Pricing in International Markets

Vijay Madanu – 17

Ankur Rathi – 37

Vishal Roge – 38

Sachin Shah – 42

Deepak Singh – 47

Nikhil Thadani -52

Price …

Price is the amount of money charged for a product or service, or the sum of the values consumers exchange for the benefits of having or using the product or service.

Pricing strategies usually change as the product passes through its life cycle, because there are constrains on the company’s freedom to price a product at different stage.

Introduction

Global Pricing is lot more complex than domestic pricing due to:International Currency FluctuationsPrice Escalations due to TariffsDifficulties to access credit risksPrice controls, Anti-dumping lawsRegulation on transfer pricingMethods of payment

Pricing Basics

Basic Principle of pricing considers:Costs or Cost-Plus formulaExperience Curve Pricing I.e costs go down

as more units are producedCompetition Pricing: Discount or premium

pricing w.r.t competitionDemand factored pricing

For Global Pricing, there are several other factors to be considered in addition to the basics

Export Pricing Considerations

In addition to pricing basics such as costs, demand, competition etc Export pricing has to consider other factors

Factors affecting export pricing are: Currency Risk & Credit RiskTariffs & Price escalationDumping orSkimming Vs Penetration Pricing

Final price depends on product positioning in foreign markets

Multinational Pricing Factors

MNC’s have different pricing considerations apart from the pricing basicsCurrency to price, Exchange Rates, Hedging

risksTransfer Pricing for profit repatriationCounter trade/systems pricingPrice coordination to prevent gray tradePolycentric/Geocentric/Ethnocentric pricing

Currency Factors

Global companies have to sell in local currency.

This exposes company to exchange risksTo minimize risks, firms use hedging,

swaps or other financial instrumentsThere may be additional constrains such

as inability to freely convert local currency to other currencies, limitations on foreign exchange transfers etc

Currency Fluctuations

Exchange Rates are never constant, appreciating or depreciating currency affects profitability.

Exchange rates affects exporters ability to competitively price their products in the long run

If exchange rates remain unfavorable for a long time, Firm may: Chose to manufacture locally instead of exportingOr chose to supply from a different countryOr withdraw from that marketOr increase price if possible

Global Coordination

Pricing disparities between regions leads to “Gray Market” or parallel ImportsE.g: Cameras imported to US from

Singapore or Japan is cheaper than the official price from the Japanese subsidiary

Gray markets leads to channel conflicts and loss of goodwill

Gray markets also results in after sales service problems

Eliminate gray trade

Firms can eliminate gray trade by Minimizing arbitrage between regions via:Tough economic control over importersCentralizing price range within a narrow

bandwidthFormalizing the pricing decisions in all local

marketsCoordinating pricing decisions between

regional markets to reduce arbitrage

Price Corridor

Global Pricing Policies

Polycentric PricingMulti-Domestic firms give wide leverage for

subsidiaries on pricing resulting in different prices in different countries – Results in gray markets

Geocentric PricingUse a regional (global) standard pricing Plus a local

markup.Base price is derived from cost plus formulaAffected by local tax laws leading to gray markets

Pricing Policies Cont’d

Geocentric Pricing E.g: HP uses a global standard price in USD

plus regional markup. • This avoids gray trade but loses competitive

position when competitors discount their products

IBM discounts products where they have competition,

• To prevent gray market, IBM sells services at a higher price for gray goods

Pricing Policies Cont’d

Ethnocentric PricingHave a common price all over the worldA global standard priceIdeal for big-ticket industrial items such as

Aircrafts, Defense Equipments, etc.Homogeneity of prices eliminated gray

marketsNot suitable when there is competition from

local manufacturers

Pricing Strategy

Transfer pricing.Cost Plus.Parity.Second Market.Low price supplier.Complementary product.Price Co-ordination.Counter Trade and System Pricing.

Transfer pricing strategy Transfer pricing is a strategy used when MNCs sell

products to their divisions in other countries. Transfer prices between divisions will vary depending

on variables such as the taxation rates (i.e., higher income tax rates in the parent’s home country will lead to lower transfer prices emanating from the home country to foreign divisions) and

The desire to minimize profitability of subsidiaries as a barrier to entry.

Pricing Strategy

Pricing Strategy

MNC’s have to determine transfer prices, I.e. the prices charged on subsidiaries for products, components and supplies.

Transfer pricing must be:Fair for local subsidiary’s performance

measurementHelp send back profitsSatisfy local tax laws governing transfer

pricingGlobal firms are setting up market related

transfer prices to satisfy local laws

Cost-plus pricing strategy This is the most widely used pricing strategy.

Cost-plus pricing plays an important role in export pricing of industrial products, especially when firms begin to export to guard against market related uncertainty.

Thus, when entering countries for the first time, it is easiest to develop a price based on the most accurate available information, internal cost figures.

Pricing Strategy

Parity pricing strategyA firm adopts this strategy when it sets its prices in

a range where most buyers would find the prices acceptable and appropriate.

Parity pricing is used by firms with lower industry control and market share.

Firms adopting this strategy do so in lieu of charging a higher price for fear that competition could gain a significant advantage due to volume sales and experience cost savings.

Pricing Strategy

Second market pricing strategy Second market pricing is a strategy where different prices

are charged based on distinct international markets. This strategy is viable when the price differential between

markets does not exceed the transaction costs associated with arbitraging a product from one market to the next.

If price differences between markets are too great, parallel markets may develop, thus reducing overall profitability.

