International Marketing 国际市场营销学

International Marketing

国际市场营销学School of International Trade,

Shandong University of Finance and Economics

山东财经大学（筹） · 国际贸易学院

山东财经大学（筹） ·国际贸易学院School of International Trade, Shandong University of Finance and Economic

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Pricing for International Markets

Chapter 10


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Chapter Learning Objectives

1. Components of pricing as competitive tools in international marketing

1. Components of pricing as competitive tools in international marketing

2. The pricing pitfalls directly related to international marketing

2. The pricing pitfalls directly related to international marketing

3. How to control pricing in parallel imports or gray markets

3. How to control pricing in parallel imports or gray markets


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Chapter Learning Objectives

4. Price escalation and how to minimize its effect

4. Price escalation and how to minimize its effect

5. Countertrading and its place in international marketing practice

5. Countertrading and its place in international marketing practice

6. The mechanics of price quotations6. The mechanics of price quotations


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Introduction Pricing strategy forms another cornerstone of a global marketing program–it

represents one of the most critical and complex issues in global marketing (due to economic, financial, and mathematical implications)

Price is the only marketing mix element that generates revenues. All other elements entail costs

Need to devote special care in pricing products as a manager’s fiduciary responsibility is to market products at a profit and increase shareholder wealth

A company’s global pricing policy may make or break its overseas expansion efforts (due to foreign exchange complications)

Firms also face significant challenges in coordinating (standardizing or adapting) their pricing strategies across various countries they operate in

This chapter reviews the plethora of international pricing strategy issues


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Pricing Objectives

In general, price decisions are viewed in two ways:

– Pricing as an active instrument of accomplishing marketing objectives, or

– Pricing as a static element in a business decision

• The more control a company has over the final selling price of a product, the better it is able to achieve its marketing goals

• The more control a company has over the final selling price of a product, the better it is able to achieve its marketing goals

• It is not always possible to control end prices• It is not always possible to control end prices

• Broader product lines and the larger the number of countries involved, the more complex the process of controlling prices charged to the end user

• Broader product lines and the larger the number of countries involved, the more complex the process of controlling prices charged to the end user


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Parallel Importation or Gray Markets

On account of competition, firms may have to charge different prices from country to country

In international marketing, this causes a vexing problem: Parallel Importation or Gray Markets

Parallel imports develop when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturer’s regular distribution system

The possibility of a parallel market occurs whenever price differences are greater than the cost of transportation between two markets


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Parallel Importation or Gray Markets

For example, the ulcer drug Losec sells for only $18 in Spain but goes for $39 in Germany; and the heart drug Plavix costs $55 in France and sells for $79 in London

Thus, it is possible for an intermediary to buy products in countries where it is less expensive and divert it to countries where the price is higher and make a profit

Exclusive distribution, a practice often used by companies to maintain high retail margins encourage retailers to stock large assortments, or to maintain the exclusive-quality image of a product, can create a favorable condition for parallel importing


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Effects of Parallel Importation

Parallel imports can do long-term damage in the market for trademarked products

Customers who unknowingly buy unauthorized imports have no assurance of the quality of the item they buy, of warranty support, or of authorized service or replacement parts

If a product fails, the consumer blames the owner of the trademark, and the quality image of the product is sullied

Companies can restrict the gray market by policing distribution channels

In some countries firms get help from the legal system


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Approaches to International Pricing

1. Full-Cost Pricing: no unit of a similar product is different from any other unit in terms of cost, which must bear its full share of the total fixed and variable cost.

• There are several approaches to pricing in international markets, which include:

• There are several approaches to pricing in international markets, which include:

2. Variable-Cost Pricing: firms regard foreign sales as bonus sales and assume that any return over their variable cost makes a contribution to net profit

• Prices are often set on a cost-plus basis, i.e., total costs plus a profit margin

• Prices are often set on a cost-plus basis, i.e., total costs plus a profit margin

• This is a practical approach to pricing when a company has high fixed costs and unused production capacity

• This is a practical approach to pricing when a company has high fixed costs and unused production capacity


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Approaches to International Pricing

