What Does a Price Mean?

• It is the exchange of goods and services for SOMETHING of equal value
• Cultures may determine in part what that something is; financial markets and currency stability may play a major role.
• Currencies:  country, multinational market, IMF
• What happens when a currency is weak?

Why are Prices so Different? Let’s Look at Japan
Rice costs double what US shoppers pay - government protects farmers by preventing lower cost rice imports
Groceries cost more - mom and pop shopkeepers are protected by law from price cutting supermarkets
Electronics: manufacturers inflate prices in Japan so they can lower prices abroad
In Japan, Japanese shoppers buy from American mail order catalogs as an alternative source without the inflated prices
What will be the impact of e-commerce on global prices?

What is Price Escalation ?

• Frequently remarkable increase in a product’s price as transportation, duty, and distributor’s margins are added to the product’s former factory price
• Tariffs are levied on freight, invoice fees, port fees, insurance, documentation to arrive at a figure called “CIF”
• These costs are often hidden and unanticipated, but your product can be priced out of the reach of consumers in the destination market

What are the Costs of Getting your Goods to Market?

• Costs of manufacture
• Costs of insurance, freight - if shipping
• Costs of contracting with exporting agents
• Costs of channels of distribution - often longer, middleman markups may be subject to negotiation
• Costs of manufacturing in new market
• Additional costs are usually incurred which are not present in the domestic market
• What is the impact of tariffs on the final price that buyers will pay?

Target Pricing:
Setting a target price develops the entire design, procurement, and manufacturing process in order to meet the target price
Target costs must be attained in order to create an acceptable product, allow dealer and distributor margins, and have a satisfactory margin left over -  the target price is used as a guide
Often used in new product design in Japan

The Basic Structure of Price Escalation
Duty is levied on CIF
First markup on is on the CIF plus duty value
Second markup is on the CIF plus duty plus first markup
Dealer markup is on the CIF plus duty plus first markup plus second markup …

Here is a simple example
FOB                                             =  $  10,090
Freight, etc.                                   =  $    2,862
CIF                                               =  $   12,952
20% duty on $12,952                    = $    2,590
 Enters market at value of               = $  15,542
10% Dist markup on $15,542        = $    1,553
Enters dist. chain at value of           =  $  17,095
25% Dealer markup on $17,095    =  $   4,295
Total retail price of                         =  $  21,390
212 % of original FOB

Strategies to Lessen Price Escalation

• Marginal Cost Pricing
• Lower Manufacturing Costs - where in value chain?
• Shorten Channels of Distribution - local distribution?
• Eliminate Functional Features - is a simpler product acceptable?
• Lower Quality - what does this really mean?
• Tariff Reclassification - can you petition? Can you add value in country of destination?
• Product Modification
• Lower Shipping Costs - can you send it cheaper?  E.g. if you are a small co., can you piggyback?

• Demand:  how sensitive are consumers to price? Are there ceilings within the local market? Customary prices?
• Costs:  set the floor, are they the same in all markets? How to control costs through market entry choice.
• Competition:  How else can consumers obtain your goods, or comparable goods? Parallel imports,  Black market, gray markets (unauthorized channels)
• What is the impact of government:  tariffs, administrative fees, costs of documentation, expected bribery

What about the consumer-level adjustments to Price?
Restricted products, coupons, limits on value of free gifts
In Brazil, alcoholic beverages and cigarettes are not permitted any type of sales promotion
In Germany, coupons not allowed; free goods restricted to specific value in DM
In Italy, no coupons on specific products
In Mexico, no promotions based on collecting a series of labels
In New Zealand, coupons redeemable for cash only; no trading stamps
In Sweden, competitions must include a degree of skill; cross-coupons, in or on-pack coupons not allowed
South Africa:  limits on comparative advertising

The Nature of Competition
Are local competitors already within the local market?
Are global competitors within the local market?
Do a SWOT analysis
What are your strengths, weaknesses in comparison?
Do you have any strategic alliances which may be of use?
Is the competition not using some area of advantage?

Looking at Export Costs
When competition exists in new markets, and competitors are unaggressive, or unwilling to use price as a competitive weapon, a lower price provides a new product with a means of entering the market against established products
What is the relationship between price and brand image
Exporter may have to reduce margins by absorbing all or part of freight costs
What is the precedent for dumping? Has the government established antidumping regulations?

The Role of Foreign Trade Zones

• A company imports parts duty-free into a zone, which it assembles them into a finished product that then can be exported from the US. duty-free or can enter the US. at a lower rate than had the parts come in separately
• Have been criticized for favoring imports over exports

Port of Philadelphia and Camden
http://www.ppc.org
Foreign-Trade Zones : A Foreign-Trade Zone (FTZ) is a duty-free, quota-free, secured area in a designated customs "port of entry", actually considered outside U.S. Customs territory. Within a zone, foreign goods can be brought into the United States without formal customs entry for warehousing, assembly, manufacture, display, destruction or other processing. Duty payments can either be deferred, reduced or perhaps eliminated when an FTZ is utilized.
 

