International Marketing Pricing Strategies

Chapter 16B: International Marketing

International Pricing Strategies

Complexity of International Pricing

  • Pricing in international business is multifaceted due to:
    • Multiple currencies
    • Trade barriers
    • Added costs resulting from tariffs, taxes, and transportation
    • Typically longer distribution channels.
  • Prices impact both sales and profits, with an often observed inverse relationship between profits and market share.
    • Firms frequently encounter pressure to reduce prices in foreign markets, primarily due to lower income levels.
  • Conversely, prices can escalate in international markets because of additional factors including tariffs, taxes, transportation costs, intermediary markups, and expenditures on after-sales service.

Factors Affecting International Pricing

  • Nature of the Market: Local purchasing power and the distribution infrastructure are key determinants of pricing strategy.
  • Nature of the Product or Industry: Specialized or highly advanced products, or industries with limited competition, may necessitate elevated pricing.
  • Type of Distribution System: Complexity in distribution channels in certain countries can increase pricing.
  • Location of Production Facility: Manufacturing closer to customers or in countries with inexpensive labor can facilitate lower pricing.

Three Pricing Strategies

  • Rigid Cost-Plus Pricing (Standardization): A fixed price is set across all export markets by adding a flat percentage to the domestic price to cover additional costs associated with overseas business operations.
  • Flexible Cost-Plus Pricing (Adaptation): Prices are established based on local market conditions, which take into account customer purchasing power, demand, and competitor pricing.
  • Incremental Pricing (Marginal Cost Pricing): Pricing focuses solely on covering variable costs, not fixed costs, under the assumption that fixed costs are already recovered in the domestic market.

Western Approach to Pricing Issues

  • Traditional focus is on cost considerations and product characteristics, which are examined through market research and design engineering. If costs are deemed excessive, the process reverts back to the design stage for optimization.

Japanese Approach to Pricing Issues

  • Target Costing: A method where design engineering and supplier pricing rely on predetermined target costs for each component, compelling teams to negotiate trade-offs continuously for cost efficiency.
    • Planned selling price is defined as the target selling price less desired profit.

International Pricing Issues

International Price Escalation

  • Various factors contribute to increased prices for products in export markets, including:
    • Multi-layered distribution channels
    • Intermediary margins
    • Tariffs and other associated foreign market costs.
  • High retail prices in target markets can create competitive disadvantages for exporters.

Strategies to Combat International Price Escalation

  1. Shorten the Distribution Channel: Bypass certain intermediaries to reduce costs.
  2. Redesign the Product: Eliminate costly features, for instance, Whirlpool’s development of a no-frills washing machine.
  3. Ship Products Unassembled: Ship components separately to qualify for reduced import tariffs, then conduct final assembly in the foreign market using inexpensive labor or in Foreign Trade Zones.
  4. Reclassify Products: Seek a different tariff classification to obtain lower tariffs.
  5. Relocate Production or Sourcing: Move operations to states that provide cheaper labor costs or advantageous currency rates.

Transfer Pricing

  • Defined as the pricing mechanism used for transactions of intermediate or finished goods exchanged among subsidiaries of the same corporate family in various countries.
    • Can facilitate repatriation of profits from nations that restrict multinational enterprises (MNEs) from withdrawing earnings.
    • Can help in shifting profits from high corporate tax jurisdictions to low corporate tax jurisdictions, thereby amplifying overall company profits.

Example of Transfer Pricing

  • U.S. Subsidiary
    • Normal Pricing with manufacturing cost of $1,000 and 20% markup:
    • Selling Price: $1,200
    • Taxable Profit: $200
    • Corporate Tax Rate: 50%
    • Taxes on $200 Profit: $100
  • Corp. Direct Pricing: Under a different scenario where profits are earned in the U.S., the total profit remains unburdened by German taxes:
    • Selling Price: $1,000, no taxes owed.

Global Automobile Company Example

  • Same pricing strategy explored in a German subsidiary context.

Gray Market

  • Refers to the legal importation of genuine products into a country by unauthorized intermediaries.
  • Gray marketers purchase products at lower prices in one country and resell them at higher prices in another.
  • Causes of gray markets:
    • Significant price differentials for identical products between two markets, often a result of company pricing strategies.
    • Variations in exchange rates that affect pricing across different currencies.

Implications of Gray Market on Firms

  • Damage to brand image when customers discover lower prices through alternative channels.
  • Strain on relationships with authorized distributors who lose sales.
  • Disrupted company activities like:
    • Sales forecasting
    • Pricing strategies
    • Merchandising plans
    • Marketing initiatives.

Strategies to Cope with Gray Markets

  1. Aggressively reduce prices in regions targeted by gray market brokers.
  2. Prevent leakage of products into networks exploited by gray market operators.
  3. Create products with exclusive features that resonate with consumer interests.
  4. Publicize limitations associated with gray market channels to deter consumers.

Dumping

  • Predatory Dumping: The deliberate practice of selling at a loss to gain market share.
  • Unintentional Dumping: Occurs due to market dynamics that lead to pricing below home market levels.
  • Remedies for Dumping:
    • Antidumping Duties: Levied on goods sold at less than fair market value.
    • Countervailing Duties: Imposed on products that are subsidized in the exporter’s home nation.

Additional Pricing Factors

  • Internal Factors:
    • Firm strategy and overarching goals, e.g., balancing profits with market share.
    • Production costs associated with delivering goods at competitive prices.
  • External Factors:
    • Consumer expectations and purchasing power in the target market.
    • Competitor pricing actions.
    • Economic conditions impacting demand for goods.
    • Adaptation costs to align products with local preferences.
    • Export and transportation expenses.
    • Tariffs affecting the cost of market entry.
    • Exchange rate fluctuations that impact product pricing.