3. Skimming Pricing: This is used to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for a product

4. Penetration Pricing: This is used to stimulate market growth and capture market share by deliberately offering products at low prices

• It is used to acquire and hold share of market

• It is used to acquire and hold share of market


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Price Escalation

1. Costs of Exporting: the term relates to situations in which ultimate prices are raised by shipping costs, insurance, packing, tariffs, longer channels of distribution, larger middlemen margins, special taxes, administrative costs, and exchange rate fluctuations

• Price escalation refers to the added costs incurred as a result of exporting products from one country to another

• Price escalation refers to the added costs incurred as a result of exporting products from one country to another

There are several factors that lead to higher prices:There are several factors that lead to higher prices:


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Price Escalation (contd ..)

2. Taxes, Tariffs, and Administrative Costs: These costs results in higher prices, which are generally passed on to the buyer of the product

3. Inflation: Inflation causes consumer prices to escalate and the consumer is faced with rising prices that eventually exclude many consumers from the market


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Price Escalation (contd ..)

4. Middleman and Transportation Costs: Longer channel length, performance of marketing functions and higher margins may make it necessary to increase prices

5. Exchange Rate Fluctuations and Varying Currency Values: Currency values swing vis-à-vis other currencies on a daily basis, which may make it necessary to increase prices


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Export Strategies Under Varying Currency Conditions

Stress, price benefits

Expand product line and add more costly features

Shift sourcing and manufacturing to domestic market

Exploit export opportunities in all markets

Conduct conventional cash-for-goods trade

Use full-costing approach, but use marginal-cost pricing to penetrate new/competitive markets

When Domestic Currency is WEAK...

Engage in nonprice competition by improving quality, delivery, and after-sale service

Improve productivity and engage in vigorous cost reduction

Shift sourcing and manufacturing overseas

Give priority to exports to relatively strong-currency countries

Deal in countertrade with weak-currency countries

Trim profit margins and use marginal-cost pricing

When Domestic Currency is STRONG...

SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"Business Horizons, May-June 1988, figure 2, p. 58.


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Export Strategies Under Varying Currency Conditions

SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"Business Horizons, May-June 1988, figure 2, p. 58.

Speed repatriation of foreign-earned income and collections

Minimize expenditures in local, host country currency

Buy needed services (advertising, insurance, transportation, etc.) in domestic market

Minimize local borrowing

Bill foreign customers in domestic currency

Keep the foreign-earned income in host country, slow collections

Maximize expenditures in local, host country currency

Buy needed services abroad and pay for them in local currencies

Borrow money needed for expansion in local market

Bill foreign customers in their own currency

When Domestic Currency is WEAK...

When Domestic Currency is STRONG...


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Leasing in International Markets

• Leasing opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash

• Leasing opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash

• Lease revenue tends to be more stable over a period of time than direct sales would be

• Lease revenue tends to be more stable over a period of time than direct sales would be

• Equipment leased and in use helps to sell other companies in that country

• Equipment leased and in use helps to sell other companies in that country

• Leasing helps guarantee better maintenance and service on overseas equipment

• Leasing helps guarantee better maintenance and service on overseas equipment


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Dumping

One approach classifies international shipments as dumped if the products are sold below their cost of production

The other approach characterizes dumping as selling goods in a foreign market below the price of the same goods in the home market

Economists define dumpingdifferently

Economists define dumpingdifferently

• World Trade Organization (WTO) rules allow for the imposition of a duty when goods are dumped

• A countervailing duty or minimum access volume (MAV), which restricts the amount a country will import, may be imposed on foreign goods benefiting from subsidies whether in production, export, or transportation


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Approaches to Lessening Price Escalation

Methods used to reduce costs and, thus, lower price escalation include:Methods used to reduce costs and, thus, lower price escalation include:

• Lowering Cost of Goods: Firms can lower costs by eliminating costly features in products or by manufacturing products in countries where labor costs are cheaper

• Lowering Tariffs: Firms can lower prices by categorizing products in classifications where the tariffs are lower

• Lowering Distribution Costs: Firms can design channels that are shorter, have fewer middlemen, and by reducing or eliminating middleman markup

