Unit 6 Flashcards
International price in relation to economies of scale
Economies of scale need to be considered as they often occur in an international context. As such, you have to keep in mind that individual products cannot be analyzed individually without considering the company’s entire product range. If there are economies of scale or spillover effects in a product range, determining the price for a product may also affect sales of other products of the company (either positively or negatively). Determining prices for the product range is also referred to as developing a price lining (also known as product line) policy (Diller, 2008). Price lining policy is when products within a product line are set at different price points, e.g. a specific vehicle is available as three models: a value model, a standard model, and a limited edition model.
Price Structure
the price structure for the targeted national markets has to be determined according to the desired positioning of the product or product range. A company may choose to either target a consistent position or develop a strategy that takes into account economies of scale or feedback effects. The latter is especially important for products in transparent markets where prices are visible to consumers who may adapt their behavior based on price comparisons.
Mixed Calculation strategies
Mixed calculation strategies are of major importance for companies and can be especially complex in international price management. Strategic calculations may be employed, as in the case where companies deliberately accept insufficient profits or even losses for specific products in order to promote the sales of other company products—losses for one product are then compensated with profits generated by the other products. This enables a company to “finance” their entry into strategically important markets or strengthen their presence on such markets, thereby improving the company’s position in international competition.
International pricing is characterized by additional costs and risks that are only emerge when doing business on an international scale (Becker, 2001; Diller, 2008).
Overcoming barriers to international trade entails additional procurement and distribution costs, e.g. export licenses, country-specific quality standards, accompanying export documents, etc.
Processing and fulfilling orders as part of foreign business usually entails higher costs, e.g. skilled employees with experience in foreign transactions usually receive higher financial compensation.
Specific logistic or contractual requirements (such as transportation, packaging, etc.) as well as specific liability or warranty claims may also cause additional costs.
Further additional costs can result from necessary product modifications.
Specific foreign trade risks and protecting the company against them (e.g. transport or warehouse insurance) may entail additional costs.
Additional costs may be incurred because of changes in exchange rates or necessary hedging activities. High inflation rates are also a common risk in an international context.
International Pricing - Cost based
Under a cost-based pricing approach, prices are based on cost accounting information. This means that prices are based on the cost of production plus a fixed amount or percentage profit. Such calculation methods are mainly used for determining lower price limits (Zentes, 2002). They are easy to apply and thus primarily used for export business, where companies do not need any differentiated information on the environment in the individual countries and can generally do without extensive market research activities. This approach is therefore quite inexpensive.
International Pricing - Demand-based
Demand-based pricing means determining prices based on observing customers. In most cases, the primary question is at what price will buyers in the respective national markets purchase the product. The most important models informing demand-based pricing are Jacob’s (1971) price threshold approach, the price corridor approach of Simon and Fassnacht (2009), and Sander’s (1997) microeconomic approach.
Competition Based
Competition-based pricing occurs when prices are based for the most part on the pricing strategies of competitors. Prices are primarily determined against the backdrop of a country’s competitive situation or by assessing cross-country competition. A company can either aim to deliberately adjust their prices according to the behavior of competitors (e.g. as part of a defensive pricing strategy) or deliberately opt for an alternative strategy to its competitors (e.g., as part of an aggressive market development strategy that includes significantly undercutting competitive prices).
Competition Based
Competition-based pricing occurs when prices are based for the most part on the pricing strategies of competitors. Prices are primarily determined against the backdrop of a country’s competitive situation or by assessing cross-country competition. A company can either aim to deliberately adjust their prices according to the behavior of competitors (e.g. as part of a defensive pricing strategy) or deliberately opt for an alternative strategy to its competitors (e.g., as part of an aggressive market development strategy that includes significantly undercutting competitive prices).
Price Discrimination
Price discrimination is a strategy that acknowledges differences in national markets and adjusts the prices accordingly in order to benefit from the fact that customers on the different markets are willing to pay different prices (Meffert & Bolz, 1998). This approach is based on determining the approximate national demand for each product, which is done with the help of expert evaluations, customer surveys using conjoint analysis, and analyses of historical market data. This type of price determination, however, can only be implemented when there are no strong interdependencies between established national markets and consumer-related factors.
