Chapter 12 Pricing Decisions

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Basic Pricing Concepts Basic pricing considerations global marketing 1.Does the price reflect the products quality? 2.Is the price competitive? 3.Should the firm pursue market penetration, market skimming, or another pricing objective? 4.What type of discount and allowance should the firm offer its international customers?

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Basic Pricing Concepts Basic pricing considerations (cont’d) 5.Should prices differ with market segment? 6.What pricing options are available if the firm’s costs increases or decrease? 7.Are the firm’s prices likely to be viewed by the host- country government as exploitative? 8.Do the foreign country dumping laws pose a problem?

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Global Pricing Objectives and Strategies Profit-Based Objectives and Strategies –Companies that seek competitive advantage by pursuing differentiation strategies frequently use Marketing skimming strategies –Attempt to reach a segment that is willing to pay a premium price for a particular brand or for a unique product –Appropriate in the introductory phase of the PLC, when both production capacity and competition are limited

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Global Pricing Objectives and Strategies Sales-Based Objectives and Strategies –Setting sales-based price objectives and using price as a competitive weapon to gain market position Penetration pricing strategy –Setting price levels that are low enough to quickly build market share

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Global Pricing Objectives and Strategies Cost-Based Pricing –Two cost-based pricing methods Full cost method –Defines cost as the sum of all past or current direct and indirect manufacturing and overhead costs Estimated Future Cost Method –Used in an attempt to estimate the future cost for all component elements

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Global Pricing Objectives and Strategies Cost-Based Pricing –Advantage is simplicity –Disadvantage is that this approach completely ignores demand and competitive conditions in target markets

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Global Pricing Objectives and Strategies Price Escalation –The cost-plus formula can drive up the final selling price of exported products Price escalation –F.O.B. (free on board) Buyer is responsible for the insurance and freight –C.I.F. (cost, insurance, freight) Seller is responsible for the insurance and freight

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Environmental Influences on Pricing Decisions Currency Fluctuations –Marketing Holding Strategy Setting prices based on the competition in each market and the ability and willingness of customers to pay –Marginal-cost Pricing Entails setting the selling price equal to the variable costs of producing one additional unit of output

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Environmental Influences on Pricing Decisions Currency Fluctuations (cont’d) –Price Transparency Means that buyers will be able to comparison shop easily because good will be priced in euros as opposed to marks, francs or lira Government Controls, Subsidies, Regulations –Price Fixing Legal in Germany’s book publishing industry

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Global Pricing: Three Policy Alternatives Extension or Ethnocentric Pricing Policy –Per unit price of an item is the same regardless of where in the world the buyer is located Advantage is extreme simplicity Disadvantage is it does not respond to the competitive and market conditions of each national market

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Global Pricing: Three Policy Alternatives Adaptation or Polycentric Pricing Policy –Permits subsidiary managers to establish the price they feel is most desirable in their circumstances Invention or Geocentric Pricing Policy –A company neither fixes a single price worldwide nor remains distant from subsidiary pricing Instead, the company strikes an intermediate position

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Gray Market Goods –Trademarked products that are exported from one country to another They are sold by unauthorized persons or organizations Parallel Importing –When gray marketers bring a product produced in one country into a second-country market To compete with authorized importers

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Dumping –The sale of an imported product at a price lower than that normally charged in a domestic market –For proof that dumping has occurred in the U.S., Both price discrimination and injury must be demonstrated Price discrimination –The practice of setting different prices when selling the same quantity of “like-quality” goods to different buyers

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Transfer Pricing –Concerns intracorporate exchanges –Major alternative approaches to transfer pricing Cost-based transfer pricing –Take the same forms as the cost-based pricing methods Market-based transfer pricing –Derived from the price required to be competitive in the international market (represents arm’s-length transaction) Negotiated transfer pricing –Transfer price negotiated between organization affiliates

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Countertrade –Barter Direct exchange of goods or services between two parties –Counterpurchase Each delivery in an exchange is paid for in cash –Offset An arrangement whereby the government in the country of import seeks to recover large sums of hard currency spent on expensive purchases

2002 – Chapter 12Andrew P. Yap - FIU – MAR 4156 Countertrade Compensation Trading –Involves the seller providing equipment in return for hard currency down payment and payment in output produced by equipment Switch Trading –A switch trader or bank steps into a countertrade agreement when one of the parties is unwilling to accept the goods received in a transaction