• Using Foreign Trade Zones: Firms can manufacture products in free trade zones where the incentive offered is the elimination of local taxes, which keep prices down


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Countertrade as a Pricing Tool

1. Barter: is the direct exchange of goods between two parties in a transaction

2. Compensation deals: is the payment in goods and in cash

3. Counter-purchase or off-set trade: the seller agrees to sell a product at a set price to a buyer and receives payment in cash and may also buy goods from the buyer for the total monetary amount involved in the first contract or for a set percentage of that amount, which will be marketed by the seller in its home market

4. Buy-back: This type of agreement is made the seller agrees to accept as partial payment a certain portion of the output that are produced from the plant or machinery that are sold to the buyer

• Countertrade is a pricing tool that every international marketer must be ready to employ

• Countertrade is a pricing tool that every international marketer must be ready to employ

• There are four distinct transactions in countertrading, which include:

• There are four distinct transactions in countertrading, which include:


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Why Purchasers Impose Countertrade Obligations

• To Preserve Hard Currency

• To Improve Balance of Trade

• To Gain Access to New Markets

• To Upgrade Manufacturing Capabilities

• To Maintain Prices of Export Goods

• To Force Reinvestment of Proceeds


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Proactive Countertrade Strategy

1. Is there a ready market for the goods bartered?

2. Is the quality of the goods offered consistent and acceptable?

3. Is an expert needed to handle the negotiations?

4. Is the contract price sufficient to cover the cost of barter and net the desired revenue?

Answering the following questions is suggested before entering into a countertrade agreement:

Answering the following questions is suggested before entering into a countertrade agreement:


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Transfer Pricing Strategy

1. Sales at the local manufacturing cost plus a standard markup

2. Sales at the cost of the most efficient producer in the company plus a standard markup

3. Sales at negotiated prices

4. Arm’s-length sales using the same prices as quoted to independent customers

• Prices of goods transferred from a company’s operations or sales units in one country to its units elsewhere, which refers to intracompany pricing or transfer pricing, may be adjusted to enhance the ultimate profit of the company as a whole

• Prices of goods transferred from a company’s operations or sales units in one country to its units elsewhere, which refers to intracompany pricing or transfer pricing, may be adjusted to enhance the ultimate profit of the company as a whole

Four arrangements for pricing goods for intracompany transfer are as follows:Four arrangements for pricing goods for intracompany transfer are as follows:


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Benefits of Transfer Pricing Strategy

2. Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries

2. Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries

1. Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low

1. Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low

3. Facilitating dividend repatriation when dividend repatriation is curtailed by government policy by inflating prices of goods transferred

3. Facilitating dividend repatriation when dividend repatriation is curtailed by government policy by inflating prices of goods transferred


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Chapter Summary

Pricing is one of the most complicated decision areas encountered by international marketers.

Rather than deal with one set of market conditions, one group of competitors, one set of cost factors, and one set of government regulations, international marketers must take all these factors into account, not only for each country in which they are operating, but often for each market within a country.

Market prices at the consumer level are much more difficult to control in international than in domestic marketing, but the international marketer must still approach the pricing task on a basis of established objectives and policy, leaving enough flexibility for tactical price movements.


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Chapter Summary

Controlling costs that lead to price escalation when exporting products from one country to another is one of the most challenging pricing tasks facing the exporter.

Some of the flexibility in pricing is reduced by the growth of the Internet, which has a tendency to equalize price differentials between country markets.

The continuing growth of Third World markets coupled with their lack of investment capital has increased the importance of countertrades for most marketers, making countertrading an important tool to include in pricing policy.

The Internet is evolving to include countertrades, which will help eliminate some of the problems associated with this practice.


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Chapter Summary

Pricing in the international marketplace requires a combination of intimate knowledge of market costs and regulations, an awareness of possible countertrade deals, infinite patience for detail, and a shrewd sense of market strategy.


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Key Terms

parallel imports exclusive distribution variable-cost pricing full-cost pricing skimming price escalation dumping countervailing duty countertrade barter

compensation deal counterpurchase product buy-back

agreement transfer pricing advanced pricing

agreement administered pricing cartel

International Marketing 国际市场营销学

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