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Lesson#42
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PRICING IN INTERNATIONAL MARKETS
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PRICING IN INTERNATIONAL MARKETS
Price: A part of the marketing mix:
The price is
what the customer pays. It includes
direct and
indirect costs as well as
opportunity costs.
Direct costs are cash outlays a customer makes in order to
obtain something. An example would be
admission to a national park. Direct costs are, in many cases, a
relatively small part of the total cost.
Indirect costs are costs associated with obtaining
something. An example would be the cost of driving to
a national park, food and entertainment along the way, etc. The
total of the indirect costs is often more,
sometimes much more, than the direct cost.
The total
cost is obtained by adding the direct and indirect costs.
Opportunity costs are what we give up when we do something.
They can have various types of value,
sometimes monetary, sometimes not. Opportunity costs include
other things you could be doing instead
of going to a national park. Examples might include mowing the
lawn or going to a baseball game
(which would be non-monetary) and not working overtime on
Saturday in order to go to a national park
(which would be monetary),
The price
the park visitor pays to go to a national park is the total of all costs,
including direct, indirect,
and opportunity. The perceived benefits of going to a national
park have to be at least as great as the
total of the costs if a potential park visitor is going to make
a decision to go to a park.
Determining the price:
How do you set monetary prices? There are basically two ways. I
call these cost-based
pricing and
value-based pricing.
Cost-based pricing is based on the total of all costs
associated with delivering a product or service to a
customer. An example of cost-based pricing would be when an
organization identifies all of the costs
associated with producing a product or service, adds them up,
adds a margin for profit (in the business
sector) and arrives at the "price" the customer is to be
charged. This type of pricing is the "floor" for
pricing decisions in that it is as low as the price can be and
still cover all of the costs associated with
delivering the product or service. I'm unaware of applications
of this type of pricing in the park service
world, unless it might be applied by concessionaires.
Value-based pricing is based on an organization's perception
of the value the potential customer (park
visitor) might place on the product or service. An example of
value-based pricing would be when an
organization believes that people would pay Rs20 for a service
and decides to price it at Rs20 even
though the price might be set at Rs10 based on a cost-based
model. This type of pricing is the "ceiling"
for pricing decisions in that it is as high as the price can be
and still find a willing customer. It has no
relationship to the cost of production, rather it is influenced
by perception of alternatives customers
face.
A subset of value-based pricing is
supply/demand pricing. In this type
of pricing, an organization has a
limited supply of the product or service and decides to price it
just barely low enough to sell all of the
limited supply. There is no relationship to the cost of
production. Sometimes applications
supply/demand pricing are labeled as gouging because the
organization is perceived as taking advantage
of the situation.
Political factors undoubtedly influence some pricing
decisions, such as utilities and essential
commodities. I would interpret this as politicians using a
value-based price model in order to obtain
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public favor. No concern is shown for the cost of production.
Part of the logic of this type of decision is
the reality that a park is a public resource and is, at least to
some extent, a public good the value of
which should be available to as many citizens as possible.
In summary, pricing is quite complex. The most responsible means
of pricing would probably give
some consideration to all of these pricing concepts, attempting
to balance the needs and desires of the
public for access with the real costs associated with delivering
the product or service. Responsible
pricing would recognize market segmentation concepts as
expressed in differing demand levels and
abilities to pay and attempt to maximize revenue through pricing
accordingly. The result would be either
maximizing gain or minimizing loss.
Importance of price in marketing mix:
• Price is the
amount of money charged for a product or a service, or the sum of the values
that
consumers exchange for the benefits of having or using the
product or service
• Price is the only
element in the marketing mix that produces revenue.
• Price is also the
most flexible element of the marketing mix.
• The most common
mistakes in setting prices are;
– pricing that
is too cost oriented
– prices that
are not revised enough to reflect the market changes
– pricing that
does not take rest of the marketing mix into account
– prices that
are not varied enough for different products, market segments & purchase
occasions
Factors influencing international pricing:
•
Factors
internal to an international firm
– strategic
objectives
• cost leader,
differentiation, focus
• gain market
share, protect market share, to maintain status quo
• revenue,
profit or market share maximization
– marketing mix
policies
• product, place
& promotion
– costs
• short term vs
long term cost focus
• full cost,
variable cost, marginal cost pricing
– organizational
considerations
• transfer
pricing
• cost vs profit
center
•
Factors
external to an international firm
– nature of market
(buyer or seller)
– level of market
development/sophistication
– market demand and
consumers’ ability to buy
– competitive
situation & consumer surplus
– product
life-cycle-stage
– type of
packaging, environmental issues
– distribution &
marketing costs
– transportation
costs
– government
policies, tariffs, taxes & other restrictions
– country of origin
image
– after-sales
service, warranties & guaranties
– exchange rate
fluctuation
– environmental
factors
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– hidden costs
Factors contributing the selection of final price:
• Psychological
effects of price
• Influence of
other marketing mix elements
• Company pricing
policies
• Costs
• Impact of price
on other parties
– distributors
or dealers
– company sales
force
– competitors
Managing price escalation in foreign markets:
• Rearrange the
distribution channel
– length of
channel / exorbitant margins
• Eliminate costly
features (or make them optional)
– no-frills
versions - sell core products
• Downsize the
product
– offer smaller
version or a lesser count
• Assemble or
manufacture the product in foreign markets
– closer
proximity to customers - lower costs
• Adapt the product
to escape tariffs and taxes
– by shifting it
to different tax classification
Pricing in inflationary environments:
- Modify components, ingredients, parts and/or packaging
materials
- Source materials from low-cost suppliers
- Shorten credit terms
- Include escalator clauses in long-term contracts - to hedge
against inflation
- Quote prices in a stable currency
- Pursue rapid inventory turnovers
- Draw lessons from other countries
Exporters strategies under varying currency conditions:
When domestic currency is WEAK…
– Stress price
benefits
– Expand product
line and add more costly features
– Shift sourcing
manufacturing to domestic market
– Exploit export
opportunities in all markets
– Use a
full-costing approach, but employ marginal-cost pricing to penetrate new or
competitive
markets
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130
– Speed
repatriation of foreign-earned income and collections
– Minimize
expenditures in local or host country currency
– Buy needed
services (advertising, insurance, transportation, etc.) in domestic market
– Bill foreign
customers in their own currency
When domestic currency is STRONG…
- Engage in
non-price competition by improving quality, delivery, and after-sale service
- Improve
productivity and engage in vigorous cost reduction
- Shift sourcing
and manufacturing overseas
- Give priority to
exports to countries with relatively strong currencies
- Trim profit
margins and use marginal-cost pricing
- Keep the
foreign-earned income in host country; slow down collections
- Maximize
expenditures in local or host country currency
- Buy needed
services abroad and pay for them in local currencies
- Bill foreign
customers in the domestic currency
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