Section 8 - Pricing Flashcards
Inflation and Deflation
In countries with rapid inflation, goods are often sold below their cost of replacement.
Deflation results in decreasing prices and creates a positive result for consumers, but it puts pressure on everyone in the supply chain to lower costs.
Exchange Rate Fluctuations
Most major currencies are floating freely relative to one another (subject to government influence).
International contracts often extend several months; the relationship between the price and payment date need to include future currency values as part of the negotiation process.
Cartels
A cartel exists when various companies producing similar products or services work together to control their markets.
Lowering the Cost of Goods
Through lowering manufacturing cost/units or reducing the quality or accessories.
Lowering Tariffs, Lowering Distribution Costs, Trade Zone Duty Rates, Lowering Shipping Costs.
Global Pricing Objectives
Pure Profit: a poor model; does not have long-term component. We don’t care about the law, loyalty, relationships, or anything like that except making money, no matter what. Price things high, lie about your product being high quality.
Unit (volume) Sales: a poor model; pricing is determined by production’s need for ‘economies of scale’.
Return on investment: a poor model; pricing is determined by the corporation’s investment return expectations.
Market Share: a better model; it includes a long-term relationship component and repeat sales. Repeat sales are the easiest sale you’ll ever make; they’ll come back to you. This is smart and important to pursue.
Global Pricing Strategies
Skimming: prestige buying with high costs.
Penetration Pricing: setting the price as low as possible when it launches. Makes money fast and dominates market share early.
Target Costing (end-price design; reverse engineering): retailer dictating price and saying how much consumers and how much they are willing to pay.
Companion Pricing (‘bundling’): buy this and I’ll give you something free but the free thing is low value.
Cost-Based Pricing: the accountants are setting the price with a set mark-up no matter what. Marketing people should set prices; not accountants.
Cost-Plus Pricing: a contract where you bid underneath the cost but then actually make more from extra work that you derive from that same contract.
Variable-Cost vs. Full-Cost Pricing: full cost has a fixed cost assigned to it; variable cost pricing lowers depending on whether the fixed cost has been covered or not.
Cross Border Price Escalation
Prices can escalate very fast when intermediaries are added in or if taxes are applied.
Geographic Pricing Issues
One of the pricing decisions the firm must make is related to which party (buyer or seller) owns and takes responsibility for the products during shipment.
Specifically, if the seller assumes this responsibility, all costs related to transportation (such as shipping charges, documentation, insurance, security) are incurred by the seller and will be reflected in the selling price. CIF!
However, if the buyer assumes this responsibility, the selling price is reduced but the buyer has assumed all transportation-related costs. FOB!
Global Pricing: Three Policy Alternatives
Extension (or ethnocentric): the price of an item is the same no matter where in the world the buyer is located.
Adaptation (or polycentric): permits local management to adjust prices based on the local target market research and cultural preferences.
Geocentric: centralized control is maintained, but some decision authority is delegated to specific market managers.
Grey Market Goods
Grey marketing (also called “Parallel Importing’) is defined as trademark products being exported from one country to another where they are sold by ‘third-party’ (unauthorized) persons or organizations.
Dumping
Defined as sales of an imported product at a price lower than that normally charged in the target market or country of origin.
Intracompany Pricing
The prices of goods being transferred from a company’s subsidiary in one country to another subsidiary (or its head office) is known as intracompany pricing or ‘transfer pricing’. These prices can be declared such that maximum profit (typically driven by preferential tax policies) is gained for the company as a whole.
Intra-corporate transactions are based on:
Cost-based transfer pricing.
Market-based transfer pricing.
Negotiated transfer pricing (often a tax-driven decision).
As products are shipped through a country, the difference between the incoming price and the exiting price reflects a taxable profit.
There will be maximum profits declared when passing through a low-tax country. Conversely, there will be minimal profits declared when passing through a high-tax country.
Horizontal Price Fixing
Horizontal price fixing occurs when competitors (who make and market the same product) conspire to keep prices high. This is illegal in most countries, but hard to prove.
Vertical Price Fixing
Occurs when a manufacturer enters agreements with wholesalers/retailers to establish profits for the manufacturer, retailer, and all intermediaries. This is normally a legal process. The intent is to ensure every intermediary makes a profit (thus sustaining the vertical chain), but is restricted by two extreme price-points: i) the actual manufacturing cost and ii) the final retail selling price.
Countertrade
Occurs when a transaction has taken place that did not include the transfer of funds. Bartering, counterpurchase, compensating trading, switch trading.
