GLOBAL PRICING ISSUES

1. GLOBAL PRICING ISSUES • Price--definition • Applicability of price research outside U.S./Western Europe • Pricing issues in international trade • Pricing under “hard” currency scarcity

2. Approaches to Pricing • Cost based • “Cost-plus” • Marginal cost for new market • Experience based costing • Prestige pricing • Market based pricing (demand) • Perceived customer value

3. Reasons for Cost Declines With Volume • Experience curves • Economies of • Scale • Scope • Spreading R&D costs over more units • Lower costs of operating in other markets • Labor costs • Costs of other resources

4. Experience Curves • Experience apart from economies of scale and volume buying power • 80% vs. 64% experience curves (actual numbers will vary depending on specifics) • Costs of initial units are very high and not very meaningful • With time, subsequent declines in cost take longer 80% 64%

5. The Role of Cost PRODUCTION AND MARKETING COST VALUE > COST + PROFIT? CUSTOMER VALUE MARKET PRICES FOR SIMILAR VALUE LOWER COST THROUGH VOLUME VALUE > DIFFERENTIAL FROM LOWER COST ALTERNATIVE? INVESTMENT IN SPECIAL VALUE PRICE CONSIDERED PRICE OFFERING IF VIABLE

6. Financial Issues • Currency of transaction • One side will face exchange rate risks • Costs of hedging and futures contracts • Currency convertibility and repatriability • Transfer prices between subsidiaries • Fairness of evaluation • Tax consequences  need for “arms length” transaction

7. Price and Positioning • Strategies • Market brand • Value brand • Prestige brand • Impact of Product Life Cycle (PLC) • Cross-market spillover • Policies • Polycentric (price set for each set of markets) • Geocentric (global policy but individual mark-up decisions) • Ethnocentric (same price across countries)

8. “Gray” Trade • “Gray” vs. “black” markets • Parallel importing • Re-importing (e.g., U.S. pharmaceuticals) • Legality • Diversion to higher cost markets (arbitrage) • “Consumer tourism”—forms • Limited quantities • Trip made for purchase of bringing back materials • “Nominal” travel to legitimize purchase • Manufacturer response

9. Counter Trade • Barter • Compensation deals • Counter purchases • Product Buy-Back

10. Effects of the Euro • Stable “exchange rates” • Easier comparability of prices across countries • May have served as sign of international competitive pressures • Changing prices to the Euro • Possible opportunity for price increase • Rounding issues • Highly visible and “institutionalized” prices • Concerns about competitor strategies

11. Distribution • Transportation logistics • Role of channel members • customs • legal restrictions • Structure of channels • Legal issues • Infrastructure issues

12. Retailers--Formats • Level of • service • assortment • Tradition of where merchandise is sold • Location and convenience • (Inter)national vs. local chains

13. Global Retailing • Increasing presence of international retailers across countries • Outright entry • Acquisition of local chains continued under the original name and position • May be able to take advantage of cross-market • Bargaining power • Economies of scale • Balance with local sourcing

14. Legal Constraints on Retailing • Restricted store hours • Regulation of assortment • Preferences for small retailers • Product uniformity • Price maintenance/ selective discounts

15. Parallel Distribution • “Gray” market vs. counterfeiting • Gray markets--diversion from • authorized to unauthorized dealers within a country • lower cost areas (e.g., Mercedes Benz from Europe to U.S.) • temporary promotions in one region • highly taxed areas (usually through tourist purchases)

16. Effects of Gray Trade • Brand equity • Relationships with established dealers • Legal liabilities • Complication of marketing strategies