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Chapter 6: Pricing in international marketing International pricing strategies

vs. domestic pricing strategies
• International pricing strategies vs. domestic pricing strategies

Pricing in domestic markets

• Structural factors of standardized vs. differentiated pricing
• Factors influencing international pricing decisions
Based on the relatively Much more complex,
• International pricing policies straightforward process affected by many

Pricing in international markets

of allocating the total additional external
• International pricing strategies estimated cost of factors, such as
producing, managing fluctuations in
• Price changes and marketing a exchange rates,
product or service and accelerating inflation in
adding an appropriate certain countries and
• Parallel importing profit margin. the use of alternative
payment methods such
• Dumping as leasing, barter and
counter-trade.
• Transfer pricing
• Counter-trade 1 2

Structural factors of standardized

Factors influencing international pricing decisions
vs. differentiated pricing

Firm-level factors

Product factors

Environmental factors

Market factors

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Firm-level factors

 Influenced by past and current corporate

philosophy, organization and managerial policies.

 The short-term tactical use of pricing (discounts,

product offers, reductions) is often at the expense
of its strategic role.

 Country-of-origin: If the brand originates from a

country with a good reputation and image, the use
premium pricing strategy will be easier.

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For many years

Volkswagen (VW) used the
Japanese firms approach new slogan ‘Das Auto’ (‘The
markets by building market share Car’), indicating that the
over a period of years car is developed and
manufactured in Germany.

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Product factors

Key product factors affecting pricing:

 Unique and innovative features of the product All cost factors (e.g. firms’ net ex-
works price, shipping costs,
 Availability of substitutes.
tariffs, distributor mark-up) in the
distribution channel add up and
 The extent to which the organization has had to adapt or
modify the product or service lead to price escalation. The
longer the distribution channel,
 The level to which the market requires service around the core the higher the final price in the
product foreign market.

 Product cost structure price escalation

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Environmental factors

The national government control of exports and imports

• Tariffs directly increase the price of imports (unless the exporter or
importer is willing to absorb the tax and accept lower profit margins)
• Quotas have an indirect impact on prices. They restrict supply, thus
causing the price of the import to increase.
Government regulations on pricing
• Price controls on specific products related to health, education, food
 Rationalizing the distribution process. and other essential items.
• Other policies and regulations: dumping legislation, resale price
 Lowering the export price from the factory (firm’s net price) maintenance legislation, price ceilings, and general reviews of price
levels.
 Pressurizing channel members to accept lower profit margins
Fluctuation in the exchange rate; Inflation.
 Establishing local production of the product within the export • An increase (revaluation) or decrease (devaluation) in the relative value of
a currency can affect the firm’s pricing structure and profitability
market
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Fluctuation in the
exchange rate

Inflation, or a persistent upward change in price levels, is a problem in

many country markets.
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Pure competition
Market factors
• Price is set in the marketplace. Price tends to be just enough
 Purchasing power of the customer, sensitivity of customers above costs to keep marginal producers in business.
to prices
Monopolistic competition

 Competitive actions.
 If competitors do not adjust their prices in response to
rising costs, management will be severely constrained
in its ability to adjust prices accordingly.
 If competitors are manufacturing or sourcing in a lower-
cost country, it may be necessary to cut prices to stay
competitive.
• Firms selling products that are differentiated from one another
(e.g. by branding or quality), it can charge a higher or lower price
than its rivals.
Oligopoly
• A market structure characterized by a small number of sellers.
There are so few firms that the actions of one firm can influence
the actions of the other firms.
Monopoly

• Exists if there is one seller in the market, such as a state-owned

 The nature of competition: pure competition/monopolistic company. The seller has the control over the market and can
competition/oligopoly/monopoly solely determine the price of its product.
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International pricing policies International pricing policies

• Calls for the per-unit price of an item to be Ethnocentric pricing (Extension pricing)
Ethnocentric
the same no matter where in the world the
(extension)
buyer is located. The importer must absorb
pricing  Advantage: it offers extreme simplicity
freight and import duties.
because it does not require information
• Permits subsidiary or affiliate managers or
independent distributors to establish on competitive or market conditions for
Polycentric whatever price they feel is most appropriate implementation.
(adaptation) in their market environment.
pricing
• No requirement that prices be coordinated  Disadvantage: it does not respond to the
from one country to the next. competitive and market conditions of
• The company neither fixes a single price each national market and, therefore,
Geocentric
worldwide, nor allows subsidiaries or local does not maximize the company’s profits
distributors to make independent pricing in each national market or globally.
pricing
decisions. Instead, the geocentric approach
represents an intermediate course of action.
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International pricing policies

Polycentric pricing (Adaptation pricing) IKEA takes a polycentric approach to pricing

 Advantage: it responds to the competitive and market

conditions of each national market  maximize the
company’s profits in each national market.

