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?
 

Foreign Price-Setting
Firm-Level Objectives (e.g. experience curve, mfgr. costs)
Product-Specific Factors (e.g., life cycle, shipping costs)
Market-Specific Factors (e.g., consumers’ ability to buy)
Environmental Factors (e.g., competition, exchange rate)
 

Price-bundling within a Product Line
Products within a product line with less competition may be priced higher to
subsidize other parts of the product line
Price Bundling:  a certain price is set for customers who simultaneously buy
several items within the product line
 

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
 

Goals of Transfer Pricing
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 *
 

Key points in analysis of Pricing
Demand:  how sensitive are consumers to price? Are there ceilings within the
local market?
Costs:  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
What is the impact of government:  tariffs, administrative fees, costs of
documentation, expected bribery
 

Demand as a Ceiling:
Related to perceived value and demand elasticity
If demand is elastic, a price change may be the most important factor in
increasing the size of the market
Understanding the price-quality relationship will influence price decreases
and increases
 

The Nature of Competition
When competition exists in new markets, and competitors are unagressive, or
unwilling to use price as a competitive weapon, a lower prices provides a
new product with a means of entering the market against established products
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?
 

A Comparison of Living Costs - in class exercise
 

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
 

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
The product are sold in other markets
 

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
 

Smith Corona’s Use of Global Strategy
Smith Corona paid 3-7% on imported parts, while Japanese typewriters entered
duty-free
They consolidated operations into one building, and obtained trade-zone
status for the facility
Thus parts could be imported duty-free, and after manufacture into
typewriters, could enter the US. market without duty
 

A Contrast in Focus
Protectionist - seems to lack strategic understanding
Global Marketer - takes active role, understands the tools of trade
 

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”
 

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?
 

Cost-Plus Pricing is Common for Export markets
A combination of manufacturing costs plus administrative, R&D, and overhead
costs, plus freight, and customs charges, plus distributor margins, plus
profit allowance
Often results in a final price that is completely out of line with
competitive conditions in export markets around the world
PROBLEMS: this method ignores competitive pricing:
What will the buyer pay?
What are incremental and full manufacturing and marketing costs?
What price offers the highest profit contribution?
 

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
Shorten Channels of Distribution
Eliminate Functional Features
Lower Quality
Tariff Reclassification
Product Modification
Lower Shipping Costs
 

The Impact of Exchange Rates
The exchange rate is the domestic price of a foreign currency
If one country changes the value of its currency, firms selling to or from
that country may find that the altered exchange rate is sufficient to wipe
out their profit or, on the brighter side, give them a windfall gain
 

Purchasing Power Parity:
Devaluation:  reduction in value of one currency compared to others
Revaluation:  increase in value of one currency compared to others

The Case of the Mexican Peso
Mexico devalued the peso on Dec. 20, 1994: attempted to end turmoil in
financial markets
Peso was worth 29 cents, changed to be worth 14 cents - some import prices
more than doubled
Imports into Mexico -  more expensive, while exports from Mexico became more
competitive
Firms with their investments in Mexico saw their earnings per share drop as
the dollar value of their Mexican assets declined
1975: 12.5 peso to $1 US; 1976:  20 peso to $1 US
Devaluation - it took more pesos to make 1 $US
 

International Financial System
SDRs:  Special Drawing Rights - special reserve assets created by IMF to
increase liquidity for international business
Weighted average of US dollar, German mark, French franc, Japanese yen, and
British pound
Negotiate in ECUs - European currency units - a weighted average of European
currencies, fluctuates less than the relationship between any two currencies
in the basket
 

When Domestic Currency is Weak ...
Your currency buys less in foreign market - spend less there
Stress price benefits, expand product line, add more costly features
Shift sourcing and manufacturing to domestic market
Conduct cash for goods trade
Minimize expenditures in local, host country currency
Buy needed services (advertising, insurance, transportation, …) in domestic
market
Bill foreign customers in domestic currency
 

When Domestic Currency is Strong
Local market currency buys less
Engage in nonprice competition by improving quality, delivery, and aftersale
service
Improve productivity
Shift sourcing and manufacturing overseas, where it is cheaper
Deal in countertrade with weak currency countries
Maximize expenditures in local, host country currency
Buy needed services abroad, pay in  local currencies
e.g. McDonalds’ in Russia, worthless ruble
Bill foreign customers in their own currency - adjust for your needs
 

Merck’s Revenue Hedging Model
Gauges impact of foreign-exchange volatility
Forecasts anticipated cash flows in multiple local currencies
Adds forecasts of exchanges rates for all the relevant currencies over a
5-year planning horizon
Computes equations that link foreign-exchanges changes with forecasted
earnings and cash flows
Then different hedging strategies are simulated using theoretical option
pricing models
Creates a set of suggested hedging policies
 

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 (cont)
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

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 butter, oil or coffee

.
Other Country-Specific Regulations
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

What Will be the Impact of Internet Sales?

 

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