Global Marketing and Sales Development

2022-23
Week 7

International Pricing
Decisions
 Learning Outcomes
Week 7 : Pricing Decision

Standardization Vs Adaptation in the pricing decisions

1. To learn the relationship between business objectives and pricing decision.

2. To learn the critical factors that influences the pricing decision in International
markets.

3. To learn how the different pricing strategies are establish according to

different business objectives and influencing factors.
Business objectives
Pricing Objectives

Growth in sales: right price at the right time can stimulate desired sales increase.

Market share: Improving and maintaining market share.

To achieve predetermined profit level

Cash flow: maintain cash flow

Recover the investment made

Factors influencing Pricing policy

1- Cost of production:
Assess production efficiency and estimate relative profits at various prices.

2- Meeting objectives:
ROI, Stability, Market share, Meeting or preventing competition and Maximising
profit.

3- Demand:
Price is decided based on type of elasticity.
Is the product price elastic:small change in price has major impact on demand.
Or
Is the product price inelastic: Change in price has no or margina impact on
demand.
Factors influencing Pricing policy

4- Competition:
Pricing decision should address the competitive pressure.

5- Distribution channel:
Longer the distribution channel, more will be the price of a product.

6- Government:
Government trade policy and trade barriers (week 2)

7- Economic condition: (week 4 seminar)

Inflation: increase in price due to increase in cost of production.

Depression: price is reduced to survive
Factors influencing Pricing policy

8- Adaptation/Differentiation:
The extent of adaptation required (week 6).

9- Positioning:
Price is based on the perceived value of the product or service (week 5).
Pricing strategies

There are many!

1- Market Penetration Pricing

2- Market Skimming Pricing

3- Full Cost Pricing

4- Marginal Cost Pricing

5- Transfer Pricing
Market Penetration Pricing

Enter the market by setting a low price and selling maximum quantity.

Necessary conditions: Economies of Scale, Low Cost of Production

Objectives: Market growth, Market share, Deter competition

Risk: Price War

With this pricing strategy, a business sets a low price on a new product or service
in an attempt to gain significant market share quickly. The business plans to
increase prices in the future, often setting a time limit on the introductory rate.
Penetration pricing: examples

In addition to setting a low price for their main product, some companies also use
discounts, promotions, and other giveaways to attract customers.

Examples:

Cable companies offer free streaming services or extra channels to draw in new
subscribers. Although there’s usually a time limit attached, perks like these are
still effective.

Amazon Prime:
https://www.amazon.co.uk/amazonprime?ie=UTF8&tag=googhydr-
21&hvadid=606451811917&hvpos=&hvexid=&hvnetw=g&hvrand=148246948803
84346512&hvpone=&hvptwo=&hvqmt=e&hvdev=c&ref=pd_sl_7g2lx56a0l_e
Market Skimming Pricing

A skimming pricing strategy is when companies charge the highest possible price
for a new product and then lower the price over time as the product becomes
less and less popular.

Necessary conditions: inelastic demand, lack of competition, speciality goods,

distinctive image (see positioning)

Objective: gather as much revenue as possible while consumer demand is high

and competition has not entered the market.

Risk: could annoy customers

Skimming Pricing Example

Apple, on the other hand, practices price skimming. They charge as high a price
as customers will pay and slowly lower it. The initial high cost builds their luxury
brand reputation, and they “skim” price-sensitive customers from competitors
over time as the price of the product slowly drops.

Tesla, Inc. uses a premium pricing strategy. This primary pricing strategy
involves high price points on the basis of uniqueness or high value attributed to
the company's products.
Full Cost Pricing

When no unit of similar product is different from any other unit in terms of cost.
Price are often set on total cost + profit margin.

Necessary condition: when a company has high variable costs relative to its fixed
cost.

Objective: The objective of full-cost pricing method is to cover costs and to derive
a predetermined percentage of profit. The percentages added to the cost are
called margins or markups. The percentages added differ widely from firm to firm,
industry to industry and even from product to product in the same industry.