 Disadvantage: when disparities in prices between different

country markets exceed the transportation and duty costs
separating the markets, individuals can purchase goods in
the lower-price country market and then transport them for
sale in higher-price markets (arbitrage)

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International pricing policies International pricing strategies

Geocentric pricing
1. Skiming pricing
 Based on the realization that unique local market factors
should be recognized: local costs, income levels, 2. Marketing pricing
competition, and the local marketing strategy.
3. Penetration pricing
 Recognizes that price coordination from headquarters is
necessary in dealing with international accounts and 4. Target costing
product arbitrage.
5. Cost-based pricing
 Ensure that accumulated national pricing experience is
leveraged and applied wherever relevant.

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Skimming pricing

• A high price is charged to ‘skim the cream’ from the top

end of the market, with the objective of achieving the
highest possible contribution in a short time.
• As more segments are targeted and more of the product
is made available, the price is gradually lowered.

Market pricing

• If similar products already exist in the target market,

market pricing may be used.
• The final customer price is based on competitive prices.

Penetration pricing

• To stimulate market growth and capture market shares by

deliberately offering products at low prices.
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Premium segment 25
Introductory phase of the product life cycle 26

 The main advantage of this

approach is that the competitive
situation is taken into account.

 The main disadvantage is that

aspects related to the demand
function are ignored. In addition,
Market pricing a strong competitive focus can
increase the risk of a price war.

A first-time exporter is unlikely to use penetration pricing

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Target costing
• Company plans in advance for the price level,
product costs, and margins that it wants to achieve
for a new product. If it cannot manufacture a
Target costing product at these planned levels, then it cancels the
design project entirely.
vs. • Ensures that development teams will bring
profitable products to market not only with the right
level of quality and functionality but also with
Cost-based pricing appropriate prices for the target customer
segments.

Cost-based (cost-plus) pricing

• Practice of setting prices based on the cost of the
goods or services being sold. A desired profit
margin is added to the cost of an item, which
results in the final selling price.
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The target costing approach with

inexpensive consumer nondurables

Target costing was used in the development of Renault’s

Logan, a car that retails for less than $10,000 in Europe 31 32

Price changes Price changes

Price changes on existing products are called for when a Related changes must be considered (e.g:
new product has been launched or when changes occur in increased promotional efforts)
overall market conditions
Timing of price changes can be nearly as
important as the changes themselves (e.g tactic of
time-lagging competitors in announcing price
increases)

Price cut sensitivity: the high probability that the

existing product is now less unique, faces stronger
competition and is aimed at a broader segment of
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the market. 34

Price changes Some issues in export pricing

happens when products can be purchased in one market and sold in another,
Price cuts occur due to: undercutting the established market prices in the process.

• Excess capacity Parallel importing

• In the face of strong price competition or a weakened economy
• Gaining market share or dominating the market through lower Dumping
costs.
Price increase from: Transfer pricing
• Cost inflation
• Increased demand Counter-trade
• Lack of supply
dumping: is the sale of an imported product at a price lower than that
35 normally charged in a domestic market or country of origin 36

transfer pricing: prices charged for intra-company movement of goods and services.
while transfer prices are internal to the company, they are important externally for cross-border taxation purposes.

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Parallel importing

 Parallel importing happens

when products can be
purchased in one market and
sold in another, undercutting the
established market prices in the
process.

 Grey market goods are

trademarked products that are
exported from one country to
another and sold by
unauthorized persons or Occurs when companies employ
a polycentric pricing policy
organizations.
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Parallel importing

Consequences:

 MNEs find themselves competing in one country, with

their own product, being imported from another country at
a lower price Parallel imports account
for as much as 10
 Customers who unknowingly buy unauthorized imports percent of the sales of
have no assurance of the quality of the item they buy, of some pharmaceutical
warranty support, or of authorized service or replacement brands.
parts. Furthermore, when a product fails, the consumer
blames the owner of the trademark, and the quality image
of the product is sullied.