What are Parallel Imports?
Importers buy products from distributors in one country and sell them to distributors who are not part of the manufacturer’s distribution system
Your text - gray market channels:  the legal export/import transaction involving genuine products into a country by intermediaries other than the authorized distributors.
Importers call them:  “parallel imports”
Gray markets are the unauthorized distribution channels
Co. may lose:  not distrib the way you want, change image,
Customer:  may not obtain full warranty

How do Gray Markets Develop?
Product must be available in other markets
Trade barriers (tariffs, transportation costs, and legal restrictions) must be low enough for parallel importers to move products from one market to another
Price differentials among various markets must be great enough to provide basic motivation for gray marketers
Your text has a good discussion in chapter 17, pp. 516-519

P&G vs. Kimberly-Clark: Diaper Price Wars
New markets in China, India, Israel, and Russia - $10 billion annual business
P&G 40% market share vs. 27% Kimberly worldwide
In Brazil, luxury product, 160 million people - demand
Average annual income - under $4,000
Relative advantage - cloth or no diapers - no alternative
1994-1995:  1.4 billion diapers used
1993 - P&G launched  Pampers Uni - nofrills, unisex
Low price to penetrate market, then introduce higher priced alternatives with more options

What Happened Next?
Uni was high-quality
Before Uni, it was cheaper for a maid to wash cloth diapers
At same time, KC identified growth markets
Inflation subsided, and purchasing power of the poor increased by 20 percent  - P&G could not keep up with demand
KC and Unilever formed a global alliance - Unilever and P&G were staunch rivals
KC began importing Huggies from Argentina , Unilever distributed in Brazil
KC also formed alliance with Kenko, local brand

And so on . . .
Kenko was P&G’s largest local rival
Local factory plus licensing of most popular cartoon character Monica
Kenko launched a cheaper version of the Monica diaper
KC then bought interest in Kenko - so leapfrogged into first place
Each firm then introduced higher and lower priced flanker variations
www.pg.com and www.kimberley-clark.com
 

Foreign Price-Setting

• Firm-Level Objectives (e.g. satisfactory return on investment, coverage of mfgr. costs, maintain mkt share, reach a certain profit goal - may depend on the place of each market in the portfolio - may accept loss in market which is being grown)
• Product-Specific Factors (e.g., life cycle, shipping costs, insurance)
• Market-Specific Factors (e.g., consumers’ ability to buy, specific transportation needs, tariffs, insurance)
• Environmental Factors (e.g., competition, exchange rate)
• Cost-plus:  domestic mfg cost + int cost + markup

Transfer Pricing
What price is charged to different affiliates?
For instance, lower duty costs by shipping goods into high-tariff countries at minimal transfer prices so duty base and duty are low
Moving profits to low-tax jurisdictions while satisfying tax  authorities of the business reasons for such moves
Maximize profits for the company as a whole
Facilitate parent-company control
Should be defensible to the tax authorities of the countries involved

Types of Transfer Pricing
Sales at the local manufacturing cost plus a standard markup
Sales at the cost of the most efficient producer in the company plus a standard markup
Sales at negotiated prices
Arm’s-length sales using the same prices as quoted to independent customers

Changes in the European Market
Will the introduction of the EURO cause an increase in gray markets?
Currently, there are substantial price differentials across European countries
Will there need to be uniform prices throughout Europe?  Suppose a product’s price is higher in one market vs. another market?
The issue of price coordination
Disaster scenario (all prices sink to lowest price) vs.
Desired scenario - develops a pricing corridor which limits parallel imports

Countertrade:  Goods for goods, currency and goods
Saudi Arabia agreed to buy ten 747 aircraft from Boeing with payment in crude oil
Levis Strauss set up a factory for the production of jeans in Hungary and agreed to supply the plant with designs and materials, and Hungary would manufacture and market the jeans
Albania began offering spring water, tomato juice, and chrome ore in exchange for a contract to build a $60 million fertilizer and methanol complex

Countertrade:  Definitions
Barter:  goods for goods; can be risky
Compensation Deals:  payment in goods and cash
Counterpurchase: 2 contracts, reciprocal buying
Seller sells product to buyer and receives payment in cash
Original seller later buys other goods from buyer; gives original seller time to market these goods in home or other markets

Countertrade:  Definitions
Buy Back:  a company builds a plant, supplies technology, equipment or training to a country, and agrees to take a certain percentage of the plant’s output as partial payment
will accept some output as payment
first receives cash, but agrees to buy back some finished product
Campbell Soup sells machinery to Mfgr plant in Hungary; receives cash, later buys back food products which can be sold in home market - suppose these goods are soup which compete with their own soups!

How to Countertrade Wisely
Can you use the goods which you received?
Be sure that your countertraded products will not be dumped into your own markets to compete with your own sales
Can you sell the goods which you received?
Can you broker the goods which you received?
Are you stuck with the goods which you received?
The role of barter houses - find markets for bartered goods
 

 

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