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Pricing Decisions
Chapter topics: Pricing concepts Pricing P i i objectives bj ti Price setting Target costing Environmental issues Pricing policy alternatives Gray market goods Dumping Price fixing Transfer pricing Countertrade
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Global Gl b l Marketing M k ti (Global Edition) Chapter 11


Basic Pricing Concepts

Law of One Price
All customers in the market get the best product for the best price

Pricing Objectives
Objective Profitability Objectives Purpose Profit Maximization Target Return Sales Maximization Market Share Value Pricing Lifestyle Image Profit Maximization Cost Recovery Market Incentives Market Suppression Example Low introductory interest rates on credit cards with high standard rates after 6 months Compaqs low-priced PCs increase market share and sales of f services Price wars among major airlines High-priced luxury autos such as Ferrari and watches by Rolex High prices for tobacco and alcohol to reduce consumption p

National markets
Costs Competition Regulation
Fragmented g beer market: Budweiser, the leading global brand, has less than 4% market share Heinekens price in Japan is a function of competition titi with ith other th i imports t and d th the national producers. 11-3

Volume Objectives

Global markets
Diamonds Di d Crude oil Commercial aircraft Integrated circuits

Competition Objectives Prestige Objectives

Not-for-Profit Objectives
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Global Pricing Objectives and Strategies

The global manager must develop systems and policies that address Price Floor: minimum price Price Ceiling: maximum price Optimum Price: function of demand Must be consistent with global opportunities and constraints Be aware of price transparency created by Euro zone and Internet
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Global Pricing Objectives and Strategies

Managers must determine the objectives for th pricing the i i
Unit Sales Market Share Return on Investment

They must then develop strategies to achieve those objectives

Penetration Pricing Market Skimming g

Price Setting
Select pricing objective(s) Determine demand Estimate costs Analyze competitors pricing Assess regulatory factors Select S l price i & price-adaptation strategies
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Three Cs Price Setting Model

Markup pricing Target-return pricing Perceived-value pricing Value pricing Going Going-rate rate pricing Auction-type pricing
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Market Skimming and Financial Objectives

Market Skimming g
Charging a premium price May y occur at the introduction stage of product life cycle Luxury goods marketers use price to differentiate products d t LVMH, Mercedes-Benz

Penetration Pricing and Non-Financial Objectives

Penetration Pricing

1979 Sony Walkman

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Charging a low price in order to penetrate market quickly Appropriate A i t to t saturate t t market k t prior to imitation by competitors Packaged food product makers, with products that do not merit patents, may use this strategy to get market saturation before competitors copy the product

Companion Products or Razors and Blades Pricing

Products whose sale is dependent p upon p the sale of primary product
Video games are dependent upon the sale of the game console

The Target Costing Process

Determine the segment(s) to be targeted, as well as the prices that customers in the segment will be willing illi to pay. Compute overall target costs with the aim of ensuring the companys future profitability. Allocate the target costs to the products various functions. Calculate the gap between the target cost and the estimated actual production cost. cost

If you make money on the

blades, bl d you can give i away the razors

Cellular service providers subsidize the phone and make money on calling plans

XB G X-Box Game S System t and dS Sports t 11-11 Game

Obey the cardinal rule: If the design team cant can t meet the targets, the product should not be launched.
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2011 Pearson Education, Inc.

Pricing Goods for Cross Border Shipment

1. 2. 3 3. 4. 5. 5 6. 7. 8. Does the price reflect the products quality? Is the price competitive, given local market conditions? Should the firm pursue market penetration, penetration market skimming, skimming or some other pricing objective? What type of discount (trade, cash, quantity) and allowance (advertising, trade-off) should the firm offer its international customers? Should prices differ with market segment? What pricing options are available if the firms costs increase or decrease? Is demand in the international market elastic or inelastic? l Are the firms prices likely to be viewed by the host-country government as reasonable or exploitative? Do the foreign countrys dumping laws pose a problem?11-13

Cost-Plus Cost Plus Pricing

Cost-based pricing is based on an analysis of internal and external cost Firms using western cost accounting principles use the full absorption cost


Per-unit product costs are the sum of all past or current direct and indirect manufacturing and overhead costs
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2011 Pearson Education, Inc.

