International Marketing - Part 5 PDF

International Marketing - Part 5 Entering new markets - different pricing approaches Penetration Charging a low price in order to penetrate market quickly Appropriate to saturate market prior to limitation from competitors Skimming Charging a premium price...

International Marketing - Part 5 Entering new markets - different pricing approaches Penetration Charging a low price in order to penetrate market quickly Appropriate to saturate market prior to limitation from competitors Skimming Charging a premium price May occur at the introduction stage of the product life cycle (because in the long-term prices drop) Price-value propositions Depending on the relative price-value relationship, one can distinguish four price positioning strategies: 1. Discounting: Low relative price and low relative value/quality. 2. Low Price: Low relative price and middle relative value/quality. 3. Middle Price: Middle relative price and middle relative value/quality. 4. Premium Price: High relative price and high relative value/quality. Examples include luxury products and high-tech products like laptops ⟶ This diagram helps businesses position their products effectively in the market by categorizing different pricing strategies based on how consumers perceive the value and quality relative to the price. Price determination - Differentiation or Standardization on international pricing Price differentiation Orientation on individuality of country markets Country-specific adaptation of prices by exploitation of different willingness-to-pay Considering purchasing power differences, this pricing approach can lead to large price differences between country markets Only applicable if few interdependencies between the country markets exist Price standardization Extreme case: Complete harmonization of prices Abdication of exploitation of different willingness-to-paytendencies Preferable if high integration of country markets and if arbitrage activities are already high with small price differences Factors influencing standardization or differentiation of pricing decisions Cost-based factors for prices 1. Taxation Differences Varying taxation in different countries leads to different gross prices in countries with exceptional high taxes. Manufacturers have to reduce their base price (net price) so that, even after high taxes, the final cost remains reasonable for customers. 2. Transportation Costs for the product International transportation costs and Incoterms (International Commercial Terms) ⟶ define who is responsible for transportation costs and risks when shipping goods internationally EXW (Ex Works) – The buyer takes responsibility right from the factory, paying for all transport costs and risks. FCA (Free Carrier) – The seller is responsible until a specified delivery point, after which the buyer takes over. FOB (Free on Board) – The seller covers costs and risks until the goods are loaded onto the ship. After that, the buyer is responsible. CFR (Cost and Freight) – The seller pays for transport to the destination port, but the risk shifts to the buyer once the goods are on the ship. CIF (Cost, Insurance, Freight) – Similar to CFR, but the seller also covers insurance until the destination port. 3. Currency exchange rates They affect the cost of importing and exporting goods. If a company buys materials or products from another country, the price they pay depends on the exchange rate. How It Works: Stronger Local Currency → Imported goods become cheaper (since less local currency is needed to buy foreign currency). Weaker Local Currency → Imported goods become more expensive (since more local currency is needed to buy foreign currency). Unstable Exchange Rates → Companies may increase prices to cover risks of currency fluctuations 4. Trade barriers Trade barriers, such as tariffs, import duties, quotas, and regulations, increase costs for businesses that import or export goods. These extra costs are often passed on to consumers, making products more expensive. Traditional approaches for price determination Cost Based Consumer Based Competition Based Prices are based on consumers’ Prices are based on price related behavior Prices are determined only by costs willingness to pay of competition Most frequent prototype is price leader Cost plus pricing Willingness to pay varies between Price leader influences price setting Maximizing margins cultures and price policy on a market Pricing with scarce resources Competitors follow price leader with their price policy Reasons for price leadership: Minimum price level Different cultures low prices Short-term: variable costs Benefit from products differently market power Long-term: Full costs Perceive prices differently chronological proceeding International Price Discrimination Idea: Price Discrimination means charging different prices to different customers based on their willingness to pay. Companies can sell to more customers (maximize profit) while still earning high profits from those willing to pay more. ⟶ The assumption here is that variable