International Marketing

Global Pricing

Outline
Pricing Basics Global Pricing Issues Countertrade

Pricing Strategies to Control Gray Trade

Global Pricing Strategies .

Basic Factors in Pricing

Costs Experience Curve

Competition
Demand

Pricing Basics
The Role of Costs

The standard pricing procedure for exporting consists of

A cost-plus formula Price escalation: The added costs in exporting mean that export prices tend to escalate over the domestic prices.

Experience Curve Pricing

Use of cost-based pricing has increased due to the experience curve effect

The experience curve shows how unit costs go down as successively more units of a product are produced Experience curve pricing has been adopted primarily by companies entering an existing market in the maturity stage, because of the need to be competitive.

The Experience Curve Effect

UNIT COST

PROFIT MARGIN < 0 P** PROFIT MARGIN > 0

BREAKEVEN

ACCUMULATED PRODUCTION = q

Pricing Basics
Competition The premium price differential refers to the degree to which the firm might be granted a higher price by the market because of the particular strengths of its product. Because of competition, prices in foreign market are sometimes lower than at home, contrary to the price escalation effect.

Demand
The strength of demand tends to vary with the PLC stage, the growth stage typically showing strongest demand. Demand and supply: Whether or not price can be high in a strong demand market, is also determined by the supply from competitors.

PRICE ESCALATION
Price escalation refers to the variation/increase in price across countries or over time. Reasons include Cost of exporting Taxes, tariffs and administrative costs Inflation/deflation Exchange rate fluctuations Varying currency values Middlemen and transportation costs

SAMPLE CAUSES AND EFFECTS OF PRICE ESCALATION

Domestic Example $ 5.00 n.a. n.a. n.a. n.a. 5.00 Foreign Example 1: Assuming the same channels with wholesaler importing directly $ 5.00 6.10 1.22 n.a. n.a. 7.32 Foreign Example 2: Importer and same margins and channels $ 5.00 6.10 1.22 7.32 1.83 9.15 Foreign Example 3: Same as 2 but with 10 percent cumulative turnover tax $ 5.00 6.10 1.22 7.32 1.83 +0.73 * 2.56 +9.88 3.29 +0.99 * =4.28 14.16 7.08 +1.42 * =8.50 22.66

Manufacturing net Transport, c.i.f. Tariff (20 percent c.i.f. value) Importer pays Importer margin when sold to wholesaler (25 percent) on cost Wholesaler pays landed cost Wholesaler margin (331/3 percent on cost) Retailer pays Retail margin (50 percent on cost) Retail price

1.67 6.67 3.34 10.01

2.44 9.76 4.88 14.64

3.05 12.20 6.10 18.30

Notes: a. All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable. b. The exhibit assumes that all domestic transportation costs are absorbed by the middleman. c. Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown. * Turnover Tax

Price Escalation The Lower Prices are at Home

New York Aspirin Movie Levi 501 jeans Ray-Ban sunglasses Sony Walkman Nike Air Jordan Nikon camera Mariah Carey CD Windows 98 Diapers $ 0.99 7.50 39.99 45.00 59.95 125.00 629.95 Los Angeles 16.22 117.99 13.52 London $ 1.23 10.50 74.92 88.50 74.98 134.99 840.00 16.09 123.94 5.03 Paris $ 7.07 7.89 75.40 81.23 86.00 157.71 691.00 17.82 179.79 5.42 Tokyo $ 6.53 17.29 79.73 134.49 211.34 172.91 768.49 15.31 211.20 6.86 Mexico City $ 1.78 4.55 54.54 89.39 110.00 154.24 1,054.42 Rome 20.67 264.46 10.55

Madrid Stockholm Berlin

SOURCE: Norihiki Shirouzu, Luxury Prices for U.S. Goods No Longer Pass Muster in Japan, Wall Street Journal, February 8, 1996, p. B1; and Elizabeth Fleick, The Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell about Prices, Time International, December 13, 1999, p. 38.

