GLOBAL  PRICING STRATEGIES - THEORETICAL CONCEPTS AND PRACTICAL EXPER IENCE  II

3.2  Intranational Pricing Strategies  18

3.2.1  Skimming Strategy  19

3.2.2  Penetration Strategy  19

3.2.3  Premium Pricing Strategy.  21

3.2.4  Medium Pricing Strategy  21

3.2.5  Promotion Pricing Strategy.  22

3.2.6  Pulsation Strategy  23

3.3  Combining International and Intranational Pricing Strategies  23

4.  Price setting  25

5.  Conclusion  27

List  of literature  II

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1. Introduction

Falling trade barriers between national markets, the rise of newly industrialized countries and technological changes have affected the structure of international markets and imposed new challenges on the international business environment. The bases of competition within many markets are changing so much that the opportunities to survive with purely domestic strategies are becoming limited. One of the implications of these developments is that the efforts of many international firms to maintain profits by reducing costs or increasing production quantities has reached a limit in many markets. Therefore a lot of managers are concentrating more and more on another determinant of profit: pricing. Indeed, a good pricing management is able to increase profits and liquidity, and therefore shareholder value. While achieving economies of scale through their global operations, companies still have to act locally. The increasing importance of the price suggests that traditionally simple methods (e.g. cost or competition related pricing) are not enough to meet the requirements anymore. As a consequence, more comprehensive pricing strategies have to be developed in order to still be successful in future. When defining a global pricing strategy, international firms should consider several determinants that influence pricing decisions in international markets. The following paper takes a closer look at the different significant determinants required to set up a global pricing strategy as well as the different pricing strategies that can be used to reach the determined goals. In order to visualize aspects of the pricing process, practical examples are used to help to understand the importance of different elements within pricing management.

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2. Factors in international pricing management

2.1 External factors

The goal of an international marketing strategy is to match the organization with its environment. If markets extend across borders, then national environments become significant in its development. External factors are determined by the existing conditions in a particular market and therefore outside a company’s control. However, multinational firms should understand these differences and make the necessary adjustments to their pricing strategies in order to effectively sell a product in international markets.

2.1.1 Governmental Regulations and Legal Environment

Differences in government laws and regulations are among the major factors that affect companies’ pricing decisions across markets. For example, a common law found in many countries that directly influences pricing is retail price maintenance, which requires firms to sell certain products at specified prices. The purpose of such laws is either to protect customers from unfair exploitation or to ensure that certain products (e.g., pharmaceuticals) are easily accessible to almost everybody in the population. Governments may also impose price controls on certain products to protect local producers from unfair international competition. Further, pricing is influenced indirectly by laws and regulations which necessitate product modifications, in compliance with different technical specifications, health and safety standards, environment-protection acts, electric, weight, and measure systems, and such like, that may prevail in foreign markets. In order to make the required modifications firms incur extra costs, forcing them to either charge higher prices or reduce their profit margins.

Import tariffs also play an important role when setting prices in international markets. Import tariffs are essentially handled as regular taxes; however, only foreign competitors are forced to play these duties. A special case is comprised by the socalled anti-dumping provisions. Their purpose is to prevent the importations of merchandise that could be sold at “dumping” prices (broadly defined as lower than regular market prices). The purpose of these tariffs is to protect vulnerable national industries against foreign competitors.

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Governments can also influence the behavior of the market through the application of antitrust regulations. Their objective is to prevent monopolistic practices and allow smaller firms to compete on an even ground. Price managers should be careful and consider the interpretations of antitrust commissions when determining prices in foreign markets while at the same time try to optimize their profits. Along with tariffs and antitrust regulations, companies can also be limited by import quotas. Import quotas are limitations on the quantity of goods that can be imported into the country during a specified period of time. International firms should keep in mind that quotas can directly affect their market share in a particular country and therefore adjust their prices accordingly.

Finally, government regulations can indirectly contribute to the creation of gray markets: If significant price differences exist among countries, there may be an opportunity for arbitrage and such markets emerge. This may cause many international firms to lose potential revenues, and this is why many of them try to reduce the size of these markets by adjusting their prices appropriately.

2.1.2 Demand and Economic Environment

The economic environment of the host country can influence pricing decisions in several ways, as it determines demand potentials for a particular product and has also a significant impact on a firm’s cost structure. On the demand side, the overall level of economic and industrial development of a country determines customers’ priorities in terms of the products they consider essential or desirable, in addition to the prices they can afford and are willing to pay for certain products (Theodosiou/ Katsikeas, p.247). For instance, a product considered essential in a developed country may be viewed as less necessary or even as a luxury item in a lesser developed country (Theodosiou/ Katsikeas, p.247). Moreover, demand for a product at different price levels is a function of the purchasing power of targeted customers, determined by the level of economic development of the country. On the cost side, the economic environment of the host country determines the cost of raw materials, labor, energy, and other resources which a firm needs to purchase or hire in order to be able to carry out its every day operations. Obviously, the level of such costs has a direct impact on the overall cost structure of local subsidiaries. Thus, the pricing

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policy pursued by an international firm in a particular foreign market should reflect these factors.

