Pricing for international markets
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Pricing for international markets

Pricing for International Markets


Pricing for international markets

Argentina Prices 2003 Meals:

Pizza AR$ 5 - AR$ 20Parrillada (barbecue) from AR$ 8Ice cream from AR$ 2Tenedor libre (all-you-can-eat restaurants) AR$ 6Breakfast in a patisserie AR$ 2 - AR$ 4Coffee in Recoleta neighborhood AR$ 2 - AR$ 3.50Lunch/dinner in a pattisserie AR$ 7 - AR$ 15Dinner per person: from AR$ 15Palermo Viejo neigborhood (lunch - dinner) AR$ 15 and AR$ 25Menú ejecutivo (midday menu) (noon, from Monday through Friday): AR$ 7 - AR$ 10Transportation:Bus: AR$ 0.75 - AR$ 0.80 liter of gasoline: AR$ 1- AR$ 2Going out:Cinema: AR$ 4.50 - AR$ 10.Ticket for a Boca-River soccer match: AR$ 15 - AR$ 30. Hotels:5* Hotel – Double room AR$ 500 - AR$ 1000. 4* Hotel – Double room AR$ 140 - AR$ 220. 3* Hotel – Double room AR$50 - AR$ 150. 1* Hotel – Double room AR$25 - AR$ 50.


Role of pricing determines success or failure

Role of PricingDetermines success or failure

  • Segments markets

  • Defines products

  • Creates customer incentives

  • Sends signals to competitors


Approaches to international pricing skimming vs penetration

Approaches to International PricingSkimming Vs. Penetration

  • Skimming

    • Pricing abovecompetitors’ prices when competition is minimal

    • Reach segment which is insensitive to price

    • Focus on quality, uniqueness and status

    • Where only two income levels, wealthy & poor


Approaches to international pricing

Approaches to International Pricing

  • Penetration

    • Price lower than competitors in orderto quickly penetrate the market at competitors' expense

    • Stimulate market growth and capture market share


Why price escalation

Why Price Escalation?

  • “People traveling abroad are surprised to find goods that are relatively inexpensive in their home country priced outrageously high in other countries.”


Price escalation the lower prices are at home

Price EscalationThe Lower Prices are at Home

New YorkLondonParisTokyoMexico City

Aspirin$ 0.99$ 1.23$ 7.07$ 6.53$ 1.78

Movie7.5010.507.8917.294.55

Levi 501 jeans39.9974.9275.4079.7354.54

Ray-Ban sunglasses 45.0088.5081.23134.4989.39

Sony Walkman 59.9574.9886.00211.34110.00

Nike Air Jordans 125.00134.99157.71172.91154.24

Nikon camera629.95840.00691.00768.491,054.42

18-7

Los AngelesMadridStockholmBerlinRome

Mariah Carey CD16.2216.0917.8215.3120.67

Windows 98117.99123.94179.79211.20264.46

Diapers13.525.035.426.8610.55

SOURCE: Norihiki Shirouzu, “Luxury Prices for U.S. Goods No Longer Pass Muster in Japan,” Wall Street Journal, February 8, 1996, p. B1; and Elizabeth Fleick, “The Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell about Prices,” Time International, December 13, 1999, p. 38.

Irwin/McGraw-Hill


Why price escalation1

Why Price Escalation?

  • Taxes

  • Tariffs

  • Administrative Costs

  • Inflation

  • Exchange Rate Fluctuations

  • Varying Currency Values

  • Middlemen and Transportation Cost


Sample causes and effects of price escalation

Sample Causes and Effects of Price Escalation

ForeignForeignForeign

Example 1:Example 2:Example 3:

Assuming theImporter andSame as 2 but

same channels withsame marginswith 10 percent

Domestic wholesaler import-and channelscumulative

Example ing directlyturnover tax

18-6

Manufacturing net$ 5.00$ 5.00$ 5.00$ 5.00

Transport, c.i.f.n.a.6.106.106.10

Tariff (20 percent c.i.f. value)n.a.1.221.221.22

Importer paysn.a.n.a.7.327.32

Importer margin when1.83

sold to wholesaler+0.73 *

(25 percent) on costn.a.n.a.1.832.56

Wholesaler pays landed cost5.007.329.15+9.88

3.29+0.99 *

Wholesaler margin (331/3 percent on cost)1.672.443.05=4.28

Retailer pays6.679.7612.2014.16

7.08

+1.42 *

Retail margin (50 percent on cost)3.344.886.10=8.50

Retail price10.0114.6418.3022.66

Notes:a.All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable.

b.The exhibit assumes that all domestic transportation costs are absorbed by the middleman.

c.Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown.

* Turnover Tax

Irwin/McGraw-Hill


Pricing for international markets

Approaches to Lessening Price Escalation

  • Lower Cost of Goods

    • Lower Manufacturing Costs

    • Eliminate Functional Features

    • Lower Quality

  •  Lower Tariffs

    • Tariff Reclassification

    • Product Modification

    • Partial Assembly

    • Repack aging

  •  Lower Distribution Costs

    • Shorten Channels of Distribution

    • Lower Shipping Costs

  •  Foreign Trade Zones-Payment of import duties is postponed until product leaves FTZ & enters the country

18-8

Irwin/McGraw-Hill


Free trade zone in uruguay

Free Trade Zone in Uruguay


Pricing for international markets

Free Trade Zone in Uruguay


Pricing for international markets

Benefits of A Foreign Trade Zone (FTC)

  • Tariffs may be lower because duties are typically assessed at a lower rate for unassembled versus assembled goods.

  • If labor costs are lower in the importing country, substantial savings may be realized in the final product costs.

  • Ocean transportation rates are affected by weight and volume; thus, unassembled goods may qualify for lower freight rates.

  • If local content, such as packaging or component parts, can be used in the final assembly, there may be further reduction of tariffs.

18-9

Irwin/McGraw-Hill


Pricing for international markets

  • Lower Home Market Prices

  • Justified by:

    • No cost advantages to producing overseas

    • Few or no challenges from international competition

    • Limited market potential

    • International buyers can afford higher prices


Pricing for international markets

  • Higher Home Market Prices

  • Justified by:

    • Lower labor or raw material cost in the international market

    • Strong local competition in the international market

    • Lower buying power of host-country consumers

    • Goal: increase market share via penetration pricing


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