REDUCING PRICE ESCALATION

Lowering cost of goods
Using efficient method of manufacturing Off-shore manufacturing Global sourcing Lowering product quality

Lowering tariffs (using customs classification)

Lowering distribution costs Using Foreign Trade Zones Dumping Taking a lower profit

Competitive Value Pricing

SETTING A PRICE PREMIUM ON THE BASIS OF DIRECT COMPARISONS WITH COMPETITION (Caterpillar example)
$ 20,000 IS THE COMPETITORS PRICE $ 3,000 IS THE PREMIUM FOR SUPERIOR DURABILITY $ 2,000 IS THE PREMIUM FOR SUPERIOR RELIABILITY $ 2,000 IS THE PREMIUM FOR SUPERIOR SERVICE $ 1,000 IS THE PREMIUM FOR LONGER WARRANTY $28,000 IS THE TOTAL VALUE $ 4,000 DISCOUNT $24,000 FINAL PRICE

Global Pricing: Added to the Pricing Basics

PRICING BASICS
COSTS, EXPERIENCE CURVE, COMPETITION, DEMAND EXPORT PRICING CURRENCY RISK, CREDIT RISK TARIFFS, PRICE ESCALATION MULTINATIONAL PRICING EXCHANGE RATES, HEDGING TRANSFER PRICE COUNTERTRADE, SYSTEMS PRICING

DUMPING
PRICE COORDINATION, GRAY TRADE SKIMMING VS. PENETRATION PRICING POLYCENTRIC PRICING, GEOCENTRIC PRICING, ETHNOCENTRIC PRICING

POSITIONING PRICE, PRICE/QUALITY FINAL PRICE

Skimming vs Penetration Pricing

Unit sales Profitability Penetration price Penetration price

Skimming price

Skimming price

Time in local market

Time in local market

Re-positioning via a Price Reduction

Before Re-positioning After Re-positioning

Economy

Economy

Brand C

Brand C

Brand A (low price)

Performance

Performanc e Brand A (high price)

Brand B

Brand B

This is the PREFERENCE VECTOR. This shows that the market wants high performance AND high economy (strong quality/price ratio)

Financial Issues
EXCHANGE RATES firms must be wary of devaluations; exchange rate fluctuations affect the performance of local subsidiaries HEDGING purchasing insurance against losses because of currency fluctuations, firms make use of forward contracts or swaps GOVERNMENT INTERVENTION various nations introduce stabilizing measures into financial systems via selective price controls and price discrimination laws

Transfer Pricing
TRANSFER PRICE the price paid for products shipped between units of the same organization when the shipment crosses national borders so that the correct duties & related fees can be paid Transfer prices should reflect the prices the subsidiary might encounter in the open market, also known as arms length prices

Transfer prices are also used to shift resources within a firm to offset inflation in country subsidiaries, to support a subsidiarys local competitive position, and in other cases for profit repatriation. This has resulted in accounting firms developing strict guideline for the transfer pricing process.

Countertrade
COUNTERTRADE transactions in which all or part of the payment is made in kind rather than cash. Examples are as follows:
Barter Compensation Deals Counterpurchases The direct exchange of goods/services between trading partners Involve payment both in goods and in cash; the inclusion of some amount of cash makes the deal more attractive to the seller. The most typical version of countertrade; two contracts are negotiated, one to sell the product (which constitutes the initial agreement) at an agreed cash price, and one to buy goods from the purchaser at an amount equal to the amount in the initial transaction. May take two forms; 1) seller agrees to accept some amount of output as full or partial payment, 2) seller agrees to buy back some output at a later date. The seller contracts to invest in local production or procurement to partially offset the sale price.

Product Buy-backs

Offset Deals

Evaluating a Countertrade Offer

For the seller evaluating a countertrade proposal, the following points must be considered: 1. Is this the only way the order can be secured? 2. Can the received goods be sold? 3. How can we maximize the cash portion? 4. Does the invoiced price incorporate extra transaction costs?

5. Are there import barriers to the received goods?

6. Could there be currency exchange problems if we repatriate the earnings from sales in a third country?

Systems Pricing in Turnkey Sales

Pricing of turnkey package

Bundled?

Unbundled

Get supplier discounts? System discounts? Package Price

No firm-specific advantages

Components where firm has FSA's

Price taker

Price maker

Competitors: standalone profit centers?

Competitive entry? Make or buy?

Profit sharing or penalty for nonperformance

Component prices? No profit sharing or penalty for nonperformance

Gray Trade
Gray trade is the sales of genuine branded goods through unauthorized channels. Gray trade involves shipments from overseas plants that enter a market via entry points not easily controlled. Examples include shipments from the Asian manufacturers who produce for Western companies and whose products can be diverted to ports in one country before entering the market country. Gray trade is acute in trade areas where barriers have been recently dismantled & exchange rates fluctuate, creating big arbitrage opportunities and consumer tourism.

