Sales & Pricing - 6. Special Topics in International Pricing

Flashcards related to gray markets, transfer pricing, price wars, innovative pricing methods, and risks in international business.

Parallel imports

Goods that are imported into a market and sold there without the consent of the manufacturer.

Gray market

A market that legally circumvents authorized channels of distribution to sell goods.

Parallel imports

Unintended flows of goods between different countries leading to the formation of gray markets.

Gray market

Branded products of a company are legally imported but via sales channels not authorized by the manufacturer.

Black market

Illicit goods or commodities traded in violation of official regulations.

Parallel imports

Arise when a dealer or end customer is able to exploit the price discrepancies between countries.

Parallel imports Process

Buying products in a low-price country, modifying if necessary, and transporting them to another country where the product is sold at a higher price.

Factors Influencing Price Variation

Differences in purchasing power, exchange rate, customs, duties, and competition.

Gray Market Emergence Condition

When the price difference across countries is greater than the cost of transport between two markets.

Gray Market Emergence Condition (Limited Supply)

When there is only limited supply of a product on a specific market.

Parallel Imports

To import products from the manufacturing country into the export market due to price differences.

Reimport

To import products from the export market to the manufacturing country due to price differences.

Lateral Gray Imports

Selling a product from one country through unauthorized channels to another country due to price differences.

Factors Supporting Parallel Imports

Ongoing differences in international prices, falling transport costs, and improved communication systems.

Factor Supporting Gray Markets

The liberalization of international trade limiting protectionist measures implemented by national markets.

Factor Supporting Gray Markets

Uniform appearance and standardized application of international and global brands.

Factor Supporting Gray Markets

Internationalization of consumers and the growing acceptance of “foreign” products.

Advantages of Gray Markets

Help to counteract competition, manage distribution channels, segment markets, and open new markets.

Dilution of Exclusivity

Diminishing the exclusivity of a product.

Free Riding

Authorized distributors may save on services such as pre-sales, employee training, and customer support.

Damage to Channel Relationships

The trusting relationship between members of the distribution network can be damaged.

Undermining Segmented Pricing Schemes

Globalization makes prices difficult to adjust according to segments or countries.

Reputation and Legal Liability

The manufacturer loses control of its products.

Control of the Gray Market Measures

Companies offer services such as financing, use standardized pricing, and regulate distribution channels.

Transfer price

The price charged by individual entities for goods or services supplied to one another in multi-department, multi-office, or multinational firms.

Joint venture

A new company formed to achieve specific objectives that require a specific type of partnership between two or more firms.

Transfer Pricing

The process in which a company calculates prices for the exchange of goods, services, or intangible property within the company.

Transfer Price Use in Cost Accounting

Used for the exchange of in-house services between individual cost centers.

Objectives of Establishing a Transfer Pricing System

Maximizing profit for the entire company and simplifying control by the parent company.

Transfer Pricing System Goals

Improve goal congruence, provide information for performance appraisal, facilitate independence of divisions.

Optimized Transfer Pricing Prerequisites

Ensuring proper accounting standards and compliance with tax regulations.

Market-based transfer pricing

Based on the price paid for the product if it were sold on the open market.

Arm’s-Length Principle

The price negotiated between two subsidiaries must be the same as if the companies weren’t linked.

Negotiated transfer pricing

Based on a negotiation between the participating business units regarding a reasonable price.

Cost-based transfer pricing

Based on an approach that accounts for all the associated costs of production.

Transfer Pricing and Taxation

Setting transfer prices to pay less tax than required or shift profits to countries with lower corporate tax rates.

Price war

A situation in which two or more companies try to increase their market share through price reductions.

Cross-subsidies

When a company charges higher prices to one group of consumers to subsidize lower prices for another.

Dumping

Selling goods in large quantities at or below market price or production costs.

Price War Dynamic

An initial price reduction by one company is often matched by a competitor.

Winner in a Price War

The cost leader, due to its cost advantage and greater quantity of sales.

Assumption for Initiating a Price War

Following a market adjustment, the subsequent profits will surpass the losses incurred from the price war in the medium-term.

Environment in a Price War

The company, customers, competitors, and other parties within or outside the industry.

Customers and Price Sensitivity

An assessment of the price sensitivity of customers.

Abilities of the Company

Skills, cost structure, and strategic position of the company.

Competitor Response

Cost structure, abilities, and strategic position of competitors.

Other Parties Involved in a Price War

Suppliers, distributors, providers of complementary goods and services, and government agencies.

Options in the Face of a Price War

To stop the price war before it begins, respond with non-monetary actions, or implement selective pricing.

Showing Company’s Strategic Intentions

Price adjustments, daily low prices, and other public positions.

