Global Marketing: Global Edition Pricing Decisions Chapter 11. The presentation

Pricing Decisions Chapter 11Learning Objectives • Review basic pricing concepts that underlie a successful global marketing pricing strategy. • Identify the different pricing strategies and objectives that influence ...

Pricing Decisions Chapter 11Learning Objectives • Review basic pricing concepts that underlie a successful global marketing pricing strategy. • Identify the different pricing strategies and objectives that influence decisions about pricing products in global markets. • Summarize the various Incoterms that affect the final price of a product. • List some of the environmental influencers that impact prices. • Apply ethnocentric/polycentric/geocentric framework to decisions regarding price. • Explain some of the tactics global companies can use to combat the problems with gray market goods. • Assess the impact of dumping on prices in global markets. • Compare and contrast the different types of price fixing. • Explain the concept of transfer pricing. • Define countertrade and explain the various forms it can take. Copyright © 2017 Pearson Education, Ltd. 11-2Basic Pricing Concepts • Law of One Price – All customers in the market get the best product for the best price • Global markets – Diamonds – Crude oil – Commercial aircraft – Integrated circuits • National markets – Costs – Competition – Regulation Copyright © 2017 Pearson Education, Ltd. 11-3Basic Pricing Concepts • The Global Manager must develop systems and policies that address – Price Floor: minimum price – Price Ceiling: maximum price – Optimum Prices: function of demand • Must be consistent with global opportunities and constraints • Be aware of price transparency created by Euro zone, Internet Copyright © 2017 Pearson Education, Ltd. 11-4Global Pricing Objectives and Strategies • Managers must determine the objectives for the pricing objectives – Unit Sales – Market Share – Return on investment • They must then develop strategies to achieve those objectives – Market Skimming – Penetration Pricing – Parity Pricing Copyright © 2017 Pearson Education, Ltd. 11-5Market Skimming and Financial Objectives • Market Skimming – Charging a premium price – May occur at the introduction stage of product life cycle – Luxury goods marketers use price to differentiate products • LVMH, Mercedes-Benz Copyright © 2017 Pearson Education, Ltd. 11-6Copyright © 2017 Pearson Education, Ltd. 11-7 Price-Skimming Advantages 1. Where a highly innovative product is launched, with high R &D costs and high costs of promotion, advertising etc., price-skimming allows for faster return on the set-up costs 2. By charging high prices initially, a company can build a high-quality image for its product. Charging initial high prices allows the firm the luxury of reducing them when the threat of competition arrives. By contrast, a lower initial price would be difficult to increase without risking the loss of sales volume 3. Skimming can be an effective strategy in segmenting the market. A firm can divide the market into a number of segments and reduce the price at different stages in each, thus acquiring maximum profit from each segment 4. Where a product is distributed via dealers, the practice of price-skimming is very popular, since high prices for the supplier are translated into high mark-ups for the dealer 5. For ‘conspicuous’ or ‘prestige goods’, the practice of price skimming can be particularly successful, or where the quality differences between competing brands is perceived to be large since the buyer tends to be more ‘prestige’ conscious than price conscious. e.g. designer-label’ clothing.Copyright © 2017 Pearson Education, Ltd. 11-8 Price-Skimming Disadvantages •The high price can attract potential competitors to enter the market • If the company has history of price skimming than consumers will not buy a product when it is newly launched, they will wait for a lower pricePenetration 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 – Packaged food product makers, with products that do not merit patents, may use this strategy to get market saturation before competitors copy the product Copyright © 2017 Pearson Education, Ltd. 11-9Copyright © 2017 Pearson Education, Ltd. 11-10 * Parity pricing policy – used to minimise competitive reaction and when the product objective can be realised by a different mix variable (advertising or distribution). Penetration Parity PremiumCompanion Products or “Razors and Blades” Pricing • 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.” • Cellular service providers subsidize the phone and make money on calling plans Copyright © 2017 Pearson Education, Ltd. 11-11Copyright © 2017 Pearson Education, Ltd. 11-12 Relationship Between PLC and a Firm’s Marketing Objectives and Marketing Mix ActionsCopyright © 2017 Pearson Education, Ltd. 11-13 Distribution channels • Direct – not possible in all countries due to price escalation and/or geographic distances required • makes long channels too costly • Indirect – length of channel can affect end price of product/service – intermediary marginsCopyright © 2017 Pearson Education, Ltd. 11-14Target Costing • Use by Japanese companies to control costs, save on production expense, & create competitively priced global products • Also called Design to Cost Copyright © 2017 Pearson Education, Ltd. 11-15The Target-Costing Process • Determine the segment(s) to be targeted, as well as the prices that customers in the segment will be willing to pay. • Compute overall target costs with the aim of ensuring the company’s future profitability. • Allocate the target costs to the product’s various functions. Calculate the gap between the target cost and the estimated actual production cost. • Obey the cardinal rule: If the design team can’t meet the targets, the product should not be launched. Copyright © 2017 Pearson Education, Ltd. 11-16Export Price Escalation • Export price escalation is the increase in the final selling price of goods traded across borders. Copyright © 2017 Pearson Education, Ltd. 11-17Export Price Escalation Copyright © 2017 Pearson Education, Ltd. 11-18Copyright © 2017 Pearson Education, Ltd. 11-19 Sample Causes and Effects of Price EscalationCopyright © 2017 Pearson Education, Ltd. 11-20 Managing price escalation • Strategies for lowering export price – rearrange the distribution channel • shortening the channel in Japan by going directly to the end retailer; private retail label supply. – rearrange costly features (or make them optional) • offer the ‘no-frills’ version of a Sony Vaio in Cambodia • give the customer the option to upgradeCopyright © 2017 Pearson Education, Ltd. 11-21 • Strategies for lowering export price (cont.) – downsize the product • make a smaller version of the product – assemble or manufacture in foreign markets • BMW assembles cars in South Africa • Qintrex flat-packed boats – adapt the product to escape tariffs or tax levies • Land Rover is heavier in the US so as to be classified as a truck rather than carPricing Factors for Goods That Cross Borders 1. Does the price reflect the product’s quality? 