Global Marketing Mix: Price

About International Pricing:

Pricing is one of the most critical parts of the marketing mix for international firms. Pricing, above all other elements of the marketing mix, is what creates revenue for the firm. The remaining “P’s (Product, Placement, and Promotion), contribute to cost for a company. It can be observed that pricing technique can either make or break expansion efforts. Marketers must work cooperatively with other organizational departments, mainly Finance, to integrate finance, accounting, manufacturing, tax and legal components into the chosen pricing strategy. One of the biggest obstacles for multinational firms to overcome is how to set prices across different countries. There are many factors to consider to ensure that parallel trade or gray market situations do not occur.

Drivers in Foreign Market Pricing:

Many different factors come into play when setting prices for the same product in different countries. Major influencers are labeled the 4 C’s:

  1. Company (costs, company goals)
  2. Customers (price sensitivity, segments, consumer preferences)
  3. Competition (market structure and intensity of competition)
  4. Channels (of distribution)
The 4 C’s can explain why both business and consumer products  may vary in price depending on where they are sold. The chart below is an example of how products can be priced differently by market.
Item New York Hong Kong Seoul Paris London Sydney
Listerine Mouthwash $4.72 $4.37 $3.60 $7.75 5.93 $5.41
BlackBerry Bold 9000 $571 $657 $666 $656 $735 $754
Source: various issues of the Weekend Journal of the Wall Street Journal (“Arbitrage”)
It is interesting to see how even in the European market, where geographic location is close, prices can still vary a great deal. Below, I will discuss what I feel are the most important international pricing issues for a marketer to understand.

International Pricing Issues

  • Export Price Escalation: Exporting products requires more steps and higher risks than selling products domestically. To make up for incremental costs, such as shipping, insurance and tariffs, foreign retail prices may often become much higher than prices in the home country of where a product is produced. The most important questions to ask yourself as a marketer are: will my customers pay an inflated price for our products/services? and will the price of our product make allow us to compete successfully with other firms? – – If the answer to these questions are negative, then there are 2 approaches to dealing with price escalation. The first way is find a way to cut the export price, and the second is to position the product as a exclusive or premium brand.
  • Inflation: Intense and unrestrained inflation rates in countries can become a huge obstacle for multinational corporations. In places where inflation rates are rampant, setting prices and controlling costs are imperative, often involving complete dedication by marketing and financial divisions of an organization. There are many alternatives to protect against the affects of inflation. Common plans include modifying components of products or packaging materials, getting raw materials from low-cost suppliers, shortening credit terms, including escalator clauses in long-term contracts (used in many b2b situations), quoting prices in stable currencies and pursuing rapid inventory turnovers. When governments impose price controls, which may accompany wage freezes, companies must also adapt several plans of action. Often in these circumstances, businesses will alter their product lines to minimize negative affects from price controls, change defined market segments, launch new products, spark negotiations with the government, and try to better predict when pricing controls may occur.  In extreme cases, companies may choose to exit foreign markets when inflation or pricing controls become too costly to the company. If, however, a company can better manage these challenges, they will gain a long-term competitive advantage by creating higher barriers to entry for potential new competitors.
  • Currency Movements
Exchange rates represent how much one form of currency is worth in terms of another. Political and economic conditions cause exchange rates to constantly fluctuate. With these rates so unstable, setting a price strategy that can combat these changes can be difficult. The two main pricing issues for managers are how much of the exchange rate gain or loss should be transferred to customers (the pass-through issue), and deciding what currency price quotes are given in.
  • Transfer Pricing
Another challenge facing organizations operating globally is how they handle sales transactions between related parts of the same company. Transfer pricing are the prices charged for transactions involving the trade of raw materials, components, finished goods, or services. Transfer pricing decisions involve the need to balance the interests of a variety of stakeholders including: the parent company, local country managers, host governments, domestic governments, and joint-venture partners. Some of the factors that influence transfer pricing decisions are the following:  tax regimes, local market conditions, market imperfections, joint venture partners and the morale of local country managers. There are two major transfer pricing strategies, market-based transfer pricing and nonmarket-based pricing. To read much more about transfer pricing, click here.
  • Anti-dumping Regulations
Dumping occurs when imports are sold at an unfair price. Recently the removal of trade barriers (tariffs, quotas) has caused countries to switch to non-tariff barriers such as anti-dumping laws in order to protect their local industries. It is important for multinational corporations to take into account anti-dumping laws when they determine their global pricing policy. If firms price too aggressively, this may cause anti-dumping measures that will hurt their competitive position. It is important to monitor how anti-dumping laws affect similar companies in your industry.
  • Price Coordination
The last issue that affects pricing in the global environment is price coordination. Price coordination is the relationship that exists between prices charged in different countries. Although the laws of economics indicate that prices should vary across region so that overall profits are maximized, reality is just not that simple. In the majority of instances, markets cannot be separated perfectly, and too much price differentiation creates gray markets. So, when deciding on how to coordinate your pricing strategy, consider these factors:
  • The nature of your customers
  • The amount of product differentiation
  • Nature of your distribution channels
  • Nature of you competition
  • Market Integration
  • Characteristics if your internal organization
  • Government regulations

Countertrade

The international marketer can use countertrade to gain rewards when conducting business globally. Countertrade describes many unconventional trade-financing transactions that involve some form of non-cash compensation. In recent times, countertrade has become more popular. The most common forms of countertrade are barters, clearing arrangements, switch trading, buyback, counterpurchases and offsets. The most important idea to remember from countertrade is that its benefits may cause short-term or long-term benefits for your company, but there are potential risks involved. For more information on the motives behind countertrade and the risks involved, visit these websites:

www.barternews.com

www.londoncountertrade.org

 

 

Source:

Kotabe, Masaaki, and Kristiaan Helsen. Global marketing management. Hoboken, NJ: J. Wiley, 1998. Print.

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