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WTO & Trade Issues - International Pricing.pptx

  1. International Pricing Policy
  2. An Introduction • Pricing products or services in international marketing is not an easy decision. Price is, in part, a function of cost, and the foreign exchange rate is an important determinant of a company's cost of production. Pricing refers to the value determination process for a good or service, and encompasses the determination of interest rates for loans, charges for rentals, fees for services, and prices for goods. • When borrowing capital to do business, the cost of that capital can be very influential in the price decision. The cost of capital has to be included in the price as well as the possible effect of changes in exchange rates if the capital is raised internationally. • The marketing manager is concerned with the revenue function of the firm. An important variable of the revenue function is price (the other being quantity). Moreover, this variable possesses the capacity to influence the other variable i.e., the quantity sold. The economists refer to this relationship as price elasticity. It therefore, becomes necessary for the marketing manager to manage this variable. • Pricing in international marketing is an extremely complex affair due to the political and economic risks involved. Yet astute handling of the elements of price can give the organisation an advantage in terms of currency gains, but this should not be the reason why organisations should get into foreign transactions Source: Secondary Sources on Google
  3. Components of Price The price variable is made up of two components viz costs and profit. The cost component is further subdivided as fixed and variable Source: Secondary Sources on Google
  4. The Process of Price Setting The following are the parameters suggested by the economists for arriving at price: • Costs: Costs represent the base line for setting the price. In other words, costs represent the price floor beyond which prices cannot be dropped. As already explained costs are made up of two components, fixed costs and variable costs. Fixed costs represent the un-escapable element of cost, whereas, the variable cost represent the escapable costs. The variable costs are also sometimes interpreted as marginal costs or incremental costs. • Demand & Supply: For a marketing manager, the upper limit is demonstrated by the demand and supply conditions as they exist in the market. The demand conditions are interpreted from the market conditions and the consumer behaviour whereas, the supply conditions are interpreted by an analysis of the competition. The prices charged by the competitors, and the attributes and quantity sold by the competitors, set the supply parameters. • Economic, Legal & Political conditions: The govt, it has been noted, can through its policy, in fact modify the market conditions, making them lopsided. Thus, the countries where the economic policies are directed by the govt, the economic & political conditions have an important bearing on price structures. Taxes & duty drawbacks represent excellent examples for the same. Legalities lengthen any process and complicate it & thereby influence the price structure. The more the legal constraints to be adhered to, the more the price charged from the customers, in an effort to pass the increase in costs. Source: Secondary Sources on Google
  5. Role of Price and Non Price Factors on Pricing Role of Price Factors in Marketing: The general rule of economics guide the marketing firms that higher prices will lead to lower demand and lower will increase the demand. In the following situation the role of the price factor is greater in marketing: • When the customers of the target market are having limited income. Limited income will make customers price-wise sensitive. This is true in the case of the number of developing countries. In these markets, the firm may take full advantage by setting lower prices of products with reasonable quality. • Price elasticity also an important factor in this regard. If the impact of price reduction is in the generation of greater demand and the firm may use price as an important weapon. Source: Secondary Sources on Google
  6. Role of Price and Non Price Factors on Pricing Role of Non-Price Factors in Marketing: The role of non-price factors is most significant. The customer not consider the prices of its products or services, but may give more weight to the number of other factors. These factors may be described as follows: • Bias Regarding Price and Quality Co-relation: This bias plays a vital role when the firm is marketing its products to developed countries or to the higher and middle-income group customers of developing countries. These customer May reject the product due to perceptions of lower price lower quality relationship. In spite of providing a good quality product at reasonable prices, the firm may face marketing problems. For these markets high price, high- quality product strategy may be more appropriate. • Country of Origin: The name of the country from which product belongs also play its much greater impact. The customers may give preference to those products in their buying decision, where the image of the country of origin is bright and good. Image perception is more important in marketing, rather than the product itself. In spite of the good quality product, the customer does not accept it due to the poor image of the country of origin. Source: Secondary Sources on Google
  7. Role of Price and Non Price Factors on Pricing Role of Non-Price Factors in Marketing: • Brand Image: The brand image of the products of the marketing company may be a great source of motivation for customers across the world in their buying decisions. This requires super quality, continuous improvement in quality and carefully designed an aggressive advertising campaign. It may take years to create a favourable brand image for its product for an individual firm. The brand image of Coca-Cola, Pepsi, Intel, IBM, Mercedes, Volvo, Tata Tea, LG, Samsung, etc. is altogether different. Brand image paves the way for the creation of brand loyalty. When the firm is successful in getting brand loyalty, It may enter into the non-price competition because the customer is attached to a specific brand and can ignore higher prices. • Price Differentiation: With the help of sound research and development, if the firm has developed significant differences in its products in comparison to its competitors, then customers will not mind high price. There is a number of areas where a firm can make a significant difference in its products, such as features, design and operational efficiency of the product. • Speed of Delivery: The firm will be able to get orders, when it is in the position of a quick delivery, in spite of higher prices from the normal market prices. Source: Secondary Sources on Google
