International Pricing Decision MEANING In any country, three basic factors determine the boundaries within which market prices should be set. The first is product cost, which establishes a price floor, or minimum price. Although it sis certainly possible to price a product below the cost boundary, few firms can afford to do this for extended period of time. The second competitive prices for comparable products create a price ceiling or upper boundary. International competition almost always puts pressure on the prices of domestic companies. A wide spread effect of international trade is to lower prices. Indeed, on to the major benefit of to a country of international business is the favorable impact of international competition on national price level, and in turn on a country’s rate of inflation. Between lower and upper boundaries for every product there is an optimum price, which is a function of the demand for the product as determined by the willingness and ability of customer to buy. Sometimes the optimum price can be affected by arbitrageurs, who exploit price differences in different countries. BASIC CONCEPT OF PRICING 1. Does the price Reflects the product’s quality? 2. Is the price competitive? 3. Should the market pursue market penetrations, Market Skimming, or some other pricing objectives? 4. What kind of discounts (Trade, Cash, Quantity) allowances (advertising, tradeoff) should the firm offers its international customers? 5. Should pricing is differed by market segment? 6. What pricing options are available if the firms cost increase or decreases? 7. Are the prices likely to be viewed by the host-country government as reasonable or exploitative? 8. Do the target country’s dumping laws pose a problem? ENVIORNMENTAL INFLUENCES ON PRICING 1. Currency Fluctuations Fluctuating currency values are a fact of life in international business. The marketer must decide what to do about this fact. Are price adjustments appropriate when currencies strengthen or waken? There are two extreme positions; one is to fix the price of products in county target market. If this is done, any appropriation or depreciation of the value of the currency in the country of production will lead to gain or losses for the seller. The other extreme position is to fix the price of products in home country currency. If this is done, any appreciation or deprecation of the home-country currency will result in price increases or decreases for customers with no immediate consequences for the seller In practice, companies rarely assume either of this extreme position. Pricing decisions should be consistent with the company’s overall business and marketing
strategy: If the strategy is long term, then it makes no sense to give up market share in order to maintain export margins. When currency fluctuations result in appreciation in the value of the currency of a country that is an exporter, wise companies do two things: They accept that currency fluctuations may unfavorably impact operating margins, and they double their efforts to reduce costs. 2. Exchange rate Clauses Many sales are contracting to supply goods or services over time. When these contracts are between parties in two countries, the problem of exchange rate fluctuations and exchange risk is addressed. An exchange rate clause allows the buyers and seller to agree to supply and purchase at fixed prices in each company’s national currency. If the exchange rate fluctuates within a specified range, say minimum 5%, the fluctuations do not affect the pricing agreement that is spelled out in the exchange rate clause. Small fluctuations in exchange rates are not a problem for most buyers and sellers. Exchange rate clauses are designed to protect both the buyers and sellers from unforeseen large swings in currencies. Purpose: To protect parties from unforeseen large swings in currencies. Exchange rate review is made quarterly to determine possible adjustments for the next period. Comparison basis is the three-month daily average and the initial average. The basic design of an exchange rate clause is straightforward: Review exchange rate periodically and compare the daily average during the review period and the initial base average. If the comparison produces exchange rate fluctuations that are outside the agreed range fluctuation, an adjustment is made to align prices with the new exchange rate. If fluctuation is grater than some limit the parties agree to discuss and negotiate new prices. The clause accepts the foreign exchange market’s effect on currency value, but only if it is within the range of 5to10%. Anything less than 5% does not affect pricing, and any thing more than 10% opens up a renegotiation of prices. 3. Pricing in an Inflationary Environment Inflation or persistent upward change in price levels is worldwide phenomenon. Inflation requires periodic price adjustment. These adjustments are necessitated by rising costs that must be covered by increased selling prices. An essential requirement when pricing in an inflationary environment is the maintenance of operating profit margin. Regardless of cost accounting practices, if a company maintains its margins, it has effectively protected itself from the effects of inflation. To keep up with inflation in Peru, for example, P&G has resorted to biweekly increases in detergent prices of 20% to 30%.