Pricing Actions against Gray Trade

ECONOMIC CONTROLS influencing price setting in local markets via changing shipping prices or by rationing the product CENTRALIZATION forming price-corridors, setting limits for local prices FORMALIZATION standardizing the process of planning and implementing pricing decisions INFORMAL COORDINATION via articulation of corporate values & culture, human resource exchanges

Controlling Gray Trade: Coordinating Pricing Strategies

Level of Marketing Standardization High Low

High Strength of Local Resources

Economic controls

Informal coordination

Low

Centralization

Formalization

Ethnocentric Pricing

ETHNOCENTRIC PRICING One global price, in one currency $

PROS: no gray trade

CONS: no local adaptation

Geocentric Pricing

GEOCENTRIC PRICING DM Y One price in each region, common regional currency

PROS: some coordination, little gray trade, some adaptation

CONS: not locally adapted

Polycentric Pricing

DM
k

PY $

DM P k

POLYCENTRIC PRICING $ Y Local prices, in local currency PROS: locally adapted CONS: not coordinated, more gray trade

International Marketing

Promotion Decisions

What Should You Learn?

Local market characteristics that affect the advertising and promotion of products The strengths and weaknesses of sales promotion and public relations in global marketing When global advertising is most effective; when modified advertising is necessary

What Should You Learn?

The effect of limited media, excessive media, paper and equipment shortages, and government regulations on advertising and promotion budgets The communication process and advertising misfires

Sales Promotions in International Markets

Sales promotions
Marketing activities that stimulate consumer purchases and improve retailer or middlemen effectiveness and cooperation Short-term efforts directed to the consumer or retailer to achieve specific objectives

In markets with media limitations the percentage of the promotional budget allocated to sales promotions may have to be increased Product sampling

International Public Relations

Public relations (PR) is creating good relationships with the popular press and other media
To help companies communicate messages to customers, the general public, and governmental regulators

Toyota recall of cars/BP oil spill

Global workplace standards

Building an international profile

Corporate sponsorships

Top 20 Global Advertisers

($ millions)

Top 100 Advertisers Global Spending

($ millions)

International Advertising
1. Perform marketing research

2. Specify the goals of the communication

3. Develop the most effective message(s) for the market segments selected 4. Select effective media 5. Compose and secure a budget 6. Execute the campaign 7. Evaluate the campaign relative to the goals specified

Advertising Strategy and Goals

Marketing problems
Require careful marketing research Thoughtful and creative advertising campaigns

In country, regional, and global markets

Increased need for more sophisticated advertising strategies Balance between standardization of advertising themes and customization Consumer cultures

Product Attributes and Benefit Segmentation

Different cultures usually agree on the benefit of the primary function of a product or service Other features and psychological attributes of the item can have significant differences
Cameras

Regional Segmentation
Pan-European communications media highlights need for more standardized promotional efforts Costs savings with a common theme in uniform promotional packaging and design

Legal restrictions slowly being eliminated

Global Advertising and the Communications Process

If not properly considered, different cultural contexts can increase the probability of misunderstandings Effective communication
Demands the existence of a psychological overlap between the sender and the receiver

It can never be assumed that if it sells well in one country, it will sell in another

The International Communications Process

Legal Constraints
Comparative advertising Advertising of specific products Control of advertising on television Accessibility to broadcast media Limitations on length and number of commercials Internet services

Special taxes that apply to advertising

Linguistic Limitations
Language is one of the major barriers to effective communication through advertising Translation challenges Low literacy in many countries Multiple languages within a country In-country testing with the target consumer group avoids problems caused by linguistic differences

Cultural Diversity
Knowledge of cultural diversity must encompass the total advertising project Existing perceptions based on tradition and heritages are often hard to overcome

Subcultures
Changing traditions

Media Limitations and Production and Cost Limitations

Media limitations may diminish the role of advertising in the promotional program Examples of production limitations:
Poor-quality printing Lack of high-grade paper

Low-cost reproduction in small markets poses a problem in many countries

Media Planning and Analysis Tactical Considerations

Availability Cost Coverage Lack of market data

Media Planning and Analysis Tactical Considerations

Newspapers Magazines Radio and television Satellite and cable TV

Media Planning and Analysis Tactical Considerations

Direct mail The Internet The New Social Media Other media

Media Penetration in Selected Countries (per 1,000 persons)