Risk: ignores competition, ignores price elasticity, leads to product cost overrun
Marginal Cost Pricing

Marginal cost is the cost of producing and selling one more unit. It sets the lower
limit to which a firm can reduce its price without affecting its overall profitability.

Necessary condition: Intense competition

Objective: Products from developing countries seldom compete on the basis of

brand image or unique value. Marginal cost pricing is used as a tool to penetrate
international markets.

Risk: Ignores current market prices - Marginal cost pricing does not consider
prevailing market prices. It is strictly based on variable costs.
Marginal cost pricing

Increase accessory sales - In some cases, a company can sell a product with a
lower price from marginal costing but still earn more profits by selling related
products that have higher profit margins to the consumer.

The marginal cost pricing approach is a short-term strategy. Companies may use
this approach when adopting loss leader pricing or promotional pricing.
Marginal cost pricing

Example:

The travel industry often employs marginal pricing to fill capacity. Hotels, airlines
and resorts must achieve a minimum capacity to sustain a profit. Not only do
these agencies fail to bring in revenue whenever they are underbooked, they
lose money in maintenance costs and staff salaries. The travel web site
Priceline.com enabled users to name their own price for their travel needs. The
bid process allows airlines to sell empty seats and hotels to fill empty rooms,
even if the bid price was far lower than the retail price.

Last minute:
https://www.lastminute.com/?COBRANDED=LMNUK_ADWORDBRANDCOUK&
acntb=brand&gclid=Cj0KCQjwidSWBhDdARIsAIoTVb0zc8Jq2WYQMs5VjYSM8
D1IEC8g_5UXzc9BL4Q0PxYVqSVnqzVU-RoaAtd0EALw_wcB&gclsrc=aw.ds
Transfer Pricing

Transfer Pricing refers to the pricing of goods transferred from operations or

sales units in one country to the company’s unit elsewhere.

Necessary condition: A subsidiary company sells goods to a parent company.

Objectives:

Maximise total profit

Facilitate parent company control.

Benefits:

Lowering duty costs: by shipping goods to the high tariff countries at minimal
transfer price.
Transfer pricing example

Multinational companies can manipulate transfer prices in order to shift profits to

low tax regions.

For example, assume entity A and entity B are two unique segments of Company
ABC. Entity A builds and sells wheels, and entity B assembles and sells bicycles.
Entity A sell wheels to entity B through an intracompany transaction.

If entity A offers entity B a rate lower than market value, entity B will have a lower
cost of goods sold (COGS) and higher earnings than it otherwise would have.
Transfer pricing example:

Another example: let’s say it costs a multinational corporation $100 to produce a

crate of bananas in Ecuador. It then sells that crate to an affiliate located in a tax
haven for $100, leaving no profits in Ecuador. The tax haven affiliate immediately
sells that crate on to an affiliate in Poland for $300, leaving $200 profit in the tax
haven. That Polish affiliate sells the crate at the genuine market price of $300 to
a supermarket, leaving no profits in Poland.

As a result, the multinational pays no tax in Ecuador and no tax in Poland, and
the $200 in profits shifted to the tax haven do not get taxed.

In this way, multinational corporations avoid their responsibility to pay tax and fail
to contribute to the societies in which they operate.
The End
Global Marketing and Sales
Development

Seminar
Week 7

Application of the
concept of Adaptation
Pricing decision
Revision of the lesson

The company
given

WHY??
Country A- Country B-
pricing strategy pricing strategy

Business objectives in 2 countries could be SIMILAR

STANDERDISATION
The influencing factors in 2 countries could be SIMILAR
Pricing decision
Revision of the lesson

The company
given

WHY??
Country A- Country B-
pricing strategy pricing strategy

Business objectives in 2 countries could be DIFFERENT

ADAPTATION
The influencing factors in 2 countries could be DIFFERENT
 Seminar task

Please log in to the Blackboard: week 7

The seminar task: ( 45 minutes total)

Please follow the instruction on the week 7, seminar section.

Watch the Oreo video individually

Read the case study individually. Please make notes during this exercise.

Working in small groups, complete the 3 questions at the end.