costs = 0, meaning all revenue contributes directly to profit. Left Graph: Uniform Price The company charges a single price (P₁) to all customers. The profit is shown in red. Some potential customers are lost because they are unwilling to pay P₁. Right Graph: Price Differentiation The company charges different prices (P₁, P₂, P₃) to different customer groups. Some customers pay a lower price (P₁), while others who are willing to pay more are charged higher prices (P₂, P₃). This strategy captures more profit, shown by the additional blue areas. Example for Price Differentiation: There are 2 consumers: Consumer A is willing to pay €8 Consumer B is willing to pay €5 Variable costs = €0, meaning every euro earned is pure profit. Uniform Pricing: If the company sets a single price of €5, both A and B will buy. ⟶ Total revenue = 5€ × 2 = 10€ (profit = 10€). Price Differentiation: The company charges €8 to A and €5 to B based on their willingness to pay. ⟶ Total revenue = 8€ + 5€ = 13€ (profit = 13€). Profit increases by 3€ compared to uniform pricing. Consumer Surplus (Extra Value for Consumers) Formula: Willingness to pay – Actual price paid. In uniform pricing (5€): A has a positive consumer surplus (8€ - 5€ = 3€). B has no surplus (5€ - 5€ = 0€, indifferent to buying). In price differentiation: A has no surplus (pays exactly 8€). B remains indifferent (pays 5€, exactly their willingness to pay). The company captures more of the consumer surplus as profit  Requirement: The company must know each customer’s willingness to pay to set different prices. International price discrimination process (stages 1-5) 1. Are there price differences between countries? ⟶ Yes. Problem: Grey markets! Grey Markets: parallel imports (or re-imports) happen when retailers or consumers buy products in one country (where they are cheaper) and sell them in another country (where they are more expensive) to profit from price differences. This is often seen in: Luxury goods (e.g., cars, jewelry), Products with low per-unit costs (e.g., medicine, batteries) Four strategies against grey markets Legal measures Aggressive reactions when a grey market exists Repurchase grey products International standard prices Limitations of offered products Utilization of the grey market Using grey markets as price discrimination instrument Acquisition of grey retailer Proactive defense Country-specific product discrimination Retailer relationship management Price corridor management 2. Can the price differences be held up? Concept of international price corridor Defining a price corridor in order to keep price differences to a certain level that does not allow grey markets to emerge Worst case scenario: dramatic drop in prices over time. This illustrates a worst-case scenario where prices are not managed effectively, leading to significant price erosion. ⟶ A price adjustment of the high-price countries to the low-price countries must be avoided A better scenario: shows a more stable price trend from "Today" to "Tomorrow" with minimal fluctuations. This represents a better-managed price scenario where prices are maintained within a controlled range, avoiding the drastic drop seen in the first slide. Strategies for how price differences can be held up Product management, Communication management, Sales management, Legal issues Product differentiation (1/2) Branding ⟶ Brands are a signal of quality (reduces risk and increases orientation) Impact on price discrimination: Strengthening a brand in one country has influence on consumers’ perception of a product/service Different brands in different countries Country-of-origin effect Example: Ariel vs tide Additional Services ⟶ Additional services can lead to successful price discrimination Examples: Different periods of guarantee After sales services for complex products Bagging-service in supermarkets, e.g. Carrefour in China Extensive advisory services Home-delivery service Quality/ Performance level Cars do not have the same equipment in countries with a lower price level for cars Example: Special Edition for cars, e.g., Ford Fiesta Product differentiation (2/2) Package Size: e.g. Schauma Shampoo is smaller and therefore cheaper in Tunisia than in Europe Flavors/tastes – adapting to local food preferences Ingredients - changing quality of ingredients  Language barriers System products - technical barriers Example: Encoding of DVDs and different video formats 3. Estimation of price elasticity in different countries 4. Determination of optimal intercountry price 1. Determination of the price corridor Price Monitoring International Company International Customers International Competitors 1. Quantitative measures 1. Products: Product profitability Analysis of transaction 2. Salesmen: Profit margin per prices Competitors´ behavior across salesperson Analysis of profit margins 3. Influences of marketing mix 2. Qualitative measures different countries and cultures instruments Customer satisfaction Price image International conditions: Market volume Political environment Technological changes Economic situation etc.