  8. Role of Price and Non Price Factors on Pricing Role of Non-Price Factors in Marketing: • Type of Product: Depending on the type of product the customers price consideration changes • Sales Service: Sales services may be divided into three types – pre-sales, at the time of selling and after-sales. Pre- Sales Services includes free advice in connection with the selection of the right product of the company. Customer may buy the wrong product in the lack of proper knowledge. At the time of sales, services include free installation services. Demonstration of product and imparting proper training to the buyer. After-sales services include free repair products and free replacement of parts under the warranty period. Customers give preference to those companies who are providing goods services and will not mind bit higher prices of products. • Credit Terms: Credit terms also play an important role in public and private buying industrial houses. Developing countries require a variety of Engineering and Industrial Products for the sound foundation of their Rapid industrialization. Preference will get those firms who are offering attractive credit terms in relation to the maximum payment period, simple terms and conditions and lesser that of interest. • Quick Settlement of Claims: The buyer gives more weight to those companies having a quick settlement of claims. If the customer is satisfied in this regard, he made a high price. Source: Secondary Sources on Google
  9. Methods of Pricing in International Marketing The price structure in international marketing, like the domestic market price structure, begins on the factory floor. But there is no similarity in the costs included in the two structures. The pricing of the products for domestic and export purposes shall be calculated in a somewhat different manner. International market price structure is the basis of all export price quotations, discounts and commissions. There are various methods of pricing the product in the foreign markets. The methods may be grouped into two • Cost-oriented export pricing methods • Market- oriented export pricing methods Source: Secondary Sources on Google
  10. Methods of Pricing in International Marketing • Cost-oriented export pricing methods The cost-oriented pricing methods are based on costs incurred in the production of the products. Total costs include fixed costs and variable costs. Thus export pricing may be based on full cost (fixed and variable) or only on variable costs. A reasonable profit will be added to the base cost to arrive at the export pricing. Thus cost-oriented export pricing methods may be divided into the following two methods:  Full Cost Methods or Cost-Plus Method: The most frequently used pricing method in exports is cost-plus method. This method is based on the full cost or total cost approach. In arriving at the export pricing under this method, the total cost of production of the article (fixed and variable) is taken into account. Over and above the fixed and variable costs incurred in the production of exportable articles, all direct and indirect expenses incurred for the development of product such as research and development expenses and other expenses necessary for the export of the articles such as transportation cost, freight, customs duties, insurance etc., are included. Then a reasonable profit margin is added to the costs and the value of the subsidy and assistance from the Government or other bodies of the country, if any, is deducted. The net result is the total export price for the commodities produced. Price per unit may be calculated by dividing the total price, thus arrived, by the number of units manufactured. Source: Secondary Sources on Google
  11. Methods of Pricing in International Marketing  Full Cost Methods or Cost-Plus Method: The various elements of cost, forming part of the total cost are: Direct Costs: This include - Variable costs (such as Direct materials, direct labour, variable production overheads, variable administrative overheads.) - Other Costs Directly Related to Exports (such as Selling costs—Advertising support to importers abroad, special packing, labelling, etc., commission to overseas agent, bank charges, etc) Fixed Costs or Common Costs: It includes production overheads, administration overheads, publicity and advertising (general), travel abroad, etc. Source: Secondary Sources on Google
  12. Methods of Pricing in International Marketing  Marginal Cost Pricing: Another cost oriented method of pricing in international market is to determine the price on the basis of variable cost or direct cost. In this method fixed cost element in the total cost of production is totally ignored and the firm is concerned only with the marginal or incremental cost of producing the goods which are sold in foreign markets. We know that the fixed cost remains fixed up to a certain level of output irrespective of the volume of output. Variable costs, on the other hand, vary in proportion to the volume of production. Thus, it is the variable or direct or marginal costs that set the price after a certain level of output is achieved, that is, output at Break-Even Point (BEP)*. This method is based on the assumption that the export sales are bonus sales and any return over the variable costs contributes to the net profit. Under this system it is assumed that the firm has been producing the goods for home consumption and the fixed costs have already been met or in other words, Break-Even Point has been achieved. *A break even point refers to the point in which total cost and total revenue are equal. The analysis is used to determine the number of units or dollars of revenue needed to cover total costs (fixed and variable costs). Source: Secondary Sources on Google
