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Chamila Perera
After this lecture you should be able to: Describe the drivers of foreign market pricing Explain the management of price escalation Explain the management of pricing in inflationary environments Discuss strategies for managing the effects of currency fluctuations Describe the use of transfer pricing Explain the implications of antidumping regulations Understand how to implement pricing coordination Describe countertrade
pricing
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http://www.exchange-rates.org/history/AUD/USD/G/30
Proctor and Gamble selling small sachets of shampoo in developing markets due to low buying power
Louis Vuitton targets more broadly in developed countries like Japan than it does in developing countries (projecting premium image)
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Our range is worn by A list celebrities to the likes of Kim Kardashian, Selena Gomez and Katy Perry to name only a few. Now, as one might appreciate, the style counsel for these types of celebrities are not ones to pick run of the mill type clothing, and they do so on the basis to ensure that the styles are cutting edge, and only worn by a select
channels
(distribution)
Government polices
OR
The organisation needs to decide what it want to accomplish through its international pricing strategy. Its goals might include maximising current profits, penetrating the market or projecting a premium image. Cost differentials between countries can lead to wide difference in price. Organisation costs figure prominently in the pricing decision.
company (costs and goals
price that will cover all costs needed to make and sell its products.
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Cost-plus pricing
Hindustan Lever spends a lot its R&D on developing new technologies to reduce manufacturing costs
Pacific Dunlap sent (2009) its manufacturing (Bonds, King Gee, and Hard Yakka) to Asia
Customer demand is also a function of buying power, tastes, habits, cultural norms and substitutes
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Nature of competition
Competitive position
Direct
not possible in all countries due to the size of markets that makes direct representation extremely costly
channels
(distribution)
Indirect
Assortment of channel choices : personal computer industry Direct marketers Specialty stores General stores Manufacturers representatives Hewlett-Packard, IBM
Dell
Harvey Norman
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Check this clip Here's an Idea-Amazon.com the Lowest Price Around http://www.youtube.com/watch?v=rSlz-NYC6-0 Briefly answer the following. Online business models often bring international retail marketers competitive advantages through minimising costs. This enables them to offer more attractive prices than competitors in the market. Can all online marketers gain this advantage? What are other key factors that determine attractive online pricing?
Taxation regulation
recent reduction on tax on imported wines in Hong Kong allows for a reduction in end selling price
Government polices
Shipping, insurance
company (costs and goals
channels
(distribution)
margins of intermediaries
The process of covering incremental costs (e.g. Shipping, insurance, tariffs, margins of intermediaries) that make the final foreign retail price higher than the domestic price
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TWO BROAD APPROACHES TO DEALING WITH PRICE ESCALATION Find ways to cut the export price Position the product as a premium brand
downsize the product make a smaller version of the product assemble or manufacture in foreign markets
i.e., BMW assemble cars in South Africa
modify components/ingredients
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to shift the organisations target segment shift target segments or markets launch new products or variants of existing products negotiate with the government navigate around by systematically launching new products or modifying existing ones. to negotiate for permission to adjust their prices. Lobbying can be done individually, but it is more likely to be successful if done industry wide. Given historical information on the occurrence of price controls and other economic variables, econometric models can be constructed to forecast the likelihood of price controls.
Exporters and importers are subject to the whims of currency movements. a strategic view of the problem should be undertaken Two major managerial pricing issues result from currency movements
the Pass-through issue. How much currency movements are reflected in changes to the price customers pay. the Pricing-to-market (PTM). Destination-specific adjustments of mark ups in response to exchange rate movements.
A weakening dollar allows Australian based organisations to lower the yen-price of Australian goods exported to Japan
This enables Australian exporters to steal market share away from the local Japanese competitors without sacrificing profit
The retail price in yen goes up as a result Australian exporters might lose market share
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Source: Terry Clark, Masaaki Kotabe and Dan Rajaratnam (1999) Exchange Rate Pass-Through and International Pricing Strategy: A Conceptual Framework and Research Propositions Journal of International Business Studie... > Vol. 30, No. 2, 2nd Qtr ,Pge 249 of 249-268.
The extent of exchange rate pass-through in international pricing is affected By: the firm's pricing orientation performance orientation Distribution policy brand equity exchange rate uncertainty Competitive structure
http://www.youtube.com/watch?v=fS8n1kdl 5_8
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A quick question for you Should exporters pass through gains (or lose) they make from currency movements to their customers?
Currency quotation
Which currency should be used in international business transactions? which party should bear the risk? Sellers and buyers usually prefer a quote in their domestic currency. That way, the other party will have to bear currency risks.
