International Marketing Management

Module 17 Pricing for International Markets

I. Introduction
 Pricing for international markets is crucial for company’s success in international trade.
 Effective pricing strategies require a deep understanding of various market dynamics, including
local economic conditions, competition, and consumer behavior.
 Organizations must develop pricing policies that accommodate these factors to ensure successful
market entry and sustained profitability.
Why it is important?
 This helps businesses stay competitive and profitable internationally.
- Proper pricing ensures companies can stay competitive in international markets by offering prices
that attract customers without sacrificing profitability.

 It considers currency, tariffs, and taxes

- Pricing takes into account exchange rates, import taxes, and tariffs to ensure the final price covers
costs and remains reasonable for customers.

 It adjusts to meet unique market needs

- Different markets have different economic conditions, customer preferences, and spending power.
Pricing is adjusted to meet these unique factors.

 Directly affects sales, revenue, and brand image

- The right price helps boost sales and profits while maintaining a good reputation. Overpricing can
drive customers away, and underpricing may hurt profitability.

 Considers local economic and market competition

- Pricing considers what competitors are offering and the financial situation of customers in the target
market to remain appealing.

 Aligns with how customers think and spend

- Understanding how customers spend in each region helps set prices they find acceptable and
affordable.

 It balances affordability and financial sustainability

- Pricing strikes a balance between being fair to customers and ensuring the business remains
financially sustainable.

II. Pricing Policy

 A pricing policy is like a guide that helps businesses decide how to set and change their prices in
different countries or markets. It helps companies stay competitive and meet local needs by adjusting
prices based on market changes. A clear pricing policy ensures businesses make thoughtful decisions
about their pricing instead of rushing into it. Pricing is also used to achieve business goals, like
increasing sales or reaching specific target markets.
Key Pricing Strategies:
 Cost-Plus Pricing
- The company adds a profit to the cost of making the product.
Example: If a t-shirt costs P100 to make, the company might sell it for P120, adding P20 profit.

 Competitive Pricing
 - Prices are set to match or be similar to competitors’ prices to stay attractive in the market.
Example: If a competitor sells a phone for P30,000, the company might set their phone price at
P29,900 to attract customers.

 Value-Based Pricing
- The price is based on how much customers think the product is worth, not just how much it costs to
make. (rather than just production costs)
Example: A designer handbag might cost P1000 to make, but if customers believe it's worth P5000,
the company sells it for that price.

 If customers believe a product is worth less than what the business is pricing it at, it can be
problematic for the company. When using value-based pricing, the goal is to price the product based
on how much customers are willing to pay, which depends on their perception of its value. If
customers think the product is worth less than the selling price, they may hesitate to buy it or may
seek cheaper alternatives. This could lead to lower sales and potentially hurt the brand’s reputation.
To avoid this, businesses need to carefully assess customer perceptions and ensure their pricing
aligns with the value that customers place on the product.

III. Factors Influencing International Pricing

Several key factors influence pricing decisions in international markets:
 Cost Structure
- the total production cost, including raw materials, labor, and overheads, directly impacts the price.
The higher the cost to produce, the higher the price may need to make a profit.
Example: If it costs P550 to make a pair of shoes, the company might sell them for P650 to cover
production costs and earn a profit.

 Market Demand
- The price should reflect what customers in each country are willing to pay. Doing market research
helps businesses understand what people can afford and what they’re willing to spend.
Example: A luxury brand may set a higher price in wealthy markets, but lower it in markets with less
purchasing power.

 Competition
- It is important to keep an eye on what competitors are changing to ensure that a firm’s prices remain
competitive. If other companies sell similar products for less, a business might need to lower its
prices to stay competitive.
Example: If competitors sell a similar phone for P20,000, a business might adjust its price to
P19,000 to attract customers.

