Pricing for International Markets

Price: is the marketing mix that brings value to company in terms of sales turnover and profit. Other components of marketing mix are part of cost of product. Pricing Objectives: Price decisions may be viewed two ways: (1) Prices may be viewed as an active instrument of accomplishing marketing objectives.

(2) As a static element in a business decision: Export only excess inventory, places low priority on foreign business and views its export sales as passive contributions to sales volumes.
In first approach prices are controlled in such a way that its meets marketing objectives: - Increased turnover/sales volume profit - Return on Investment - Market share -Liquidity

Parallel Imports: It develops when importers buy products from distributors in one country and sell the products to distributors in another country who are not part of the manufacturers regular distribution system. This practice is lucrative when wide margins exist between prices for same products in different countries. This is also referred as grey market . Ex: In India major portion of computer components are imported through grey market. In Europe medicine prices vary in different countries and this leads to grey market operation. Heart drug plavix cost $55 in France and $79 in London.

Manufacturer

Buyer X

Freight Forwarder

Fake Paperwork

U.S. Store

U.S. Store

U.S. Store

Gray Market operation in US

1. A major manufacturer agrees to sell its products, at a price competitive for an overseas market, to Buyer X who promises to sell the products overseas. 2. The manufacturer ships the goods to Buyer X. 3. Buyer X has a local freight forwarder at the port who takes possession of the goods. 4. Instead of shipping the goods to their supposed destination, the freight forwarder (at the behest of Buyer X) sends them to smaller distributions and discount outlets in the United States. 5. The freight forwarder sends a bogus Bill of Lading to the manufacturer, so the company believes the goods have been sold overseas.

International Pricing Situations

Pricing Situation Exporting International Involvement Foreign Market Pricing Intra Company Pricing

First Time Pricing Changing Pricing

Multi Product Pricing

First Time Pricing: 3 Alternatives: Skimming: Objective is to achieve highest possible contribution in a short time period. - To use this approach, product has to be unique and some segment to customers must be willing to pay the high price. - As more segments are targeted, more product is made available and price is lowered . - Success of skimming depends on ability and speed of competitive reaction. Follow Market Pricing - Can be used if similar products already exist.

- Price depends on competitive prices by adjusting product and marketing factors. - Exporters are expected to have thorough knowledge of products costs and confidence that Product Life Cycle is long enough to warrant entry into market. Penetration Pricing: - Product is offered at a low price intended to generate volume sales and achieve high market share, which would compensate for a lower per-unit return. - This approach typically requires mass markets, pricesensitive customers, and decreasing production and marketing costs as sales volume increase. 2. Changing Pricing: - Price changes are called when a new product is launched in the market and when change occurs in overall market conditions.

- If new stage of PLC occurs, the price changes become inevitable. 3. Multiple-product Pricing - In case of various items in product line, the pricing objectives of different may be different to meet overall marketing objective of a company. Export Pricing Strategy 1 Standard Word wide Price: Same price for domestic and ex: gold export, standard pricing is based on average cost: fixed, variable and export related cost.

2 Dual Pricing: Differentiates domestic and export prices. - Two methods: (i) Cost driven (ii) Market driven If cost based approach is decided upon, market may choose: - Cost plus methods - Marginal cost method Market Differential pricing: According to dynamic condition of market place.

Drivers of Foreign Market Pricing

1. Company Goals 2. Company Cost- Rigid Cost Plus Flexible Cost Plus 3. Customer Demand: Buying power, testes, habits, substitutes. 4. Competition 5. Distribution Channels EDLP (Everyday Low Pricing): To retailer/ultimate stopper. Super market chains may not appreciate this. Even they delisted P&G brands for this reason. 6. Parallel imports (Grey markets) 7. Government Policies: Car prices vary in European countries due to sales tax differences.

Managing Price Escalation - Exporting involves more steps and higher risks than selling goods in domestic market. - Foreign retail prices are normally higher than domestic prices to cover incremental costs like: - Shipping - Insurance - Tariffs - Margins for intermediarie Higher price phenomenon is known as price escalation. Two broad approaches to deal with price escalation: (i) Find ways to cut the export price. (ii) Position the product as a premium brand.

Options to lower export price (i) Rearrange distribution channel (reduce channel length). (ii) Eliminate costly feature-make them optional. (iii) Down size the product size to avoid Sticker shock. (iv) Assemble or manufacture the product in foreign markets. (v) Adapt the product to escape tariff or tax levies.

Safeguard against inflation 1. Modify components, ingredients, parts and or packaging material. 2. Source material from low-cost suppliers. 3. Shorten credit term. 4. Include escalation clause in long term contracts. 5. Quote prices in stable currency. 6. Pursue rapid inventory turnover. 7. Draw lessons from other countries. Eg.: Mc Donalds used experience of Latin American Managers to deal inflation in Former Soviet Union. Each supplier to be negotiated separately for inflation.

Transfer Pricing Strategy - As companies increase the number of world-wide subsidiaries , Joint Ventures, company-owned distribution systems and other marketing arrangements, the price charged to different affiliates becomes very important decision. - Prices of goods transferred from a companys operations or sales units in one country to its units elsewhere, known as intra company pricing or transfer pricing, may be adjusted to enhance the ultimate profit of the company as a whole.

CRITERIA FOR MAKING TRANSFER PRICING DECISIONS

1. Tax Regimes: Firms like to boost profits in low tax countries and dampen them in high tax countries. - Companies keep transfer prices high for product entering into high tax countries and vice-versa for low tax countries. 2. Local Market Conditions: To enter in a new market MNC may initially under price intra-company shipments to start-up subsidiary. 3. Market Imperfections: These include price freezer, profit repatriation restrictions which may hinder MNCs ability to move earnings out of country. High Import Duties may lead to lowering of transfer prices, to subsidiaries located in that country.

4. Joint Venture Partner: Interest of local Joint Venture partner should also be taken care while deciding transfer prices. 5. Morale of Local Country Managers: Artificial deflation of profits may de motivate local managers.