4. Government Controls and Subsidies If government action limits the freedom of management to adjust prices the maintenance of margins is definitely compromised. Under certain conditions, government action is a real threat to the profitability of a subsidiary operation. In country that undergoing severe financial difficulties and is in the midst of a financial crises, government officials are under pressure to take some type of action. In some cases government will take expedient steps rather than getting at the underlying causes of inflation and foreign exchange shortages. Such steps might include the use of broad or selective price controls. When selective controls are imposed, foreign companies are more vulnerable to control than local business, particularly if the outsiders lack the political influence over government decision making by local mangers. Government control can also take the form of prior cash deposit requirements imposed on importers. This is requirement that a company has to tie up funds in the form of a non-interest-bearing deposit for a specified period of time if it wishes to import products. Such requirements clearly create an incentive for a company to minimize the price of the imported product; lower prices mean smaller deposits. Other government requirements that affect the pricing decision are profit transfer rules that restrict the conditions under which profits can be transferred out of a company. Under such rules, a high transfer price paid fro imported goods by an affiliated company can be interpreted as device fro transferring profits out of a country. Government subsidies can also force a company to make strategic use of sourcing to be price competitive. 5. Competitive Behavior Pricing decision is bounded not only by cost and the nature of demand but also by competitive action. If competitors do not adjust their price in response to rising costs, managementeven if acutely aware of the effect of rising costs on operating on operating margins-will be severely constrained in its ability to adjust prices accordingly. Conversely, if competitors are manufacturing sourcing in a lower cost country, it may be necessary to cut prices to stay competitive 6. Price and Quality Relationships Is there a relationship between price and quality? Do you get what you pay for? The study says that, this is not surprising when one recognizes that consumer make purchase decisions with limited information and rely more on product appearance and style and less on technical quality as measured by testing organizations. Global Pricing Objectives and Strategies 1. Market Skimming The market skimming pricing strategy is a deliberate attempt to reach a market segment that is willing to pay a premium price for product.
The product must create high value for buyers. This pricing strategy often used in the introductory phase of the PLC, when both production capacity and competition are limited. By setting a deliberately high price, demand is limited to early adopters who are willing and able to pay the price. One goal of this pricing strategy is t maximize revenue on limited volume and to match demand to available supply. Another goal of market skimming pricing is to reinforce customers’ perception of high product value. When this is done, the price is part of the total product positioning strategy. 2. Penetration Pricing Penetrating pricing uses pricing as a competitive weapon to gain market position. The majority of companies using this type of pricing in international marketing are located in the Pacific Rim. Scale-efficient plants and low cost labor allow these companies to blitz the market. It should be noted that a first-time exporter is unlikely to use penetration pricing. The reason is simple: Penetration pricing often means that the product may be sold at a loss for a certain length of time. Companies that are new to exporting cannot absorb such losses. They are not likely to have the marketing system in place that allows global companies such as Sony to make effective use of penetration pricing to achieve market saturation before the product is copied by competitors. 3. Market Holding This strategy is frequently adopted by companies that want to maintain their share of the market. In single-country marketing, this strategy often involves reacting to price adjustments by competitors. For example, when one airline announces special bargain fares, most competing carriers must match the offer or risk losing passengers. This strategy dictates that source country currency appreciation will not be automatically passed on in the form of higher prices. If the competitive situation in market countries is price sensitive, manufacturer must absorb the cost of currency appreciation by accepting lower margins in order to maintain competitive prices in country markets. A strong home currency and rising cost s in the home country may also force a company to shift its sourcing to in-country or third-country licensing agreements, rather than exporting from the home country, to maintain market share. When currency of a country weakens, it becomes more difficult to compete on price with imported products. However, a weak-currency country can be a windfall for a global company with production operation in weak currency country. 4. Cost Plus/Price Escalation Companies new to exporting frequently use a strategy known as cost-plus pricing to gain a grip in global marketplace.