  13. Methods of Pricing in International Marketing  Marginal Cost Pricing: Example of Break Even Analysis: Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable cost associated with producing one water bottle is $2 per unit. The water bottle is sold at a premium price of $12. To determine the break even point of Company A’s premium water bottle: So the equation will be: FC + VC = Sales i.e: 1,00,000 + $2 x Qty = $12 x Qty 1,00,000 = 10 x Qty Qty = 1,00,000/10 = 10,000 units or we can directly apply the formula : Break even quantity = Fixed costs / (Sales price per unit – Variable cost per unit) Source: Secondary Sources on Google
  14. Methods of Pricing in International Marketing • Market-oriented export pricing methods Both the methods are based on cost considerations. Under market- oriented pricing, price is changed in accordance with market changes. The costs are, no doubt, important but the competitive prices should also be considered before fixing the export price. Competitive prices mean the prices that are charged by the competitors for the same product or for the substitute of the product in the target market. Once this price level is established, the base price or what the buyer can afford, should be determined. The base price can be determined by following the three basic steps:  First, relevant demand schedules (quantities to be bought) at various prices should be estimated over the planning period  Then, relevant costs (total and incremental) of production and marketing should be estimated to achieve the target sales volume as per demand schedules prepared;  Lastly, the price that offers the highest profit contribution, i.e., sales revenues minus all fixed and variable costs The final determination of base price should be made after considering all other elements of marketing mix. Source: Secondary Sources on Google
  15. International Pricing Strategies The price of the product for domestic and export purposes shall be calculated in somewhat different manner. There are various methods of pricing the product in international market. Exporter may follow any method to calculate price. But before that he must be able to identify competitor’s price. The price quotation for international markets may not be the same for all the markets. Prices may differ from market to market due to various reasons, i.e., political influences, buying capacity, financial and import facilities, total market turnover and other pricing and non-pricing factors etc. The profitability will also be affected to a great extent and may be different in different markets. Thus, different strategies may be used in different markets. In some markets, prices may be higher, in some others, they may be around the cost price or in many others, and they may be even less than the cost price. Source: Secondary Sources on Google
  16. International Pricing Strategies Ordinarily, the following pricing strategies are used in the export market: • Skimming the Price Strategy: Under this policy, a very high price is fixed by an industrial enterprise for its products at the outset. Thus, this policy involves the setting of a very high initial price of the product that enters the market and then reducing the price gradually as the competitors enter the field. It has been rightly said, “Launching a new product with high price is an efficient device for breaking up the market into segments that differ in price elasticity of demand.” The basic advantage of this policy is that if the market does not accept the product satisfactorily the price can be lowered. Secondly, an initial high price generates more profits which can be used for further promotion and expansion of the market. • Market Penetration Price Strategy: The basic objective of penetration pricing is to help the product penetrate into markets to hold a position. The price of the product is kept at a low level until such time as the product is finally accepted by the customers. Such a policy is adopted to capture a market share from a competing product. The low price allows a small profit margin in the beginning which may go up in the later stages. The price fixed under this policy is also known as ‘Stay out Price’. Source: Secondary Sources on Google
  17. International Pricing Strategies Ordinarily, the following pricing strategies are used in the export market: • Probe Pricing Policy: Fixing low price for its product may have an adverse effect on the image of the firm and of the product. It may raise doubts in the minds of the buyer about the quality of the product if it is lower than the price of competitors or it is reduced subsequently. When no information is available on the extent of competition or the likely preferences of the buyers, sufficiently higher prices may be quoted on the first few offers. No business is really expected except feedback information. The prices may be adjusted accordingly. This is called probe pricing, i.e., fixing high prices only to probe the export markets. • Follow the Leader Pricing Strategy: In a competitive market or where adequate market information is not available, it may be useful to follow the leader in the market. Comparing its product with that of the leader, the exporter may fix the price for his product. In such cases, the price of the product is lower than the leader’s product. • Cheaper Price for Original Equipment and Higher Price for Spare Parts: Under this method of price strategy lower prices are to be quoted for original equipments and higher prices charged for the spare parts and replacement parts, when required. This strategy is useful where standard spare parts can be supplied only by a supplier of original equipment. This strategy could be used for tractors, telephone equipment and railway equipment etc. Source: Secondary Sources on Google