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Parallel importing Case: Coca Cola seek legal redress

A proactive approach to the problem of grey marketing is needed:
Taiwan: The court ruled that two companies that were buying Coca-
Cola in the United States and shipping it to Taiwan were violating the
 Seek legal redress. time-consuming and expensive
trademark rights of both the Coca-Cola Company and its sole
Taiwan licensee. The violators were prohibited from importing,
 Change the marketing mix.
displaying, or selling products bearing the Coca-Cola trademark.
 Product strategy. Moving away from the standardization
Canada: Coca-Cola sued, but the court ruled that the product was
concept and introducing a differentiated concept with a
bought and sold legally. The reasoning is that once the trademarked
different product for each main market.
item is sold, the owner’s rights to control the trademarked item are
lost. A Canadian exporter who was buying 50,000 cases of Coke a
 Pricing strategy. Minimize price differentials between
week and shipping them to Hong Kong and Japan. The exporter
markets.
paid $4.25 a case, plus shipping of $1.00 a case, and sold them at
$6.00, a nifty profit of 75 cents a case.
 Warranty strategy. The manufacturer may reduce or cancel
the warranty period for grey market products. This will require
that the products can be identified through the channel
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system.

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Dumping

Dumping is the sale of an imported product at a price Dumping is rarely an issue

lower than that normally charged in a domestic market or when world markets are
country of origin. strong.

(General Agreement on Tariff and Trade’s (GATT) 1979 antidumping code) In the 1980s and 1990s,
dumping became a major
issue for a large number of
industries when excess
production capacity relative
to home-country demand
caused many companies
to price their goods on a
marginal-cost basis.

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Dumping

 For countervailing duties to be invoked, it must be shown:

 prices are lower in the importing country than in the
exporting country
 producers in the importing country are being directly
harmed by the dumping.

 Today, tighter government enforcement of dumping

legislation is causing international marketers to seek new
routes around such legislation.
 Assembly in the importing country
Anti-dumping duty is a tax or duty imposed on imported
products or services when their prices are lower than the fair
market value in the domestic country.
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Transfer pricing Transfer pricing

There are 03 basic approaches to transfer pricing:
Transfer pricing (intracompany pricing): Prices charged
for intra-company movement of goods and services.
Transfer at cost
While transfer prices are internal to the company, they are • Transfer price is set at the level of the production cost and
important externally for cross-border taxation purposes. the international division is credited with the entire profit
that the firm makes

Transfer at arm’s length

• Called ‘market-based pricing’. The international division is

charged the same as any buyer outside the firm

Transfer at cost plus

• Profits are split between the production and international

divisions
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Transfer pricing Transfer pricing

The OECD and World Bank recommend Transfer pricing is sometimes

intragroup pricing rules based on the inaccurately presented by
arm’s-length principle, and 19 of the 20
commentators as a tax avoidance
members of the G20 have adopted similar
measures through bilateral treaties and practice or technique (transfer
domestic legislation, regulations, or mispricing)
administrative practice

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Transfer pricing

Multinational companies would like to place as much profit in

countries with the lowest tax rates

 Set a relatively low transfer price to the subsidiary in the

‘low tax rate’ country.

 Ensure that the transfer price optimizes corporate rather

than divisional objectives.

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Counter-trade
Counter-trade
• This is a straightforward exchange of goods
Counter-trade is a generic term used to describe a variety Barter
for goods without any money transfer.
of trade agreements in which a seller provides a buyer
with products (commodities, goods, services, technology) • This involves the export of goods in one
and payment is made in some form other than money direction. The ‘payment’ of the goods is split
into two parts:
• (1) Part payment in cash by the importer.
Compensation
deal • (2) For the rest of the ‘payment’ the original
- Normally between seller from the West and buyer in exporter makes an obligation to purchase
developing country some of the buyer’s goods (used in the
exporter’s internal production or sold on in
the wider market)
- When money is scarce, when difficult to obtain bank
financing for exports • The sale of machinery, equipment or a
Buy-back turnkey plant to the buyer’s production is
agreement financed at least in part by the exporter’s
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purchase of some of the resultant output.54