2.1.3 Market Conditions and Competitive Structure

Due to possible differences in economic and market development levels among countries, some products may be at different stages of their life cycle in different countries (Theodosiou/ Katsikeas, p.248). As a result, multinational corporations may have to modify their pricing programs to take account of particular local market conditions. The significance of such an approach is lower in circumstances where there is no difference in a product’s life cycle stage between domestic and international markets.

It is also essential to carefully evaluate competitors pricing policies before setting prices in international markets. The level of competition in the market is often strongly linked to the stage of the products life cycle in different countries. For instance, the carbonated soft drinks market in France is relatively mature in the lemonade, fruited carbonates and tonic sector. The main driving force is the competition from iced teas and fruit juice drinks with their “new age” positioning (Marsh). These impose new challenges for price setting with companies forced to resort to positioning on value for money.

The emergence and continued growth of own-branded labels in the French breakfast cereals market is altering the competitive structure of the industry. The market was created by Kellogg’s, the large US multinational. However, more recently, ownlabeled products have gained a significant market share of 14 per cent in volume sales. In particular, close to a quarter of sales in the French muesli sales are from own branded products, which are positioned at the lower end of the price range (Marsh). As the growth continues, the flexibility that companies such as Kellogg’s have in their pricing policies will decrease, presenting management with a series of implications placed on their pricing strategies.

Heilwasser, a German bottled water company, markets its water product on a “semimedicinal basis”, which since 1995 has been losing market share. This is said to be linked to promotion of the healthy lifestyle qualities of mainstream mineral waters, which differ little from higher price Heilwasser in terms of mineral content (Marsh).

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Competitor activity within an industry such as this can have profound effects on the products price.

2.1.4 Distribution Infrastructure

International firms often have to rely on existing distribution channels in order to distribute their products in foreign markets. Thus, the number, type, competencies, costs, and margins of the intermediaries involved in the process of transferring the product from the point of production to the final end-user has a significant effect on a firm’s cost structure (particularly if the distribution cost constitutes a significant proportion of the total cost); this in turn might influence price levels, profit margins, and allied international pricing policy elements. For instance, if the distribution channel used in a particular foreign market involves a greater number of middlemen, or channel members are less competent and efficient than those in the home market, a significantly higher cost will be added to the product by the time it reaches the enduser. The additional cost incurred is likely to result in higher final selling prices and/or reduced profit margins for the firm. Under such circumstances a firm may also decide to modify other elements of its international pricing policy including sales and credit terms and discounts offered.

For instance, the distribution structure of the frozen ready meal market in Germany is a major determinant on pricing. Sales via discount outlets have tended to grow over the past few years and cut into sales via smaller supermarkets and traditional food retailers (Marsh). Such an increasing trend towards discounters like Aldi is a strong determinant of price, and certainly in many cases, a deterrent.

2.1.5 Inflation and Exchange Rates

Inflation is the climbing of the average price levels in a country, which in turn reduces the buying power of money. Companies need to adapt the prices to the different inflation ratios in order to work against this effect. However, in high-inflation countries, the adaptation of prices is often prevented by national price inspections, with the consequence that target profit margins may no longer be reached. The following example illustrates the effect of inflation in international trade: A product is manufactured in Germany and sold in two countries at essentially the same price. The inflation rate in Germany is 0% and in the other country it is 20%,

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with the exchange rate of the foreign country falling around 20%. This would cause the German firm’s proceeds to be 20% lower, and therefore it would have to raise its prices accordingly (Unless the foreign government prohibits a rise in prices for the product in question).

On the other hand, international companies may also enjoy the benefits of the cost advantages created by the different inflation and exchange rates among countries. The weak Lira makes it difficult for foreign car manufacturers to export to Italy, where Fiat is highly successful. The Italian producer has been more than willing to price aggressively in international markets, where market share continues to increase. Fiat believes that its “competitive advantage lies in developing small cheap cars for thefast growing markets of Asia and Latin America”. (Marsh). Developing a “cut price” car in Asia, Latin America and North Africa, will enable them to reap benefits from economies of scale. It will deliver an absolute cost advantage, which firmly supports a cost leadership strategy in the growing market of developing countries, thus building barriers of entry.

2.1.6 Cultural Factors and Consumer Behavior

Consumer behavior due to cultural differences also influences the pricing strategy that a company should follow. For example, in the Japanese culture the perceived value of a product directly affects its success in the market. The image of quality significantly outweighs the actual value of the product, as quality is culturally associated with high prices. This is demonstrated by the domination of Mercedes and BMW in the foreign car import market. The Johnny Walker whisky marketed in Japan represented an image of high status. In an attempt to gain market share from its main rival Chivas, it reduced its price. Japanese consumers perceived the reduction in price to be a reduction in quality and status, resulting in a drastic decline in sales (Marsh).

In the early 1980s, Swiss watch manufacturers SMH Ltd entered the Chinese watch market with the lowly priced Rado brand. Positioning itself in direct competition with subsidized domestic companies (whose costs were significantly lower) seriously limited the potential for achieving any success. Realizing this effect and the Chinese consumer preference for foreign products over that of domestic suppliers, they launched lines that were considerably more expensive, focusing their strategy on the