INTERNATIONAL PRICING POLICIES STRATEGIES,THE PROCESS OF PRICE SETTING,PRICING DECISIONS, INFORMATION FOR PRICING DECISIONS

INTRODUCTION Price is the currency value a customer is asked to pay for the product or service offered for sale by the seller.

It determines : The competitive positioning, The profitability & The relative quality perception

REASONS FOR PRICE FIXATION

To ensure that the product competes with like competitive products. To ensure that the manufacturer gets adequately compensated for the inputs employed. To adequately compensate the distribution channels involved in rendering the services of making that product available to the customers at the place & time of their choice and convenience.

BASIC FACTORS TO FIX THE PRICES

Product cost Competitives products pricing strategies Optimum price (determined by forces of demand and supply)

Price Escalation
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:

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 (Cont.)

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

Price Escalation (Cont.)

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--vis other currencies on a daily basis, which may make it necessary to increase prices

Combating Price Escalation

Reduce cost of goods
Simplify product Off-shore manufacturing or assembly

Lower tariffs
Modify product

Reduce distribution costs

Shorten supply chain

FACTORS INFLUENCING PRICING DECISIONS IN INTERNATIONAL MARKETS

Cost Competition Irregular or Unaccounted Payment in Exportimport Purchasing Power (McDonalds) Buyers Behavior Foreign Exchange Fluctuations

PRICING APPROACHES FOR INTERNATIONAL MARKETS

A. 1. COST-BASED PRICING: Full Cost Pricing/Mark-up Pricing Benefits Widely used by exporters in the initial phases of international marketing. Ensures fast recovery of investments. Useful for firms that are primarily dependent on international markets & register very low or negligible sales in domestic market. Eases operations & implementation of marketing strategies. Bottlenecks Overlooks the prevailing price structure in international markets that may either make the product uncompetitive or prevent the firm from charging higher prices. As competitors often use price-cutting strategies to penetrate or gain share in international markets, this method may result in making the product uncompetitive in international markets.

CONTD..
2. Marginal Cost Pricing: It is cost of producing & selling one more unit. It sets the lower limit to which a firm can reduce its price without affecting its overall profitability. Benefits In cases where foreign markets are used to dispose of surplus production, marginal cost pricing provides an alternate market outlet. Products from developing countries seldom compete on the basis of brand image or unique value; this pricing is used as a tool to penetrate international markets. Limitations In case the firm is selling most of its output in international markets, it cannot use marginal cost pricing as the fixed cost also has to be recovered. This tends to trigger a price war in overseas markets & leads to price undercutting among suppliers. Use of marginal cost pricing with little information on prevailing market prices leads to unrealistically low price quotations.

CONTD.

B. MARKET-BASED PRICING Assessment of prevailing prices in international markets, propensity of buyer to pay, competitive positioning, customer needs. Leadership positioning Follow the competition positioning Below the competition positioning Advantages: More flexible, hence benefits of market opportunity can be obtained. When PLC is short, this method is suitable. Risk of product becoming out of date decreases. Disadvantages: Not easy to estimate market changes If demand is less in a market compared to others, it may mislead.

TRANSFER PRICING
It refers to the pricing strategy adopted for intrafirms sales whether within the same borders or outside the state borders but to the same corporate units to which this firm belongs. It is a strategy by which a transaction between the buyer and seller belonging to the same corporate parent takes place. The international marketing firms will have to adhere to the local laws, taxes, duties, tariffs and other government regulations.

Transfer Pricing

Home Country

Foreign Country

Taxes Tariffs

Taxes

Purposes of Transfer Pricing

Generate separate prot gures for each division and thereby evaluate the performance of each division separately.

Help coordinate production, sales and pricing decisions of the dierent divisions (via an appropriate choice of transfer prices). Transfer prices make managers aware of the value that goods and services have for other segments of the rm.

Mechanics of Transfer Pricing

No money need change hands between the two divisions. The transfer price might only be used for internal record keeping. (Transfer Price quantity of goods exchanged) is an expense for the purchasing center and a revenue for the selling center.

TYPES OF TRANSFER PRICING

TYPES OF TRANSFER PRICING

Cost-based Transfer Pricing

Negotiated Transfer Pricing

Market-based Transfer Pricing

ARMS LENGTH PRICING

Sales transactions unrelated parties.

occur

between

two

DUMPING
It means selling of a product below the cost of production or at a lower price in overseas markets compared to domestic markets. It is considered to be an unfair trade practice by the WTO. Antidumping duties can be levied on imports of such products under the agreement on Anti-dumping practices. For dumping to occur, the following conditions need to be satisfied: The industry must be imperfectly competitve so that the firm acts as price setter rather than a price taker. Market must be so segmented as to make it difficult for the domestic buyers to purchase goods intended for overseas markets.

