PRICING STRATEGIES

PRICING STRATEGIES

Price Standardization

A study of the marketing mix large US-based industrial firms in their Latin American businesses found that the degree of standardization varies across individual elements, with branding and product being least adapted.

According to one study, most American multinational firms standardize their prices in most world markets because they are probably cost driven.

Pricing Decisions

Factors to consider when pricing a product in case of international marketing

Supply and demand – The law of supply and demand is a sound starting point in explaining companies’ price behavior.

Cost – In pricing a product, it is inevitable that cost must be taken into account. British Airways at one time blindly matched the competition’s prices without carefully considering its cost structure.

The typical costs associated with international marketing include: market research; credit checks; business travel; international postage, cable, and telephone rates; translation costs; commissions, training charges, and other costs involving foreign representatives; consultants and freight forwarders; product modification; and special packaging.

A number of international marketers use marginal cost pricing, which is more polycentric and decentralized. This pricing method is oriented more toward incremental costs. An implicit assumption is that some of the product costs, such as administration costs and advertising at home, are irrelevant overseas.

Exchange rate – The exchange rate is one factor that is quite crucial in international marketing.

One pricing problem involves the currency to be used for billing purposes. As a rule, a seller should negotiate to bill in a strong currency, and a buyer should try to gain acceptance in a weak currency.

These exchange rate/price relationships are basic in measuring the impact of an exchange rate change on countries’ actual trade balances.

Market share – A high market share provides pricing flexibility because the company has the advantage of being above the market if it so chooses.

  • The company can also choose to lower its price because of the better economies of scale derived from lower production and marketing costs.
  • Market share is more crucial for late entrants because market share acts as an entry barrier.
  • Market share can be bought with a very low price at the expense of profit. Compaq shocked the Japanese market in 1992 selling desktop PCs for less than half the price of Japanese manufacturers.

Hysteresis is a type of market inertia that says that the relationship between two or more variables depends crucially on past history. Hysteresis can occur when a firm has increasing returns to scale or when consumers are loyal to particular brands, making it very difficult for new entrants to sell their products at the same level of profit as established firms.

Tariffs and distribution costs – As a rule, a product sold in a foreign country should cost more than an identical item sold in a manufacturer’s home market. This is the case because the overseas price must be increased to cover tariffs and extra distribution costs.

In Japan, both tariffs and quotas combine to restrain imports and force the prices of imported goods upward. In addition, the long distribution channel (i.e., many middlemen) common in many countries around the world is responsible for price escalation, often without any corresponding increase in distribution efficiency.

Culture – Home manufacturers should keep in mind that neither the one-price policy nor the suggested list price will be effective in a number of countries.

In the USA, a common practice is for retailers to charge all buyers the same price under similar  buying conditions. In most other countries, a flexible or negotiated price is common practice, and buyers and sellers often spend hours haggling about price.

Thus, price haggling is an art, and the buyer with the superior negotiating skills is expected to do better on price than those unfamiliar with the practice.

Alternative Pricing Strategies

These strategies include the timing of the price change, number of price changes, time interval to which price change applies, number of items to change, use of discount and credit, and bundling and unbundling.

The effect of price can be masked and greatly moderated financing or credit terms. Airbus, a European consortium owned jointly four companies from France, Germany, the United Kingdom, and Spain, assembles and markets airplanes as an alternative to carriers that prefer not to buy American. In its eagerness to penetrate the US market, the consortium provided export financing that subsidized Eastern Air Lines more than $100 million. For Boeing, the consortium engaged in predatory export financing just to get sales.

Discounts (cash, quantity, functional) may be used to adjust prices indirectly. Large buyers are in a position to command a higher discount if it can be granted legally. Although a quantity discount may provide an incentive for dealers to work harder, it often discriminates against smaller middlemen.

Another method used to moderate the price effect is to bundle or unbundle the product.

Bundling adds value and increases prices a little or not at all for added value. This is the strategy used Japanese car makers, who increase the base price of their cars just enough to cover actual costs. The Japanese also sell cars in the USA with more standard equipment and fewer options. The strategy makes sense because their vehicles must be shipped from overseas factories, and any custom orders would only serve to delay production and shipment.

Moreover, the price charged covers a “bundle” of standard equipment and represents good value for buyers.

Bundling offers a buyer more product for less money while simplifying production and marketing activities. A product can be unbundled so that the buyer does not have to pay for any extras not wanted. In effect, the price can be made more affordable unbundling the product.

Dumping

Dumping is a form of price discrimination. It can be described as the practice of charging different prices for the same product in similar markets. As a result, imported goods are sold at prices so low as to be detrimental (unfavorable) to local producers of the same kind of merchandise.

Boeing and McDonnell Douglas, for example, accused Airbus of receiving $9 billion in subsidies from the government consortium, enabling the company to price each airplane at some $15 to 20 million less than the true cost.

