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Chapter 18 GLOBAL PRICING and DISTRIBUTION STRATEGIES 18_Biz_in_Global_Econ 12/14/04 12:08 PM Page 470 ©Getty Images/PhotoDisc Chapter 18 GLOBAL PRICING AND DISTRIBUTION STRATEGIES 18-1 International Pricing Activities 18-2 Global Distribution Activities 18-3 Moving Goods Around the World 18_Biz_in_Global_Econ 12/14/04 12:08 PM Page 471 Toys “R” Us in Japan In 1984, after becoming the largest U.S. toy seller, Toys “R” Us started its inter- national expansion into Canada, Europe, Hong Kong, and Singapore. The com- pany was then attracted by the over $6 billion annual toy sales market in Japan. However, Toys “R” Us faced several barriers when entering the world’s second-largest toy market. Japan’s Large-Scale Retail Store Law attempted to protect smaller busi- nesses. For any store larger than 5,382 square feet (approximately 500 square meters), owners had to obtain approval from government agencies to build the facility. This process could take as long as ten years. Pressure from U.S. trade representatives and price-conscious Japanese consumers reduced the time needed for Toys “R” Us to gain approval for a store. The first Toys “R” Us store in Japan was 44,000 square feet and stocked nearly 15,000 products. Toys “R” Us buys items in large quantities, which allows the company to sell at discounted prices. Instead of buying through wholesalers, Toys “R” Us attempts to deal directly with manufacturers. In the beginning, many toy producers hesitated to participate since they did not want to upset their long-term relationships with whole- salers and retailers. For Toys “R” Us stores to gain acceptance among business people and con- sumers in Japan, McDonald’s Company of Japan purchased 20 percent of the Toys “R” Us stores in that country. Both enterprises have similar target markets—families with children—resulting in many cooperative selling efforts. Today, even though Toys “R” Us has over 500 stores outside the United States in 29 countries, the company faces strong competition. Wal-Mart and other discount retailers have expanded their market share of the retail toy market. Online selling by eToys.com and others has also put competitive pres- sure on Toys “R” Us. Think Critically 1. What factors may have affected the decision of Toys “R” Us to first expand into Canada, Europe, Hong Kong, and Singapore? 2. How did the Large-Scale Retail Store Law in Japan protect small stores? 3. Go to the web site of Toys “R” Us to obtain additional information about the company’s international operations and online selling activities. 471 18_Biz_in_Global_Econ 12/14/04 12:08 PM Page 472 Chapter 18 GLOBAL PRICING AND DISTRIBUTION STRATEGIES INTERNATIONAL 18-1 PRICING ACTIVITIES GOALS Ⅲ Identify the factors that must be consid- ered by businesses when setting prices. Ⅲ Describe pricing methods used by businesses. Ⅲ Discuss some pricing factors that are unique to global markets. ©Getty Images/PhotoDisc PRICE PLANNING FOR INTERNATIONAL MARKETING s a part of its marketing plan, every business must decide what amount Ato charge and how to get goods and services to customers. Factors such as export costs, values of foreign currencies, and the availability of trans- portation systems influence pricing and distribution for international mar- keting. Price is the monetary value of a good or service. Everything has a price. Interest is the price paid on loans. Fare is the price paid for airline trans- portation. Fees are the prices paid for medical and legal services. The three main factors that influence the price a company charges for goods and serv- ices are costs, consumer demand, and competition, as shown in Figure 18-1. FACTORS AFFECTING PRICE Figure 18-1 Costs, consumer demand, and competition are the main factors that influence the price of goods and services. Costs Consumer Demand Competition 472 18_Biz_in_Global_Econ 12/14/04 12:08 PM Page 473 18-1 INTERNATIONAL PRICING ACTIVITIES ❙ COSTS A company cannot sell an item for less than it costs the company to make or for the company to buy. Production and other operating costs must be cov- ered by the price of an item. Besides incurring ordinary business expenses, organizations involved in international marketing will incur other costs, such as the following. 1. The cost of modifying a product to meet cultural or legal restrictions 2. Tariffs and other taxes that must be paid when selling to customers in another country 3. Fees to acquire export or import licenses 4. Expenses for the preparation of export documents 5. Changes in the exchange rate for a nation’s currency 6. Transportation costs due to selling to buyers at a greater distance ❙ CONSUMER DEMAND When prices are high, con- sumers tend to buy less of an item than when prices are low. The basics of demand operate in all buying situations. Lower incomes, higher prices, and needs for other items result in reduced demand for a good or service. The economic condi- tions, cultural preferences, and legal restrictions in a foreign market also are likely to affect potential demand and the price that is charged. ❙ COMPETITION If many companies are selling an identical or similar prod- uct, consumers have more choices than if only one com- pany or a few companies were selling the item. Competition tends to keep prices lower. For example, if many stores in Bogota are selling similar ©Getty Images/PhotoDisc products, consumers will purchase at the store with the lowest price. This competition will force companies to offer special prices or promotions to attract customers. When a company starts marketing their goods and services in another country, it faces competition from domestic companies in that country and from other exporting companies around the world. What factors affect consumer demand? 473 18_Biz_in_Global_Econ 12/14/04 12:08 PM Page 474 Chapter 18 GLOBAL PRICING AND DISTRIBUTION STRATEGIES PRICING METHODS WORK AS International marketing managers use a variety of methods to determine A GROUP appropriate prices. Markup pricing, new product pricing, psychological pric- ing, and discount pricing can be effective price determination methods. List the costs associated ❙ with producing various MARKUP PRICING products and services. Tell Many prices are based on the cost that the store paid for an item plus an how these costs would amount to cover the expenses and add profit. Markup is an amount added affect the price charged for to the cost of a product to determine the selling price. The markup includes these items. operating costs and a profit on the item. Markups are commonly stated in percentages. For example, a company may use a 40 percent markup on its products. For an item that costs $50, this would result in a $70 selling price. To determine the selling price, multi- ply the cost by the markup percentage; then add this result to the cost. Percentage ؋ Cost ؍ Markup ϭ 0.40 ϫ $50 ϭ $20 Cost ؉ Markup ؍ Selling Price ϭ $50 ϩ $20 ϭ $70 Competition affects markup, like many other marketing decisions. Products in competitive markets with constant demand, such as food prod- ucts, tend to have low markups. In contrast, products with inconsistent demand—such as high-fashion clothing items and jewelry—will usually have higher markups to cover the carrying costs of these items. ❙ NEW PRODUCT PRICING When a company decides to sell a new product, managers face the problem of deciding what price to charge. The pricing strategy used for a new prod- uct is affected by the product image desired, the amount of competition, and sales goals. Three commonly used methods for pricing new products are competitive pricing, skim pricing, and penetration pricing. Competitive Pricing If the new product has competition already on the market, a company may decide to sell its new product at a comparable price. Certain products and services always seem to be priced about the same at all selling locations. Gasoline, pizza, and basic groceries tend to have com- petitive prices in a given geographic area. Any price differences can usually be attributed to special services or special product features. Skim Pricing When a new product is introduced, managers may decide to charge as much as possible. This approach, called skim pricing, sets a rel- atively high introductory price. Skim pricing attempts to attract buyers who are not concerned with price while also quickly covering the research and development costs of the new product. This approach was used when video recorders and personal computers were first introduced. With skim pricing, a company faces two potential problems. First, the high price may quickly attract competitors to the market. Second, the com- pany faces the risk of setting the price too high and selling very few items. 474 18_Biz_in_Global_Econ 12/14/04 12:08 PM Page 475 18-1 INTERNATIONAL PRICING ACTIVITIES limited number of Hungarian house- holds that could afford the product. GLOBAL BUSINESS Bestfoods (a part of Unilever) dis- tributes its products in over 130 countries, with about 60 percent of SKIPPY IN HUNGARY its sales coming from international markets. Some of the company’s Peanut butter is not as popular in other well-known products are Knorr other countries as it is in the United soup, Thomas’ English muffins, States and Canada. In an attempt to Hellmann’s salad dressings, and expand sales of Skippy peanut but- Boboli pizza crusts. ter, Skippy’s parent company, Bestfoods, obtained assistance from Think Critically Dove Frucht, a trading company in 1. What factors affected the pricing Budapest, Hungary. for Skippy peanut butter in Most young Hungarians liked the Hungary? taste of the product. Parents, howev- 2. Go to the web site of Bestfoods er, had concerns. The $4 price for a and Unilever to obtain additional 12-ounce jar was quite expensive for information about the company’s consumers in that country.
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