Quoting a common currency could be a way of sharing the risk US dollar across countries with their own currency
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Transfer pricing
Prices charged for sales transactions among related entities of the same organization in different countries
Factors of Transfer pricing tax regimes local market conditions market imperfections joint venture partner morale of local country managers
WTO helps regulating some of this behaviour Governments of countries can seek redress with WTO if they feel another country has dumped product in their market member countries must comply with WTO rulings
Price coordination
Price coordination is critical for global (or regional brands) that are marketed with no or very few crossborder variations
IF MARGINAL COST ARE ROUGHLY EQUIVALENT , ORGANISATIONS WOULD CHARGE RELATIVELY LOW PRICES IN HIGHLY PRICE SENSITIVE COUNTRIES AND HIGH PRICE IN PRICE INSENSITIVE MARKETS
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Activity 2
Quickly read Microsoft rethinks unified pricing strategy See whether you can find international pricing related theoretical concepts that we discussed so far in the lecture. Underline them. Will the proposed strategy work? What do you think?
Increasingly, purchasers demand global-pricing contracts (GPCs) from their suppliers. Before engaging in a GPC with a purchaser, it is important for companies to do their homework: Select customer who want more than just the lowest price Align the suppliers organisation with the customers Hire global account manger who can handle diversity. Reward those global-account managers and local sales representatives who make the relationship work Allow for some pricing flexibility Building information systems to monitor the key variables (e.g. cost variations, competitive situation)
http://www.youtube.com/watch?v=RQ8QsqdJq0c http://www.youtube.com/watch?v=Qf4jtatsGoY&NR=1
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The trading of products without direct monetary payments Countertrade is an umbrella term used to describe unconventional trade-financing transactions that involve some form of non-cash compensation
Pepsis US$ 3 billion arrangement with the former Soviet Union to swap Pepsi for profits in Stolichnaya vodka and ocean freighters and tankers
15% of world trade! (some say its about30 %-50 %) Barter - Direct exchange of goods Compensation deal - cash and products Buyback - buy completed products from the supply of components Offset - cash but spent in the customer country Other parties - Trading houses
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Swapping one product for another without the use of money. (seldom use these days) Two governments agree to import a set of specified value of goods from one another over a given period. Indonesia provides paper, and galvanised sheets in exchange for 30 000 barrels a day of Iranian crude oil A form of clearing agreement but a third party is involved. The surplus credits are sold to specialised traders at a discount. The third party then uses the credit to buy from good from the deficit country. Specially in trade of technology, turnkey plants or machinery. The seller provides the equipment and agrees to be paid (partly or fully) by the output of the equipment. The most popular form. Two parallel contracts are set up. Each party agrees to buy a specified amount of goods from the other for hard currency over set period. Products are unrelated. The seller agress to offset the purchase price by sourcing from the importers country or transferring technology to the other partys country . Common in Defence contracts .
Counterpurchase Offset
Motives
Shortcomings
No in-house use for goods offered by customers timely and costly negotiations uncertainty and lack of information on future prices Transaction cost
gain access to new or difficult markets (necessary evil) Overcome exchange rate controls or lack of hard currency overcome low country credit worthiness Increase sales volume Generate long-term customer goodwill
The drivers of foreign market pricing The management of price escalation The management of pricing in inflationary environments
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(1) ________________ is the only marketing mix instrument that creates revenues.
a. Product
(2) All of the following are drivers that govern global pricing decisions EXCEPT:
(3) In the international marketplace, _________________ pricing adds international costs and a mark-up to the domestic manufacturing cost.
A. Dynamic incremental pricing B. Export price C. Import price D. Cost-plus price
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(4) One of the risks of dynamic incremental pricing (in the case where the export list price is far below the domestic price) that _____________ can be triggered in the export market.
a. High profit potential b. Dumping charges or accusations c. Falling profits d. Falling quality
(5) ________________ is a function of buying power, tastes, habits, cultural norms and substitutes.
a. Customer needs b. Customer demand c. Competition d. Company costs
(6) Countries with low per-capita income are more __________ than in developed countries.
a. Promotion sensitive b. Price sensitive c. Need sensitive d. Demand sensitive
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(7) Once brand loyalty has been established, price will play less of a role as a purchase criterion, and the firm may be able to institute a ________________ strategy.
a. Demand-based b. Premium pricing c. Elastic pricing d. Promotion-related pricing
(8) There are two ways to deal with the price escalation phenomenon. One of these methods is to cut the export price. The other is to:
a. Change the promotion strategy b. Position the product as a (super) premium brand c. Position the product as a lower quality brand d. Reduce retailer margins.
(9) Which of the following would be a good option to follow if lowering the export price were the firms objective? a. Rearrange the distribution channel b. Change the promotion c. Change the warranty provisions d. Give more of the product in the package as an incentive to purchase
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(10) How can Australian exporters minimise the effects of price escalation in foreign markets?
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