 Other Factors
- other influencing factors are exchange rates, taxes, tariffs, and overall economic condition of the
country can affect the final price. Such as, changes in the currency value can make products more
expensive or cheaper for customers in different markets. Example: If the exchange rate changes and
a product becomes cheaper to import into a country, the business may lower its price to attract more
buyers.

IV. Administered Pricing

- is when a company sets its own prices rather than letting the market decide based on supply and
demand. This helps keep prices stable, even in markets where things are changing a lot, like during a
crisis or when costs fluctuate. It also allows the company to control how much profit it makes and
how customers perceive its prices, which is useful for long-term agreements with partners or clients.
Examples:
1. Price Stability: A company might keep the price of a product the same even if the cost of raw
materials changes. For example, a car company may keep car prices steady even if the cost of
steel goes up.
2. Industry Cooperation: Competing companies may agree to set similar prices for their products to
avoid price wars. This is often seen in industries like airlines or oil, where companies agree to
maintain similar ticket or fuel prices.
3. Government Involvement: In some cases, governments may help set prices, especially for essential
goods, to ensure fairness or prevent extreme price increases. For example, governments might set
price controls on food or medicine during a crisis. (SRP-Suggested Retail Price)
However, in some countries, administered pricing might be illegal if it leads to price fixing, which is when
businesses agree to set prices to avoid competition. Administered pricing should be used responsibly, and
businesses must ensure that their pricing policies do not cross into illegal collusion.
V. Transfer Pricing
- refers to the price set for goods and services exchanged between subsidiaries within the same
multinational company. It’s important for tax and legal reasons, as managing it correctly ensures
compliance with international tax rules and avoids penalties.
Key Concepts of Transfer Pricing:
 Pricing between subsidiaries
- Transfer pricing is the price at which a company sells goods or services between its branches or
subsidiaries in different countries.
- Transfer pricing is the price set when one part of a company (a branch or subsidiary) sells goods or
services to another part of the same company in a different country.
Example: Imagine a company based in the U.S. has a branch in the Philippines. When the U.S.
company sells products to the branch in the Philippines, the price they set for that sale is called
transfer pricing.
In simple terms, it's the price between different parts of the same company when they buy and sell
from each other across countries.

 Follow tax rules/Tax Compliance

- Companies must follow the rules for transfer pricing to avoid getting into trouble with tax
authorities. If prices are not set right, the company may have to pay extra taxes or face penalties.
- If a company sets its transfer price wrong, tax authorities may charge extra taxes or penalties.
Example: If the company sets a price too low or too high, the government may want more taxes.

 Avoid penalties and issues

- Mismanagement can cause or lead to tax penalties, legal problems and compliance issues.
- Improper transfer pricing can cause companies to face tax audits, fines, or legal problems. Example:
A company that manipulates transfer pricing to reduce profits in a high-tax country may face audits
and fines from tax authorities.
Bad (Illegal) Manipulation:
 Lower Tariffs: A company might sell goods at a low price to reduce taxes in countries with high
tariffs. Example: If a company sets a low price to avoid high import taxes in a country, it could be
breaking the law.
 Reduce Income in High Tax Areas: A company might set high prices when selling to subsidiaries in
countries with low taxes, moving profits to avoid taxes. Example: Setting a high price to shift profits
to a low-tax country.
Methods to Set Transfer Pricing:
  At Cost: The subsidiary buys the product just for what it costs to make it, with no extra profit.
Example: A company sells products to its branch at the cost to make the product.
 Arm’s Length: The price is set like the subsidiaries are separate companies. The price is the same as
what the subsidiary would pay to another business. Example: The subsidiary pays the same price it
would pay to another company.
 Cost Plus: The company adds a profit margin on top of the cost to produce the product. Example:
The company sells goods at cost plus 10% profit, which is shared between the parent company and
subsidiary.
Summary:
Transfer pricing is important for international businesses to set fair prices between subsidiaries in different
countries. If not done properly, it can lead to legal and tax problems. Companies should manage it carefully
to avoid fines and ensure they follow tax laws.
VI. