How to Set Price The global manager must develop systems and policies that address Pricing Decisions Price floor: minimum price Price ceiling: maximum price Global Marketing Optimum prices: function of Chapter 11 demand Must be consistent with global opportunities and constraints Global Marketing - Schrage 11-2 Basic Pricing Concepts Market Price Strategy Law of One Price would prevail in a truly global market May make or break your International trade helps keep profitability prices low and low prices keep inflation in check Global markets exist for certain May not be able to use the same products—integrated circuits, strategy crude oil Internationally as Domestically National markets reflect costs, regulation, demand, competition— beer 11-3 11-4 Global Marketing - Schrage Global Marketing - Schrage Global Pricing Objectives and Market Skimming and Financial Strategies Objectives Managers must determine the objectives Market skimming for the pricing objectives Charging a premium Unit sales price Market share May occur at the Return on investment introduction stage of product life They must then develop strategies to cycle achieve those objectives Regain investment Penetration pricing in R&D and product Market skimming development faster Global Marketing - Schrage 11-6 11-5 Global Marketing - Schrage 1 Penetration Pricing and Companion Products Non-financial Objectives Penetration pricing Products whose sale is dependent upon the Charging a low price in sale of primary order to penetrate product market quickly Video games are Appropriate to saturate dependent upon the sale X-Box Game System and Sports market prior to imitation Game of the game console by competitors “If you make money on Goal is to gain majority the blades, you can give market share away the razors.” 1979 Sony Walkman Global Marketing - Schrage 11-7 Global Marketing - Schrage 11-8 The Target-Costing Process Target Costing—Eight Questions 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 Determine the segment(s) to be skimming, or some other pricing objective? targeted 4. What type of discount (trade, cash, quantity) and allowance (advertising, trade-off) should the firm offer Compute overall target costs its international customers? Allocate target costs to product’s 5. Should prices differ with market segment? 6. What pricing options are available if the firm’s costs various functions increase or decrease? Is demand in the international market elastic or inelastic? Obey the cardinal rule 7. Are the firm’s prices likely to be viewed by the host- country government as reasonable or exploitative? 8. Do the foreign country’s dumping laws pose a problem? 11-9 11-10 Global Marketing - Schrage Global Marketing - Schrage Target Costing Target Costing Cost-based pricing is based on an Rigid cost-plus pricing means that analysis of internal and external cost companies set prices without regard Firms using western cost accounting to the eight foundational pricing principles use the full absorption cost considerations method Flexible cost-plus pricing ensures that Per-unit product costs are the sum of prices are competitive in the contest all past or current direct and indirect of the particular market environment manufacturing and overhead costs 11-11 11-12 Global Marketing - Schrage Global Marketing - Schrage 2 Terms of the Sale Terms of the Sale Obtain export license if required There are 13 Incoterms set by the ICC Obtain currency permit Pack goods for export Incoterms Transport goods to place of departure Ex-works —seller places goods at the disposal of the buyer at the time specified in the Prepare a land bill of lading contract; buyer takes delivery at the premises Complete necessary customs export papers of the seller and bears all risks and expenses Prepare customs or consular invoices from that point on. Delivery duty paid —seller agrees to deliver the Arrange for ocean freight and preparation goods to the buyer at the place he or she names Obtain marine insurance and certificate of in the country of import with all costs, including the policy duties, paid. 11-13 11-14 Global Marketing - Schrage Global Marketing - Schrage Environmental Influences on Incoterms Pricing Decisions FAS (free alongside ship) named port of destination —seller places goods alongside the Currency fluctuations vessel or other mode of transport and pays all charges up to that point Inflationary environment FOB (free on board) —seller’s responsibility does Government controls, not end until goods have actually been placed aboard ship subsidies, regulations CIF (cost, insurance, freight) named port of destination —risk of loss or damage of goods is Competitive behavior transferred to buyer once goods have passed the ship’s rail Sourcing CFR (cost and freight) —seller is not responsible at any point outside of factory 11-15 11-16 Global Marketing - Schrage Global Marketing - Schrage Currency Fluctuations U.S. Dollar versus Japanese Yen January 2000 January 2002 October 2008 $1 = ¥¥101 $1 = ¥¥130 $1 = ¥¥9393 11-17 11-18 Global Marketing - Schrage Global Marketing - Schrage 3 Foreign exchange Pressures Pricing challenges IMPORTS EXPORTS Stimulates DETERS Currency exchange yInflation controlled yForeign products replace fluctuations affect ySome capital outflow domestic exports Strong yHome assets expensive yBalance of Payments deficit customer Currency yLower costs of production yUnderutilized domestic purchasing power capability yDomestic prices higher than Use of a strong international prices currency for DETERS Stimulates y y pricing doesn’t Weak Home assets cheap Balance of payments surplus eliminate the Currency yStimulates inflations yDomestic products replace yDomestic costs of production foreign products problem rise yFull capacity: export led boom ySome capital inflow yAccumulation of wealth Global Marketing - Schrage 11-19 ySales rise for import 20 Journal of Teaching in International Business, Vol. 6, 1995 11-20 Joseph GlobalW. Weiss Marketing and Alexander - Schrage Zampieron WTP -11 Chris Schrage competing companies Government Controls, Inflationary Environment Subsidies, and Regulations Defined as a persistent upward change in price levels Can be caused by an increase in the The types of policies and regulations money supply that affect pricing decisions are Can be caused by currency devaluation Dumping legislation Essential requirement for pricing is Resale price maintenance legislation the maintenance of operating margins Price ceilings Hyperinflation is a term used when General reviews of price levels extremely rapid increases in costs occur. 11-21 11-22 Global Marketing - Schrage Global Marketing - Schrage Using Sourcing as a Strategic Competitive Behavior Pricing Tool If competitors do not adjust their Marketers of domestically manufactured prices in response to rising costs, it is finished products may move to offshore difficult to adjust your pricing to sourcing of certain components to keep costs down and prices competitive. maintain operating margins. China is “the world’s workshop.” If competitors are manufacturing or Rationalize the distribution system—Toys sourcing in a lower-cost country, it R Us bypasses traditional intermediaries in may be necessary to cut prices to Japan to operate U.S.-style warehouse stay competitive. stores. 11-23 11-24 Global Marketing - Schrage Global Marketing - Schrage 4 Extension or Ethnocentric Per-unit price of an item is the same no matter where in the world the buyer is located Extensions Importer must absorb freight and Adaption or or import duties Polycentric Ethnocentric Fails to respond to each national market 11-25 11-26 Global Marketing - Schrage Global Marketing - Schrage Adaptation or Polycentric Geocentric Intermediate course of action Permits affiliate managers or Recognizes that several factors are independent distributors to establish price as they feel is most desirable in relevant to pricing decision their circumstances Local costs Income levels Sensitive to market conditions but Competition creates potential for gray marketing Local marketing strategy 11-27 11-28 Global Marketing - Schrage Global Marketing - Schrage Gray Market Goods Gray Market Issues Trademarked products are exported Dilution of exclusivity from one country to another where Free riding they are sold by unauthorized persons Damage to channel relationships or organizations. Undermining segmented pricing schemes Occurs when product is in short supply, when producers use skimming Reputation and legal liability strategies in some markets, and when goods are subject to substantial markups 11-29 11-30 Global Marketing - Schrage Global Marketing - Schrage 5 Dumping Price Fixing Sale of an imported product at a price lower than that normally Representatives of two or more companies charged in a domestic market or secretly set similar prices for their country of origin products Illegal act because it is anticompetitive Occurs when imports sold in the U.S. Horizontal price fixing occurs when market are priced at either levels competitors within an industry that make that represent less than the cost of and market the same product conspire to production plus an 8% profit margin keep prices high or at levels below those prevailing in Vertical price fixing occurs when a the producing countries manufacturer conspires with wholesalers/retailers to ensure certain To prove, both price discrimination retail prices are maintained and injury must be shown11-31