Limits of Price Discrimination
In industrial goods markets in particular, high market transparency means that companies are rarely able to charge different prices for identical products/services on different national markets. The ever increasing use of the Internet has also resulted in a greater price transparency on the consumer goods markets, so that companies now have to be careful when using a differentiated pricing strategy.
Factors influencing price discrimination and standardization
A number of factors influence the extent of price discrimination and standardization. These include supplier-, competition- and consumer-related factors as well as environmental conditions, as outlined in the following section
Consumer Related factors
Image: Price discrimination can affect the image of the product. It may irritate consumers to discover that a company is offering the same service on different national markets at significantly different prices. If a company does not either succeed in either hiding these prices differences or reasonably explaining them to consumers, customer perception of the brand may change to the detriment of the company (Channon & Jalland, 1979).
Levels of buying power in targeted countries: Standardizing prices may turn out to be a problem for companies intending to address similar customer segments in different international markets that actually have large variations in their degrees of buying power. Country-specific levels of buying power have to be considered when determining the level of price discrimination.
Similarity of buyers’ preferences: Analyzing only buyers’ willingness to pay for a product without considering their actual buying power is problematic, as is analyzing the buyers’ buying power without considering their willingness to pay. Considering both these factors in association will result in different recommendations for price discrimination.
Arbitrage tendency: A consumers’ tendency toward arbitrage is the subjective tendency of the buyers to procure a product from an alternate source (from a so-called “gray market”) instead of through the producer’s regular, national distribution channels if this offers a certain arbitrage profit (arbitrage profit = price difference – transaction costs). The arbitrage tendency of consumers does not only depend on individual price sensitivity, but whether there is a need for product clarification and whether the product quality can be assured. Arbitrage tendency can be identified by analyzing historical market data or the results of (direct or indirect) expert and customer surveys.
Supplier-Related Factors
Company costs: The main argument for price discrimination abroad is that higher prices have to be charged in international market because transport costs account for a comparatively high share of the overall costs. Distribution channels are available to varying extents and there may be major differences in local trade margins leading to price discrimination across national markets. However, if the company establishes a local production site, it does not have any reason to pursue a policy of country-specific pricing.
Competition-Related Factors
Competitive situation: The degree of competition present in various national markets also influences the extent of economically reasonable price discrimination. As a rule of thumb, the more different the competitive situations on the individual national markets, the stronger the tendency towards price discrimination.
Existence of re-imports: The larger the price differences and the greater the estimated tendency for consumer arbitrage, the more attractive it is for a company to act as a re-importer. The existence of re-importers is affected by re-import or arbitrage costs as well as the actual extent of prices discrimination and the consumer arbitrage tendency.
Environmental Factors
inflation and currency effects: The influence of these parameters on pricing should not be underestimated. On one hand, the profit generated by a company operating in foreign markets may depend on the exchange rates, with one currency fairing favourably in comparison with another. On the other hand, currency hedging can present a problem for transactions in foreign currencies when there is a time lag between an agreement and the actual date of payment. Fluctuating exchange rates will also directly affect the price differences arbitragers seek to take advantage of and thus affect their decisions to purchase products for a specific price.
Tax differences: The tax systems and calculation rules may differ significantly between individual countries. Different tax rates or additional taxes, e.g. specific luxury taxes, force companies to establish differentiated prices. However, this will enable arbitragers to take advantage of net price differences. When buying a product in a country with high additional taxes, purchasers are refunded when the product is designated for export meaning the arbitrager usually only has to pay the net price in the country of supply. Local (sales) taxes have to be paid when importing the product into the target country but generally they are lower.
Sales channel differences: The eventual price for a product paid by the consumer is usually influenced not only by the producer, but also by the sales channels. As only few producers have the power to affect local trade margins within existing sales channels, they have to consider them for their own pricing policy.
