-time)

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International Pricing Framework

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INTERNAL EXTERNAL

Firm-Level Factors Environmental Factor

Product Factors Market Factors

Pricing Strategies• Pricing level (first-time)• Price changes over PLC• Pricing across products• Pricing across countries

Terms of business• Terms of sale• Terms of payment

Other elements of marketing mix

Firm performanceSales, shares, contribution margins, profits, image etc.

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Pricing Approaches for International Markets

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The various approaches/ strategies used for pricing in

international markets are as:

1. Cost-based Pricing

2. Full Cost Pricing

3. Marginal Cost Pricing

4. Market-based Pricing

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Pricing Approaches for International Markets: Full Cost Pricing

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• It includes adding a mark-up on the product’s cost to determine price.

• Now assume, manufacturer wants to earn a 20 % markup on sales. The manufacturer’s markup price is given by:

Markup price =

e.g. Phillips, wanted to make a profit on each player but Japanese competitors priced low and succeed in

building their market share rapidly.

UNIT COST

(1- Desired return on sales)

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Pricing Approaches for International Markets: Marginal Cost Pricing

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Variable Cost

Volume

Tot

al C

ost

Domestic Sales Exports

Fixed Cost

VariableCost

Total Costs

Marginal Cost(MC)

Pricing Approaches for International Markets: Market-based Pricing

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INCOTERMS 2000 and its Applicability

Category Applicable forsea transport

only

Applicable for all modes of transport(including water)

Departure terms EXW (ex-works)

Shipment terms, main carriage unpaid

FAS (Free alongside ship)FOB (Free on board)

FCA (Free carrier)

Shipment terms, main carriage unpaid

CFR (cost and freight)CIF (cost, insurance and freight)

CPT (carriage paid to)CIP (carriage and insurance paid to)

Delivery terms DES (delivered ex ship)DEQ (delivered ex quay)

DAF (delivered at frontier)DDU (delivered duty unpaid)DDP (delivered duty paid)

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Top-down Calculation for International PricingConsumer Price 1160

VAT 160 + 16%

Market Price minus VAT 1000

Margin retailer 250 = 25%

Price to retailer 750

Margin wholesaler 90 + 12%

Price to wholesaler 660

Margin to importer 33 + 05%

Landed-cost Price 627

Import duties 110 + 20%

Other costs (storage, banking) 17

CIF (port of destination) 500


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Top-down Calculation for International PricingCIF (port of destination) 500

Transportation costs 130

Insurance costs 6

FOB (port of shipment) 364

Transportation costs factory to port 34

Export price ex-works (EXW) 330

Factory cost price 300

Export profit (per unit) 30

The ‘ex-works’ price US$ 330 is 28.4% of the price paid by the consumer. It works out to be a ‘multiplier’ of 3.5. This

‘multiplier’ is used as a calculating aid while offering price quotations in international markets.

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Different Types of Countertrade

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Countertrade occurs when a firm accepts something than money as payment for its goods or services. Thus,

countertrade is essentially a barter trade.

CounterTrade

Barter

SwitchTrading

CounterPurchase

OffsetBuy-back

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Terms of Payment in International Transaction

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The Five Principal Means of Payment in international trade, ranked in order of increasing risk to the exporter, are:

1. Cash in Advance

2. Letter of Credit

3. Draft

4. Consignment

5. Open Account

InternationalTrade

Consignment

OpenAccount

Cash in Advance

Letter of Credit

Draft

IMS-Unit-06 (Global Pricing Strategies)

Documents

plc pricing

products pricing

pricing decisions

international marketing

pricing tool terms of

unit cost

cfr cost

cost price import duties