Cost-Plus Cost Plus Pricing

Rigid cost-plus pricing means that companies set prices without regard to the eight pricing considerations Flexible cost-plus pricing i i ensures that h prices are competitive in the context of f the particular market environment 11-15
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Currency Fluctuations

Jan 2000 $1=101

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Jan 2002 $1=130

Jan 2007 $1=113

Jan 2010 $1=91

Inflationary Environment
Defined as a persistent upward change in price levels Can be caused by an increase in the money supply Can be caused by currency devaluation Essential requirement for pricing is the maintenance of operating margins 11-17
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Government Controls, Subsidies, and Regulations

The types of policies Foreign governments and regulations that may: affect pricing decisions require funds to be noninterest-bearing noninterest bearing are:
Dumping legislation Resale price maintenance legislation Price ceilings General reviews of price levels
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accounts for a long time restrict p profits taken out of the country and limit funds paid for imported material l Restrict price competition

Competitive Behavior
If competitors do not adjust their prices in response to rising costs, it is difficult to adjust j your y pricing p g to maintain operating margins If competitors are manufacturing or sourcing in a lower-cost country, it may be necessary to cut prices to stay competitive p
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Using Sourcing as a Strategic Pricing Tool

Marketers of domestically manufactured fi i h d products finished d t may move to t offshore ff h sourcing of certain components to keep costs d down and d prices i competitive titi China is the worlds workshop Rationalize the distribution system: Toys R Us yp layers y of intermediaries in Japan p to bypasses operate US-style warehouse stores

Global Pricing: Policy Alternatives

Extension or Ethnocentric Adaptation or Polycentric Geocentric
Mercedes moved beyond ethnocentric pricing when Toyota began offering Lexus Mercedes value at $20K less. In 1993, Mercedes d boosted b d employee l productivity, increased low-cost suppliers and invested in production facilities in the US to move to better pricing.11-21
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Extension or Ethnocentric Pricing

Ethnocentric Per-unit price of an item is the same, no matter where in the world the buyer is located Importer I must absorb b b freight f i h and d import p duties Fails to respond to each national market
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Adaptation or Polycentric Pricing

Permits affiliate managers or independent distributors to establish price as they feel is most desirable in their circumstances Sensitive to market conditions but creates conditions, potential for gray marketing
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Geocentric Pricing
Intermediate course of action ti g that several Recognizes factors are relevant to pricing p g decision

AIDS drugs g meant for Africa are smuggled into Europe

Local costs Income levels Competition Local marketing strategy

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Gray Market Goods

Trademarked products are exported from one country to another where they are sold by unauthorized persons or organizations Occurs O when h product d t is i in i short supply, when producers use skimming ki i strategies t t i in i some markets, and when goods d are subject bj t to t substantial mark-ups
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Gray Market Issues

Dilution of exclusivity Free riding Damage to channel relationships Undermining segmented pricing schemes Reputation R t ti and d legal l l liability

Selling drugs out of date leads to lawsuits


Sale of an imported product at a price lower than that normally charged in a domestic market or country of origin Occurs when imports sold in the US market are priced at either levels that represent less than the cost of production plus an 8% profit margin or at levels below those prevailing in producing g countries the p To prove, both price discrimination and injury must be shown
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In 2003, the Southern Shrimp Alliance protested that six countries were dumping p in the US shrimp The International Trade Commission agreed g and allowed the US Dept. of Commerce to raise duty rates on shrimp from India, China, Brazil, Vietnam, Ecuador, and Thailand

Price Fixing
Representatives of two or more companies secretly sec et y set s similar a p prices ces for o t their e p products oducts
Illegal act because it is anti-competitive

Transfer Pricing
Pricing of goods, services, and intangible property t b bought ht and d sold ld by b operating ti units it or divisions of a company doing business with an affiliate ffili t in i another th jurisdiction j i di ti Intra-corporate exchanges Cost-based transfer pricing Market Market-based based transfer pricing Negotiated transfer pricing
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Horizontal price fixing occurs when competitors within an industry that make and market the same product conspire to keep prices high Vertical price fixing occurs when a manufacture conspires with wholesalers/retailers to ensure certain retail prices i are maintained i t i d
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Countertrade occurs when payment is made in some form other than money Options
Barter Barter Counterpurchase or parallel trading p g Offset Compensation Compensation trading or buyback Switch trading g
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Th The least l t complex l and d oldest ld t form f of bilateral, non-monetary countertrade A direct exchange of goods or services between two parties