2. Is the price competitive given local market conditions? 3. Should the firm pursue market penetration, market skimming, or some other pricing objective? 4. What type of discount (trade, cash, quantity) and allowance (advertising, trade-off) should the firm offer its international customers? 5. Should prices differ with market segment? 6. What pricing options are available if the firm’s costs increase or decrease? Is demand in the international market elastic or inelastic? 7. Are the firm’s prices likely to be viewed by the hostcountry government as reasonable or exploitative? 8. Do the foreign country’s dumping laws pose a problem? Copyright © 2017 Pearson Education, Ltd. 11-22Cost-Based Pricing • Cost-based pricing is based on an analysis of internal and external cost • Firms using western cost accounting principles use the Full absorption cost method – Per-unit product costs are the sum of all past or current direct and indirect manufacturing and overhead costs – Must include additional costs & expense when goods cross national boarders Copyright © 2017 Pearson Education, Ltd. 11-23Cost-Plus Pricing • Rigid cost-plus pricing means that companies set prices without regard to the eight pricing considerations • Flexible cost-plus pricing ensures that prices are competitive in the contest of the particular market environment Copyright © 2017 Pearson Education, Ltd. 11-24Crossing International Borders • 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 Copyright © 2017 Pearson Education, Ltd. 11-25Terms 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 Copyright © 2017 Pearson Education, Ltd. 11-26Incoterms • FCA (free carrier) sale occurs when goods are delivered to the carrier • 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 Copyright © 2017 Pearson Education, Ltd. 11-27Copyright © 2017 Pearson Education, Ltd. 11-28 Currency quotation • Which currency should be used in international business transactions? – which party should bear the risk? • Quoting a common currency could be a way of sharing the risk – US dollar across countries with their own currency • trading between Australia and New ZealandInflationary 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 • Essential requirement for pricing is the maintenance of operating margins Copyright © 2017 Pearson Education, Ltd. 11-29Copyright © 2017 Pearson Education, Ltd. 11-30 • Ways to safeguard against inflation – modify components/ingredients/parts/packaging • not all components are subject to the same level of inflation – source material from low-cost suppliers • import from low-inflation countries – shorten credit terms • juggle terms of paymentLow Inflation Environment • Should make it possible to raise prices but consider the global competitive environment • U.S. inflation rate in the 1990s was low and strong demand had factories at capacity • However, mid-1990s Europe had high unemployment, Asia was in recession • By the end of the decade, globalization, the Internet, low-cost products from China, and costconscious consumers became other constraining factors Copyright © 2017 Pearson Education, Ltd. 11-31Government Controls, Subsidies, and Regulations • The types of policies and regulations that affect pricing decisions are: – Dumping legislation – Resale price maintenance legislation – Price ceilings – General reviews of price levels • Foreign governments may: – require funds to be noninterest-bearing accounts for a long time – restrict profits taken out of the country and limit funds paid for imported material – Restrict price competition Copyright © 2017 Pearson Education, Ltd. 11-32Competitive 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 Copyright © 2017 Pearson Education, Ltd. 11-33Using 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 • China is “the world’s workshop” • Rationalize the distribution system—Toys ‘R’ Us bypasses layers of intermediaries in Japan to operate U.S. style warehouse stores Copyright © 2017 Pearson Education, Ltd. 11-34Global Pricing: Three Policy Alternatives • Extension or Ethnocentric • Adaptation or Polycentric • Geocentric Copyright © 2017 Pearson Education, Ltd. 11-35Extension 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 Copyright © 2017 Pearson Education, Ltd. 11-36"In the past, Mercedes vehicles would be priced for the European market, and that price was translated into U.S. dollars. Surprise, surprise: You're 20 percent more expensive than the Lexus LS 400, and you don't sell too many cars.” -Joe Eberhardt, Chrysler Group Executive VP for Global Sales, Marketing, and Service Extension Pricing Copyright © 2017 Pearson Education, Ltd. 11-37Adaptation or Polycentric Pricing • 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 Copyright © 2017 Pearson Education, Ltd. 11-38Geocentric Pricing • Intermediate course of action • Recognizes that several factors are relevant to pricing decision – Local costs – Income levels – Competition – Local marketing strategy Copyright © 2017 Pearson Education, Ltd. 11-39Grey 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 Copyright © 2017 Pearson Education, Ltd. 11-40Copyright © 2017 Pearson Education, Ltd. 11-41Grey Market Issues • Dilution of exclusivity • Free riding • Damage to channel relationships • Undermining segmented pricing schemes • Reputation and legal liability Copyright © 2017 Pearson Education, Ltd. 11-42Dumping • 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 U.S. 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 • U.S. law, the Byrd Amendment, provides for payment to companies harmed by dumping • To prove, both price discrimination and injury must be shown Copyright © 2017 Pearson Education, Ltd. 11-43Price 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 • Vertical price fixing occurs when a manufacturer conspires with wholesalers/retailers to ensure certain retail prices are maintained Copyright © 2017 Pearson Education, Ltd. 11-44Transfer 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 jurisdiction • Intra-corporate exchanges – Cost-based transfer pricing – Market-based transfer pricing – Negotiated transfer pricing Copyright © 2017 Pearson Education, Ltd. 11-45Countertrade • Countertrade occurs when payment is made in some form other than money • Options – Barter – Counterpurchase or parallel trading – Offset – Compensation trading or buyback – Switch trading