Svend Hollensen

GLOBAL MARKETING
4th Edition

15 Pricing decisions and terms of doing business

Learning objectives (1)

Explain how internal and external variables influence international pricing decisions Explain why and how prices escalate in export selling Discuss the strategic options in determining the price level for a new product Explain the necessary sales volume increase as a consequence of a price decrease

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Learning objectives (2)

Explain what is meant by experience curve pricing Explore the special roles and problems of transfer pricing in global marketing Discuss how varying currency conditions challenge the international marketer

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Learning objectives (3)

Identify and explain the different terms of sale (price quotations) Discuss the conditions that affect terms of payment Discuss the role of expert credit and financing for successful export marketing

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Pricing
Only area of global marketing mix where policy can be changed rapidly without large direct cost implications Decisions in global markets are affected by complexity of influential factors

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Figure 15.1 International pricing framework

Firm-level factors

Environmental factors
Market factors

Product factors

Pricing strategies
First Time Pricing 00 Price Changes over PLC Pricing across products 00Pricing across countries

Other elements

Terms
Terms of sale 00 Payments

Firm performance

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Internal factors affecting international pricing decisions

Firm-level factors Corporate and marketing objectives Competitive strategy Firm positioning Product development Production location Market entry modes Product factors Stage in PLC Place in product line Most important product features Product positioning Product cost structure

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External factors affecting international pricing decisions

Environmental factors Government influences and constraints Inflation Currency fluctuations Business cycle stage Market factors Customers perceptions Customers ability to pay Nature of competition Competitors objectives, strategies, strengths and weaknesses Grey market appeal

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What is this?
What price-related phenomenon is caused by the summation of all cost factors in the distribution channel including ex-works price, shipping costs, tariffs, and distributor mark-up?

Price escalation

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Tactics for countering price escalation

Rationalizing the distribution process Lowering the export price from the factory Establishing local production of the product Pressurizing channel members to accept lower profit margins

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Factors influencing customer sensitivity to price (1)

More distinctive product Greater perceived quality of products Consumers less aware of substitutes in the market Difficulty in making comparisons Proportion price represents of total expenditure of the customer

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Factors influencing customer sensitivity to price (2)

Perceived benefit for customer increases Product is used in association with a product bought previously, such that components and replacements are highly priced Costs are shared with other parties Product or service cannot be stored

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What is this?
What price strategy involves charging a high price at the top end of the market with the objective of achieving the highest possible contribution in a short time?

Skimming

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Problems with skimming

Having a small market share makes the firm vulnerable to aggressive local competition Maintenance of a high-quality product requires a lot of resources If product is sold more cheaply at home or in another country grey marketing is likely

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What is this?
What price strategy involves charging a final price based on competitive prices?

Market pricing

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What is this?
What price strategy involves charging a low price with the objective of achieving the highest possible sales?

Penetration pricing

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Motives for penetration pricing

Intensive local competition Lower income levels of locals

View of exporting as marginal activity

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What is this?
What price changes are based on the idea that total unit costs of a product in real terms can be reduced by a certain percentage with each doubling of cumulative production?

Experience curve pricing

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Figure 15.3 Experience curves of value chain activities

Source: Czepiel, 1992, p. 154.

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Agreement on Custom Valuation

The value of goods traded that is taken into account by customs authorities is of major importance to exporters and importers. If the value is more than what it should be, it will result in higher duties at the importers expenses, consequently making the product less competitive. The Agreement on Customs Valuation (ACV), which was adopted during the Uruguay Round, intends to address these problems, and indicates how goods are to be valued by customs authorities. The Agreement lists various alternatives methods of valuing goods. The first method the priority method bases the customs value on the transaction value of the goods when they are exported under normal conditions. These measures are likely to discourage invoicing firms from lowering prices with a view of saving on customs duties, in agreement with the importing party.
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Pre-Shipment Inspection
Many governments, in particular developing countries, request that goods be inspected before shipment Independent firms provide inspection services, and certify the quality and quantity of products exported It reduces the risk of under- or over-invoicing. Inspections should be carried out in a non-discriminatory manner It also provides a new institutional mechanism for handling complaints regarding alleged arbitrary decisions by inspection companies It may also reduce the level of customs-related corruption

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Subsidies
GATT has attempted in the past and during the Uruguay Round to limit their use and ill effects. WTO treatment of subsidies depends on whether the goods exported are industrial or agricultural products.