Campaign Execution and Advertising Agencies

Managed by advertising agencies
Local domestic agency Company-owned agency Multinational agency with local branches

Compensation
Commonly 15 percent throughout the world Some companies moving to reward-by-results

Worlds Top Ten Advertising Agency Organizations

Exhibit 16.8

International Control of Advertising Broader Issues

Consumer criticism Deceptive advertising Decency and blatant use of sex

Self-regulation
Government regulations

International Trade Fairs & Exhibitions

Participation in International Trade fairs is a way of identifying potential distributors in a new local market. At trade fairs, local marketers can introduce a companys latest products, discover industry trends, & spot new competitive developments.
Participation involves preparation of product and sales materials, opening a booth, sending a team plus paying a sometimes steep fee. Fairs cost money.

Direct Marketing
DIRECT MARKETING: an interactive marketing system that uses one or more advertising media to effect a measurable response and/or transaction at any location.
MAIL ORDER catalogs, sales offers through snail mail TELEMARKETING phone calls from companies to households DIRECT RESPONSE TV (DRTV) TV commercials with phone numbers to let viewers call for purchases.

Direct Marketing is often outsourced

1. DO IT YOURSELF the firm develops the market and the necessary contacts on its own, very labor-intensive & costly 2. MARKETING INTERMEDIARY the firm turns the product over to a direct marketing company specializing in international marketing through a contractual relationship; the intermediary then sets-up the infrastructure & local contacts 3. STRATEGIC ALLIANCE the firm develops an alliance with a direct marketing company in the local market; this leverages the local companys existing infrastructure and contacts

E-Commerce Pros
E-COMMERCE: buying & selling of goods/services online, a.k.a. online marketing; the online marketplace is naturally global
PROS

Easy

and convenient for the customer Creates a natural on-to-one relationship between buyer and seller Fosters customer loyalty and increases customer retention rates Helps the company focus on providing customer value Lowers costs for buyers and sellers from the pre-purchase stage to the post-purchase stage Facilitates price comparisons

E-Commerce Cons
CONS Can reach only a certain segment, those with desktops and Internet access Cannot provide the full tactile experience with the product or the personal interaction in services E-commerce needs good electronic communication links Customers are put off by computers and technology Perceived risks involved can be great Without credit cards, e-commerce would be unthinkable

Successful E-Commerce Cases

SERVICES Airline tickets Tourist packages Banking services Brokerage services Rental cars Hotel reservations PRODUCTS Personal computers (e.g. Dell) Books (e.g. Amazon) Computer software Cameras Compact discs

Successful E-Commerce: B2B

E-commerce has been particularly successful in business-to-business transactions. Reasons: Many products use standardized components where price is the only concern.

The Internet makes it easy to compare prices and entry barriers are low for new entrants.
Technology is diffused rapidly so new entrants can access state-of-the-art technology. Cost pressures inside the corporations force the use of low-cost suppliers.

Global Personal Selling

Culture affects the people skills of the global marketer.

Good salesmanship varies across countries.

Personal selling is usually the least global of all marketing activities.

Global Personal Selling

How transferable are selling strategies & techniques? The following are factors that affect transferability:
DIFFERING HUMAN RELATIONS (e.g. the role of a salesperson is looked down on by hierarchical cultures) DEGREE OF MARKET DEVELOPMENT (e.g. level of customer sophistication)

DIFFERING REGULATORY ENVIRONMENTS

(e.g. salesperson costs escalate in countries where fringe benefits are high) GEOGRAPHIC & PHYSICAL DIMENSIONS (e.g. climate, transportation conditions, population density)

Global Personal Selling

Presentations made during a sales visit usually consist of five distinct stages:

1. ATTENTION get the customer to listen to you 2. INTEREST get the customer interested in what you have to say 3. DESIRE get the customer to desire what you are selling 4. CONVICTION get the buyer convinced that the offer is a good deal 5. ACTION get the customers signature on the contract

In foreign markets, these stages are still valid but the salesperson needs to adapt these stages to the local culture.

Culture and Salesmanship

LOW CONTEXT CULTURES
PREPARATION

HIGH CONTEXT CULTURES

PREPARATION GREAT PRODUCT THE PERSON CULTURAL AWARENESS RELATIONSHIP ORIENTED

GREAT PRODUCT
APPEARANCE ENTHUSIASM SELF-CONFIDENCE GREAT CLOSER OF

TRANSACTION