The 4Ps in Marketing Planning Communication Decisions (Promotion)

Product Decisions

International Marketing Plan Distribution Decisions (Place)

Pricing Decisions

Pricing Decisions • Part of the marketing mix (4Ps) – The only source of profits of the 4Ps

• Pricing in international markets more complex – Exchange rate fluctuations, inflation rates vary across countries, alternative payment methods (e.g. leasing)

International Pricing Framework Firm-level factors

Environmental factors

Product factors

Market factors

Pricing strategies

Other 4Ps

Terms of business

Firm performance

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Factors Influencing International Pricing Decisions Firm-level factors • Corporate and marketing objectives • Competitive strategy • Firm positioning • Product development • Production locations (cost) • Market entry modes

Factors Influencing International Pricing Decisions Product factors • Stage in PLC • Place in product line • Most important product features (quality, service etc) • Product positioning (USP) • Product cost structure (manufacturing, experience effects etc)

Price Escalation • All costs in the distribution channel add up and lead to price escalation – The longer the channel, the higher the final price

• Ways to fight price escalation – Rationalizing the distribution process – Lowering the export price from the factory – Establishing local production – Pressurizing channel member to accept lower profit margins

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Example of Price Escalation Domestic Export

• • • • • • • • • • •

Firm’s net price Insurance and shipping Landed cost Tariff (10% of landed cost) Importer pays Importer’s margin (15%) Wholesaler pays Wholesaler’s margin (20%) Retailer pays Retailer’s margin (40%) Consumer pays (VAT 0)

100 100 20 120 48 168

100 10 110 11 121 18 139 28 167 67 234

Factors Influencing International Pricing Decisions Environmental factors • Government influences and constraints: import controls, taxes, price controls • Inflation • Currency fluctuations • Business cycle stage

Factors Influencing International Pricing Decisions Market factors • Customers’ perceptions (needs, tastes) • Customers’ ability to pay • Nature of competition • Competitors’ objectives, strategies and relative strengths/weaknesses • Grey market appeal

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International Pricing Strategies • Skimming – ’Skim the cream’ with high price – Trading off a low market share against high profits

• Market pricing – Pricing based on competitive prices, reactive approach

• Penetration pricing – Used to stimulate market growth and capture market shares by offering low prices – Requires mass markets, price-sensitive customers and reduction of unit costs (economies of scale) – E.g. Japanese cars in Finnish market

International Pricing Strategies • Pricing across products – Economy, standard or premium version – E.g. software business pricing

• Product-service bundle pricing – Lowering the entry price and pricing service contract higher – E.g. mobile phones sales by telecom operators

• Pricing across countries – Price standardization (fixed ex-works price) – Price differentiation (locally suitable pricing), previously used in European markets

Price Changes to Increase Sales Before price reduction Per product sales price 100 variable cost / unit 80 contribution margin 20 Total contribution margin: 100 units*20=2000 After price reduction Per product sales price variable cost / unit contribution margin Total contribution margin: 133 units*15=1995

95 80 15


A price reduction of 5% requires >33% of increase in sales to maintain the total contribution margin

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International Pricing Taxonomy

Preparedness for internationalization

3 Multilocal price setter 4 Global price leader • Local market leader in • Global market leaders selected markets • Market oriented, adapted prices • Local competition

• Market and cost oriented ’global’ prices • Global competition but local differences

2 Local price follower • Limited resources

1 Global price follower • Newcomers to global

• Dependent on local export intermediary • Cost oriented, standard prices • Unexposed to global forces

markets • Market-oriented, standard prices • Global competition but local differences

Multilocal markets Adapted from Solberg et al (2006)

Global markets

Industry globalism

Transfer Pricing • ~ prices charged for intra-company movement of goods and services • Internal prices, but have external impact because of taxation from country to country • Can create mistrust between conpany units who are in charge of their own profitability • Three basic approaches – Transfer at cost; transfer price = costs, profits go to the international unit – Transfer at arm’s length; International unit treated as any other external customer (market prices) – Transfer at cost plus; costs split between the units

Currency Issues • Currency of the price can be – Local currency (currency of the buyer’s country) – Domestic currency (currency of the exporter’s country) – Third country currency (usually USD)

• Benefits of quoting in foreign currencies – Could provide access to finance abroad at lower interest rates – Good currency management can gain additional profits – Customers often prefer their own curency

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Implications of the Euro • Currency issues not part of Euro area trade • Main implications – Lower prices by transparent pricing – Creation of a real single market with recude transaction costs – Enhanced competition by forcing companies to concentrade on price, quality and production instead of hiding behind weak currencies – Easier trading for SMEs – Establishing stable inflation rate

Class Discussion • In the light of the recent economic turbulences, what might be the influences in currency selection in international trade? – USD vs Euro vs Yen vs ???

Terms of Sale/Delivery Terms • Price quotation describes – Specified delivery location – Time of shipment – Specific payment terms

• Incoterms used for standardized delivery terms • CIF/DDP type of delivery terms reflect market orientation • Ex-works pricing refers to short-term commitment

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Terms of Payment • Factors influencing the choice – Practices in the industry – Terms offered by competitors – Relative strength of the buyer and the seller Most advantageous

Consignment Open account Documents against acceptance Documents against payment Letter of credit Confirmed letter of credit Cash in advance

Least advantageous Buyer

High risk/ high trust

Low risk/ low trust

Seller

Export Financing • Commercial banks • Export credit insurance against political or commercial risks • Factoring; selling export debts for immediate cash • Forfeiting; exporter of capital goods gives mediumterm credit to buyer • Bonding; a written instrument issued to an overseas buyer by an acceptable third party, guaranteeing that the exporter fulfils its obligations

Export Financing • Leasing, two ways – To arrange cross-border leases directly from a bank to the buyer – To obtain local leasing facilities through overseas branches of international banks or through international leasing associations

• Counter-trade – Barter; exchange of goods for goods (no money) – Compensation deal; part by cash, part by agreeing that the exporter buys some of the buyer’s products – Buy-back agreement; long-term agreements (5-10 years) where transactions are linked, but separate financially

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Class Discussion Task • Get into pairs of two students • Read the Harley-Davidson case text • Prepare for class discussion of the text via the given questions with the rest of class • 15 minutes for reading and preparing, 10 minutes for discussion

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