Two types of subsidies are prohibited (so-called red subsidies): export subsidies that are contingent one way or another on export performance and import substitution subsidies that are contingent to the use of domestic products Subsidies that are non-actionable (green subsidies) are non-specific subsidies that do not favor any firm over other firms. Basic assistance to research, regional assistance and assistance for the adaptation to new environmental regulations are examples of green subsidies. With regard to pricing, the reduction in the margin of subsidy in the export price of products originating from countries that support heavily the agricultural sector is likely to make many products uncompetitive on world market. It will increase the relevance of adding value to products in order reduce the burden of a comparative disadvantage in the primary sector.

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Agreement on Anti-Dumping Practices

When a Firms may want to set the export price at a lower level than the normal price with a view of gaining market share or access to a new market. It is a rather common practice in exporting

Dumping is not allowed only if it causes or threatens to cause material injury to an industry or if it delays the establishment of a domestic industry in a member country.

A product is to be considered as being dumped, i.e. introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.

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Duty Remission
Under GATT, members are allowed to return to exporters the duty that they paid on imported inputs that are being re-exported in exported products The same principle applies to indirect taxes charged to exported products (e.g. sales taxes, value-added tax, excise tax, Agreement on SMC, Annex I). Such remissions are not considered to be subsidies and exporters should take advantage of these measures with a view of lowering their export prices and of making their products more competitive. Duty drawbacks are made available to exporters in many countries (ITC/CS, 1999 p. 125). It appears, however, that only experienced exporters take advantage of these measures.

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What is this?
What term is used to describe the prices charged for intracompany movement of goods and services?

Transfer pricing

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Transfer Pricing
Firms should be attentive to this rule since governments usually monitor quite carefully the transfer pricing practices of multinational firms, and apply stiff sanctions when firms are caught not applying fair transfer prices (Al-Eryani, Alam and Akhter 1990).

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Gillette relies on product line pricing

www.gillette.com/

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What is this?
What price strategy is based on grouping products and services in a system-solution product in order to overcome possible customer price concerns?

Bundle pricing

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Basic approaches to pricing across countries

Price standardization

Price differentiation

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Figure 15.5 Structural factors of standardized versus differentiated pricing

Source: Reprinted from European Management Journal, Vol. 12, No. 2, Diller. H. and Bukhari, I. (1994) Pricing conditions in the European Common Market, p. 168, Copyright 199 4, with permission from Elsevier.

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Figure 15.6 A taxonomy of international pricing practices

Preparedness for internationalization

High
3 Multilocal price setter 4 Global price leader

1 Local price follower

Low Multilocal markets

2 Global price follower

Global markets

Industry globalism
Source: Adapted from Solberg et al., 2006, p. 31. In the original article Solberg has used the concept Globality instead of Globalism.

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International pricing practices (1)

Prototype 1: Local price follower Limited resources and leverage Dependent on local export intermediary Cost-oriented, standard prices Unexposed to global forces Prototype 2: Global price follower Newcomers to global markets Market-oriented, standard prices Global competition but local differences

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International pricing practices (2)

Prototype 3: Multilocal price setter Local market leaders in selected markets Market-oriented, adapted prices Local competition Prototype 4: Global price leader Global market leaders Market and costoriented global prices Global competition but local differences

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What is this?
When a customer requires one global price per product from the supplier for all its foreign SBUs and subsidiaries, a _____ has been requested.