Complaints can be filed against organizations of “Dumping”

Pricing Strategy

Low price supplier strategyLow cost suppliers need to be in a market in

which their price changes are not easily detected by competitors.

The ability of a competitor not to retaliate would be limited if it is already producing at full capacity.

If larger competitors were to retaliate, it will result in a price war. The price reduction might undermine overall sales and profits in the larger related markets.

Pricing Strategy

Complementary product pricingThis pricing strategy is usually more appropriate with products with high switching costs. The motivation of firms to use this strategy is to enhance customers’ involvement with the original product to the degree that they are likely to purchase increased amounts of ancillary products or supplies.

The advantage-accorded firms using complementary products is that by charging a lower price for the primary product, they realize the benefits of higher profits through the sale of the complementary products or supplies.

Eg: Printer cartridge (HP)

Pricing Strategy

Price Strategy

Price Co-ordination.MNC’s have to coordinate prices in different

geographic market such that:Eliminate gray trade & other distribution

channel conflictsIt does not limit local subsidiaries

performance or abilitiesRemain competitive in local marketsPricing strategy is a part for global

marketing strategy

Price Strategy

Counter trade & Systems PricingWhen local currency is not freely convertible,

firms resort to counter trade. Exchange local currency for some other goods

that is then sold for US$ or other currencySystems pricing or Pricing for turnkey projects

have several subcomponents that may be separately priced or priced as a bundle

Price Strategy

Issues with Counter Trade Counter Trade arises when a country does not have

sufficient foreign exchange or its currency is not freely convertible

Counter Trade is like a Barter, and the exchanged goods then has to be sold to realize any profits

Counter trade can arise from counter purchase agreements to buy back a part of local production for the right to export into that country Product Buyback e.g : Hundai exporting cars from India Third goods buy back e.g: Pepsi exporting potato chips from

India Major Problem is accessing the value of the bartered

goods

Evaluation of Counter Trade

Counter Trade is done if it’s the only option for trade

Firms use trading houses to dispose of the goods received in trade

Firms need to be extra cautious in fixing the barter exchange rates as international value of certain goods is difficult to valuate

Counter Trade is a reality in Global markets

Price Strategy

Turnkey PricingTurnkey Projects are usually of 2 types:

Bundled Pricing : Entire project is priced as one bundle

Unbundled Pricing: Components of the project is priced individually

Profit Sharing or Penalties for nonperformance is usually used in pricing strategy

Component prices are based on competitive positions, market entry decisions

Factors that need special attention

Factors that need special attention

National Market SizeOne of the main factors to determine an

international pricing strategy is the size of the national market.

A company will often attempt to use the potential volume of sales to estimate the price at which they will need to market their product to break even.

Eg; Nokia (Base Models)

Exchange RateExchange rates also play a significant role in

setting prices. Due to differences in the value of different

currency, similar products in different countries may be priced differently.

This has to do not just with demand for that particular product, but with macroeconomic demand for national currencies, which affects inflation and, by extension, pricing. Companies often have to adjust prices due to fluctuations in exchange rates.

Factors that need special attention

Cultural DifferencesOne of the more complicated factors in

international pricing is cultural differences. How members of certain cultures perceive the

value of certain products, which in turn affects how much they are willing to pay for them.

For example, in the United States women's handbags often are seen as a status symbol. Female consumers, therefore, often are willing to pay high prices. In other cultures, handbags are considered more functional.

Factors that need special attention

RegulationsWhen setting prices in other countries, companies

must research all national regulations relevant to their product.

Many countries set price ceilings as well as price floors on certain products. For example, in Nigeria (a large oil producer) the price of gasoline and other petroleum derivatives is capped. Even if the product a company is selling does not have price restrictions, regulations placed on the prices of similar products may affect potential demand and thus price.

Factors that need special attention

DistributionBefore setting a price, companies also must

consider the distribution network by which they are selling their products overseas.

For example, if a company is selling a product through franchise licenses, they are likely to price their products differently than if they were selling them wholesale to local distributors

Factors that need special attention

Pricing – MC Donald's

As the value of currencies varies worldwide, McDonald’s is often forced to change its pricing strategy in accordance to its target market.

In Switzerland, the Big Mac is valued $ 4.93.In the china, the Big Mac is price at $ 1.3 .

$4.93$4.49$4.28$3.51$3.32$3.15$3.08$3.07$3.01$2.98$2.74$2.71$2.66$2.60$2.56$2.44$2.35$2.29$2.20$2.19$2.09$1.61$1.60$1.56$1.55$1.55$1.54$1.51$1.47$1.30

Comparison of BIG MAC prices internationally

The company tries to maintain a price range on all its products based on the location, income

Its primary goal is to initially attract middle and upper class citizens, as they can afford McDonald’s prices.

In the United States, for example, the restaurant chain has appealed equally well to all classes ranging from the poor to the upper class; however, its popularity continues to be among the lower, middle and upper middle class.

Pricing – MC Donald's

Product Line Pricing: (Combo meals)Promotional Pricing: (Happy Hours)Penetration Pricing:(Coffee offered free)Value Pricing: (Dollar Menu)

Aap ke zamane me, bap ke zamane ke daam.

Pricing Strategies – MC Donald

Price and Positioning

Final selling price depends on PositioningPrice-Quality Relationships (high price =

High Quality)Competitive Positioning : Premium or

discount w.r.t competitorsPurchasing power : How much customers are

able to pay?Product Life Cycle & Price Skimming : High

price during introduction & falling prices later on

Penetration Pricing : Discount to gain market share

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