CONTD..

FORMS OF DUMPING Sporadic Dumping (occasionally selling excess goods in overseas market at low price) Predatory Dumping Persistent Dumping( consistent tendency to sell the goods at lower prices in international markets)

GREY MARKETING
It means export or import of goods and marketing them through unauthorized channels. International brands with high price differentials and low cost of arbitrage constitute typical grey market goods. Gray Market - An unofficial market in which goods are bought and sold at prices lower than the official price set by a regulatory agency

TYPES OF GREY MARKETING CHANNELS

COUNTRY A (PRODUCTION CENTRE)

Authorized Exports

Re-import

Parallel Import

Authorized Exports(high price)

Lateral grey-Import COUNTRY B COUNTRY C

Price in country B < Price in country C

COUNTER TRADE
It is a practice where price setting and trade financing are tied together in one transaction. Transaction involves reciprocal commitments other than cash payments.

Factors contributing to counter trade include: Importing countrys inability to pay in hard currency. Importing countrys regulations to conserve hard currency Importing countrys concern about balance of trade. Exploring opportunities in new markets Gaining access to capital goods markets in countries with shortage of hard currency.

TYPES OF COUNTER TRADE

BARTER Simple Barter (FIG.1) Clearing Arrangement (FIG.2)
GOODS/SERVICES

COUNTRY X

COUNTRY Y EXPORTER/ IMPORTER

EXPORTER/ IMPORTER

GOODS/SERVICES
FIG.1:SIMPLE BARTER

CONTD..

Clearing Arrangement: Existed between India and USSR under the Rupee Payment Agreement

COUNTRY X

BILATERAL CLEARING ACCOUNT

COUNTRY Y EXPORTER/ IMPORTER

EXPORTER/ IMPORTER

GOODS/SERVICES

FIG.2:CLEARING ARRANGEMENT

CONTD.. SWITCH TRADING (involves Third Parties)

COUNTRY X EXPORTER

GOODS/SERVICE A

COUNTRY Y IMPORTER

PAYMENT OR GOODS/SERVICE C

GOODS/SERVICE B

COUNTRY Z SWITCH TRADER

CONTD..

COUNTER PURCHASE (involves two separate transactions) Also known as Parallel Barter.
GOODS/SERVICES

COUNTRY Y
PAYMENT (HARD CURRENCY)

IMPORTER

COUNTRY X

EXPORTER

GOODS/SERVICES

COUNTRY Y THIRD PARTY MANUFACTURER/ SUPPLIER OR IMPORTER

PAYMENT (HARD CURRENCY)

CONTD..

BUY-BACK (COMPENSATION)

CAPITAL GOODS/TECHNOLOGY

COUNTRY X
PAYMENT (HARD CURRENCY)

COUNTRY Y

EXPORTER (Capital Goods or Technology)

OR LICENSER

OUTPUT FROM CAPITAL GOODS/TECHNOLOGY

IMPORTER OR LICENSEE

PAYMENT (HARD CURRENCY)

CONTD..

OFFSET

EXPORT

COUNTRY X

PAYMENT (PARTIAL) (HARD CURRENCY)

COUNTRY Y

EXPORTER

INVESTMENT

IMPORTER (Importing Countrys Government)

INPUT SOURCING COUTER TRADE

Countertrade
Advantages Facilitates sale of products in emerging markets Can help an exporting company bypass trade restrictions Disadvantages Foreign lenders could have prior claim on goods Restrict profit margins Encourage economic inefficiency Prices are distorted Could receive inferior quality goods Exchange partners can become competitors Involves extensive negotiations

PRICING STRATEGIES
Value and Skimming Pricing Penetration Pricing Strategy Pricing with Demand Curve Geographical Pricing Dual Standards Conspicuous (Attractive) Pricing Psychological Pricing/Odd-pricing Value-added Pricing Complementary Product Pricing Price Discounts Promotional Pricing

PRICING PROCESS
INFORMATION OF COST: INFORMATION OF FOREIGN MARKET PRICES OF THE PRODUCT CHECKLIST OF INFORMATION REQUIRED: Information on Total Market Information on Competition Information on Govt. Policies Information on Prices Information on Production And Cost Information on Revenue And Profit