Global pricing contract

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Customer advantages and disadvantages of GPCs

Advantages Lower prices worldwide Higher levels of service Standardization of products Efficiency of processes Faster diffusion of innovations Disadvantages Less adaptability to market changes Potential for quality inconsistencies Dependence upon supplier could result in higher prices Resistance to GPCs among local managers Monitoring costs

Source: Source: adapted from Narayandas, Quelch and Swartz, 2000, pp. 61 70.

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Supplier advantages and disadvantages of GPCs

Advantages Access to new markets Economies of scale Influence over market development through association with industry leaders Strong relationships developed Solve price and service anomalies across countries
Source: Source: adapted from Narayandas, Quelch and Swartz, 2000, pp. 61 70.

Disadvantages Resistance to change Loss of customers Risk of failing to deliver on promises Inappropriate use of cost information Over dependence on one customer Conflict in distribution channels

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Approaches to transfer pricing

Transfer at cost Transfer at arms length

Transfer at cost plus

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Currency decisions in export pricing

Quote price in foreign currency of buyers country Quote price in currency of exporters country Quote price in currency of a third country Quote price in currency unit (euro)

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Benefits to quoting price in buyers country currency

Quoting in foreign currency could be a condition of the contract Access to finance abroad at lower interest rates Good currency management may be a means of gaining additional profits Customer preference for quotes in their currency

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Euro implications
Lower prices due to price transparency
Real single market without transaction costs

Enhanced competition
Easier entry to foreign markets in EU Inflation and entry rate stability Lower costs of doing business

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Delivery terms
EXW Ex-works FCA Free carrier FAS Free alongside ship FOB Free on board CFR Cost and freight CIF Cost, insurance, and freight CPT Carriage paid to CIP Carriage and insurance paid to DAF Delivered at frontier DES Delivered ex-ship DEQ Delivered ex-quay DDU Delivered duty unpaid DDP Delivered duty paid

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Figure 15.8 Different terms of payment

Source: Chase Manhattan Bank, 1984, p. 5.

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Characteristics of letters of credit

An arrangement by banks for settling international commercial transactions Provide a form of security for parties involved Ensure payment, provided that terms and conditions of credit have been fulfilled Payment based on documents only and not on merchandise or services involved

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Figure 15.9 The process for handling letters of credit

Source: Phillips et al., 1994, p. 454, with permission from ITBP Ltd.

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Letter of credit forms

Revocable L/C Irrevocable but unconfirmed L/C Confirmed irrevocable L/C

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Export financing
Commercial banks Export credit insurance Factoring Forfeiting Bonding Leasing Counter-trade
Barter Compensation deal Buy-back agreement

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For discussion (1)

What are the major causes of international price escalation? Suggest possible courses of action to deal with this problem Explain how exchange rate and inflation affect the way you price your product In order to protect themselves, how should marketers price their product in a country with high inflation?
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For discussion (2)

International buyers and sellers of technology frequently disagree on the appropriate price for knowledge. Why? What methods can be used to compute a transfer price (for transactions between affiliated companies)? What relevance has the international product life cycle theory for pricing strategy in international firms?
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For discussion (3)

Why is it often difficult to compute fair arms-length transfer prices? Explain these terms of sale: EXW, FAS, FOB, CFR, CIF, DEQ and DDP. Which factors will determine the terms of sale? Explain these types of letter of credit: revocable/ irrevocable, confirmed/unconfirmed. Under what sets of circumstances would exporters use the following methods of payment:
(a) revocable letter of credit; (b) confirmed letter of credit; (c) confirmed irrevocable letter of credit; (d) time draft (i.e. bill of exchange)?
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For discussion (4)

Name some of the financing sources for exporters. How does inflation affect a countrys currency value? Is it a good idea to borrow or obtain finance in a country with high inflation? How and why are export credit financing terms and conditions relevant to international pricing? What is counter-trade? Why should firms be willing to consider counter-trade arrangements in their global marketing efforts?
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