Dumping also applies to services. Japanese banks in California were accused of dumping money in the US market pricing their loans at an interest rate lower than that charged US banks.

Types of dumping

  • Sporadic dumping
  • Predatory dumping
  • Persistent dumping
  • Reverse dumping

Sporadic dumping – This occurs when a manufacturer with unsold inventories wants to get rid of distressed and excess merchandise. To preserve its competitive position at home, the manufacturer must avoid starting a price war that could harm its home market. One way to find a solution involves destroying excess supplies, as in the example of Asian farmers dumping small chickens in the sea or burning them.

Predatory dumping –This is more permanent than sporadic dumping. This strategy involves selling at a loss to gain access to a market and perhaps to drive out competition. Once the competition is gone or the market established, the company uses its monopoly position to increase price. Some critics question the allegation that predatory dumping is harmful pointing out that if price is subsequently raised the firm that does the dumping, former competitors can rejoin the market when it becomes more profitable again. Hitachi was accused of employing predatory pricing for its EPROM (electrically programmable read-only memory) chips.

Persistent dumping –It is the most permanent type of dumping, which requires consistent selling at lower prices in one market than in others. This practice may be the result of a firm’s recognition that markets are different in terms of overhead costs and demand characteristics. For example, a firm may assume that demand abroad is more elastic than it is at home. Based on this perception, the firm may decide to use incremental or marginal-cost pricing abroad while using full-cost pricing to cover fixed costs at home. This practice benefits foreign consumers, but it works to the disadvantage of local consumers. Japan, for example, is able to keep prices high at home, especially for consumer electronics, because it has no foreign competition there, but it is more than willing to lower prices in the US market in order to gain or maintain market share.

Japanese consumers, as a result, suffer paying higher prices for Japanese products that are priced much lower in other markets.

Legal aspect of dumping

Whether or not dumping is illegal depends on whether the practice is tolerated in a particular country. Switzerland has no specific antidumping laws. Most countries, however, have dumping laws that set a minimum price or a floor on prices that can be charged in the market.

Illegal dumping occurs when the price charged drops below a specified level.

Price Distortion

Dumping laws are not the only cause of price variations.The power of the market force in setting prices can be moderated a government’s price policy. Few governments allow the market to set prices completely of its own accord. When a government is actively involved in buying and selling local and foreign goods, price deviations usually and readily follow. Because of the political influence of the agricultural sector in Japan, Japanese rice farmers are able to price their rice at several times more than US prices, resulting in Japanese consumers paying double or triple the world price.

Inflation

Once the price is set, it must still be adjusted periodically because of the impact of inflation. During 1985, the runaway inflation in Argentina made it easy to see that prices had to be adjusted upward on a sharp and continuous basis. Supermarkets there adjusted prices twice each day, and restaurants marked their prices in pencil to make easy daily changes. Argentine consumers rushed out to purchase goods as soon as they were paid, as a one-day delay could cost them dearly in terms of higher prices.

Problems with Inflationary environment

  • A firm’s price may be constrained government price controls
  • It is also difficult to guarantee prices over an extended period of time
  • When a marketer operates within a highly inflationary environment, it must think like its customers in order to protect itself.

Strategies used to deal with Inflationary environment

  • Merchants must collect their accounts receivable quickly. To protect itself, American Express requires its Argentine cardholders to pay their charge account purchases even before the bills are sent.
  • A product may be modified reducing the quantity or eliminating extra frills (additions) so that an affordable price can be achieved.
  • Sometimes it may be better not to make a sale. Some Argentine retailers and distributors felt that they would come out ahead closing their stores for a month instead of making sales because their inventories would greatly appreciate in value over the interval.

Transfer Pricing

A common practice is for an MNC’s many subsidiaries to trade among themselves or with the parent firm.

Methods used to determine transfer prices

Direct manufacturing costs The problem with this method is that when a buying subsidiary acquires merchandise at a very low price it has no incentive to hold down expenses or to maximize profits. The selling unit is also likely to be unhappy for not showing profit, feeling that it is subsidizing an affiliate of the firm’s operations.

Direct manufacturing cost plus a predetermined markup- This is to cover additional expenses. Profit is produced and added at every stage. The disadvantage of this method is that the price generated may be too high because market conditions are given secondary consideration to the markups taken.

Market-based transfer price The price, though competitive, may end up being too low for the selling subsidiary because production cost may not be considered.

Arm’s length price – This is pricing where unaffiliated traders would agree on for a particular transaction. The problem with using this method occurs when the product has no external buyers or is sold at different prices in different markets.

NB: Cost-plus and market-based pricing are the most popular methods used both in more developed and less developed countries. The findings show that size and legal considerations (e.g., compliance with tax and custom regulations, antidumping and antitrust legislations, and financial reporting rules of host countries) are influential in the use of market based transfer pricing.

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