Chapter 14: Pricing Strategies and Tactics Flashcards
Price
The only element in the marketing mix that generates revenue
The alternative strategies for first-time pricing are:
- Skimming
- Market pricing
- Penetration pricing
Skimming
Achieve the highest possible contribution in a short time period
Market pricing
final customer price is determined based on competitive prices
- Then both production and marketing must be adjusted to the price
Penetration pricing
Offer products at a low price to generate volume sales and achieve high market share, which would compensate for a lower per-unit return.
Export pricing strategies
- Standard worldwide price
- Dual pricing
- Market differentiated pricing
The first two methods are cost-oriented methods that are relatively simple to establish and easy to understand. The third strategy is based on a demand orientation and thus may be more consistent with the marketing concept
Standard worldwide price
- May be the same price regardless of the buyer (if foreign product or foreign marketing costs are negligible)
- May be based on average unit costs of fixed, variable, and export-related costs
Dual pricing
Differentiates between domestic and export prices.
If a cost-based approach is decided upon, the marketer can choose between:
- Cost-plus method
- Direct (marginal) cost method
Cost-plus method
The true cost, fully allocating domestic and foreign costs to the product.
- Although this type of pricing ensures margins, the final price may be so high that the firm’s competitiveness is compromised.
Direct (marginal) cost method
Considers direct costs for producing and selling products for export as the floor beneath which prices cannot be set.
Market-differentiated pricing
Calls for pricing exports according to the dynamic conditions of the marketplace.
- The marginal cost strategy provides a basis, and price may change frequently due to changes in competition, exchange rate changes, or other environmental changes.
Export-related costs include:
- Cost of modifying the product for foreign markets
- Operational costs of export operation
- Cost incurred in entering the foreign markets
Operational costs of export operation
- personnel
- marketing research
- additional shipping and insurance
- communication costs
Costs incurred in entering the foreign markets
- tariff and taxes
- buyer’s credit risks
- political risks
- risks of dealing with foreign currencies
Price escalation
The export-related costs (combined effect of both clear-cut and hidden costs) result in export prices that far exceed domestic prices.
Price escalation can be overcome through:
- Reorganize the channel of distribution
- Adapt the product
- Use new or more economical tariff or tax classifications (In some cases, products may qualify for entry under different categories that have different tariffs)
- Assemble or produce overseas
These methods focus on cost-cutting
Exchange rates movements may harm or benefit the exporter or importer:
- If the price is quoted in the exporter’s currency, the exporter will get exactly the price it wants, but may lose some sales due to lack of customer orientation
- If the exporter needs the sale, the invoice may be in the importer’s currency, and the exchange risk will be burden of the exporter
Strategies used to manage exchange risks
- Forward exchange market
- Currency options market
- Currency futures market
Forward exchange market
The exporter gets a bank to agree to a rate at which it will buy the foreign currency the exporter will receive when the importer makes payment
What is the benefit of forward exchange market?
- A fixed rate allows the exporter to budget effectively without currency fluctuation
- The risk still remains if the exchange rate does not move as anticipated, and the exporter may be worse off than if it had not bought forward
Currency options market (an option)
- An option gives the holder the right to buy or sell foreign currency at a prespecified price on or up to a pre-specified date
- The greater flexibility in the options contract makes it more expensive
What is the difference between the currency options market and the forward market?
that a transaction in the currency options market gives the participant the right to buy or sell, whereas a transaction in the forward market entails a contractual obligation to buy or sell
Currency futures market
- Conceptually similar to forward market
- Minimum transaction sizes are smaller on the futures market
- Forward quotes apply to transactions of $1 million or more, whereas on the futures market transactions will typically be below $100,000.
Exporter strategies under varying currency conditions:
- When the exporter’s domestic currency is weak
- When the exporter’s domestic currency is strong
- Techniques to adjust pricing