  18. International Pricing Strategies Ordinarily, the following pricing strategies are used in the export market: • Differential Trade Margins Strategy: Variations in trade margins may be adopted by the exporter as the pricing strategy in the foreign market. This strategy allows various types of discounts on the list price. Quantity discounts encourage to procure huge orders. It may be based on the rupee value or on the quantity purchased or the size of packages purchased. Special discounts may be allowed while introducing the product. These are given on all purchases. Seasonal discount aims at shifting the storing function in the channel. The approach is ‘buy sooner or more.’ Cash discount attracts prompt payments. Trade discount is a reduction in list price given to channel members in anticipation of a job they are going to perform. • Standard Export Pricing Strategy: In some cases, exporter quotes the standard price or list price, i.e., one price for all. But still, there should be some margins for negotiations as in many markets, especially in underdeveloped countries, bargaining over prices is a part of life. In such cases, fixed prices may serve as starting point for negotiations. Hence, it is desirable to keep a certain margin for negotiations. This strategy is generally adopted in case of export of capital equipment, i.e., plant and machinery. Source: Secondary Sources on Google
  19. Dumping & Price Distortion Dumping is an international price discrimination in which an exporter firm sells a portion of its output in a foreign market at a very low price and the remaining output at a high price in the home market There is also a scenario in which the foreign price is higher than the domestic price. This is done to turn out foreign competitors from the domestic market. When the product is sold at a price lower than the cost of production in the domestic market it is called reverse dumping. There can also be a scenario, when there is no consumption of the commodity in the domestic market and it is sold in two different foreign market, out of which one market is charged a high price and the other market a low price. But in practice, dumping means selling of the product at a high price in the domestic market and a low price in the foreign market Source: Secondary Sources on Google
  20. Dumping & Price Distortion Types of Dumping • Sporadic or Intermittent Dumping: It is adopted under exceptional or unforeseen circumstances when the domestic production of the commodity is more than the target or there are unsold stocks of the commodity even after sales. In such a situation, the producer sells the unsold stocks at a low price in the foreign market without reducing the domestic price. This is possible only if the foreign demand for his commodity is elastic and the producer is a monopolist in the domestic market. His aim may be to identify his commodity in a new market or to establish himself in a foreign market to drive out a competitor from a foreign market. In this type of dumping, the producer sells his commodity in a foreign country at a price which covers his variable costs and some current fixed costs in order to reduce his loss Source: Secondary Sources on Google
  21. Dumping & Price Distortion Types of Dumping • Persistent Dumping: When a monopolist continuously sells a portion of his commodity at a high price in the domestic market and the remaining output at a low price in the foreign market, it is called persistent dumping. This is possible only if the domestic demand for that commodity is less elastic and the foreign demand is highly elastic. When costs fall continuously along with increasing production, the producer does not lower the price of the product more in the domestic market because the home demand is less elastic. However, he keeps a low price in the foreign market because the demand is highly elastic there. Thus, he earns more profit by selling more quantity of the commodity in the foreign market. • Predatory Dumping: The predatory dumping is one in which a monopolist firm sells its commodity at a very low price or at a loss in the foreign market in order to drive out some competitors. But when the competition ends, it raises the price of the commodity in the foreign market. Thus, the firm covers loss and if the demand in the foreign market is less elastic, its profit may be more. Source: Secondary Sources on Google
  22. Dumping & Price Distortion In order to detect price distortions systematically one can take three different angles: • The first is to understand and identify the causes of distortions, such as institutional risk management constraints, market liquidity problems and so forth. If a market is being heavily influenced by any of these causes it is more probable that prices will be regularly distorted • The second angle are metrics of misalignment between prices and fundamental value, such as in financial bubbles • The third approach is to investigate the time series pattern of asset prices. For example, higher- than-exponential asset price growth with apparent feedback loops is often an indication of an unsustainable asset price bubbles Source: Secondary Sources on Google
  23. Countertrade Countertrade is a reciprocal form of international trade in which goods or services are exchanged for other goods or services rather than for hard currency. This type of international trade is more common in developing countries with limited foreign exchange or credit facilities. Countertrade can be classified into three broad categories: barter, counter purchase, and offset. • Barter: Bartering is the oldest countertrade arrangement. It is the direct exchange of goods and services with an equivalent value but with no cash settlement. The bartering transaction is referred to as a trade. For example, a bag of nuts might be exchanged for coffee beans or meat. • Counterpurchase: Under a counterpurchase arrangement, the exporter sells goods or services to an importer and agrees to also purchase other goods from the importer within a specified period. Unlike bartering, exporters entering into a counterpurchase arrangement must use a trading firm to sell the goods they purchase and will not use the goods themselves. • Offset: Offset agreements are commitments by an exporter to a reciprocal purchase obligation. The reciprocal purchase is generally related to the exported product. Offsets are often comprised of component purchases, technology transfers, investments, training and research programs, and counter purchases. International trade, especially involving military equipment, advanced technology or high value contracts, frequently requires an offset agreement Source: Secondary Sources on Google