Responding with Non-Monetary Actions

Focusing on quality rather than on price.

New Product Development

Creating a unique selling proposition that no longer competes with the lower-priced competitor product.

Highlighting Risk or Other Negative Consequences

Strengthening an association between lower prices and poorer quality in the mind of consumers.

Implementing Selective Pricing

Redesigning the offer made to customers, selling in bundles, volume discounts, and loyalty programs.

Price bundling

Several products are grouped into a bundle and offered at a special price.

Changing Certain Prices in a Range

Adjusting prices specifically for one area or distribution channel and leaving prices in other segments unaltered.

Building Up Another Brand

Building up a second “fighter” brand to sell cheaper products.

Package Products Differently

Packaging the product in larger quantities and offering a price reduction for this bundle.

Engaging Fully in the Price War

Any price reduction should be fast and unambiguous.

Retreat/Withdraw from Price War

In some individual cases, it may be sensible not to enter into an unprofitable price competition.

Price Management

Manipulating this aspect of the marketing mix to create a competitive advantage and maximize profits.

Internet Impact on Pricing

The Internet facilitates the comparison of prices and facilitates greater transparency.

Opportunities Made Available by the Internet

More accurate prices, more flexibility when changing prices, and information for better customer segmentation.

Precision Pricing

The price of a product fits within a range of possible prices that the customer is willing and able to pay.

Adaptability in Online Pricing

Companies can rapidly change prices to react to only minor changes in market conditions, demand, and competition.

Segmentation in Online Pricing

The ability to offer different prices for different customer segments.

Clickstream

A record of a user’s activity on the Internet.

Cookies

Used to collect identifying information about the user.

Segmentation Example

Electronic components for core vs. fill-in customers.

Freemium Pricing

The basic version of a product is offered free of charge and higher-quality premium services attract charges.

Conversion Rate

Measures the proportion of paying and non-paying customers.

Freemium Pricing Essential

Marginal costs for the basic services are equal to or close to zero.

Example of Freemium Model (Dropbox)

Users receive free but limited cloud storage which they can increase with payment.

Freemium and Established Companies

A study showed that two-thirds of established companies made poor decisions in the face of a free offer.

Threat Associated with a Freemium Product

The provider’s ability to cover its costs quickly enough.

Threat Associated with a Freemium Product

The speed with which the number of users of the free offer grows.

Threat Associated with a Freemium Product

The speed with which paying customers switch to the new offer.

Established Company Response to Freemium

The situation should be observed if the threat posed by a freemium model is low.

Established Company Response to Freemium

A free product is immediately launched as a response to a competing freemium product.

Established Company Response to Freemium

Waiting and potentially offering a free offer later.

Established Company Response to Freemium

The business model is changed as quickly as possible to survive.

Upsell

A free basic product is offered to gain a wide distribution network. Users continue to pay for the premium version.

Cross-sell

Other products are sold which are not directly related to the free product.

Charge Third Parties

The product is offered free of charge and a third party pays for access to the customer.

Bundle

A free product is offered along with a paid one.

Razor and Blades Pricing

The basic product is offered cheaply or even free of charge but using the basic product requires a complementary product.

Razor and Blades Pricing Feature

The complementary product is more expensive and is responsible for the majority of turnover.

Razor and Blades Strategy

A company can bind its customers to the brand by reducing barriers to buying the basic product.

Exit Barriers

Ensuring that customers do not buy complementary products from competitors.

Example of Razor and Blades (Nespresso)

Selling low-priced coffee machines and expensive coffee capsules.

Razor and Blades Example (Amazon Kindle Fire)

The device is sold at a price close to its production price because it forms the virtual gateway to the store’s products, services, and content.

Name-Your-Own-Price Pricing

An interactive pricing model in which the price is determined in a participatory process between the seller and buyer.

Name-Your-Own-Price Mechanism

The customer offers a price and the provider decides whether to accept this price offer.

Name-Your-Own-Price Model (Priceline.com)

Specifying preferences and a maximum price willing to spend on a service.

Name-Your-Own-Price Model (Etihad)

Offering customer upgrades at auction.

Risks in International Business

Operating in another corporate culture, using multiple languages, and handling different legal regulations.

Political risks and Country risks

The risk that foreign borrowers cannot make payments for political and/or economic reasons.

Risk in Concrete Business Transaction

Misjudgments or incorrect assumptions about the commercial relations of foreign business partners.

Top Three Risks Associated with Exports

Currency risk, economic risk, and del credere/credit risk.

Del credere risk

The risk that the buyer or guarantor is not capable of or is reluctant to make a payment.

Force majeure

Unforeseeable circumstances that prevent someone from fulfilling a contract.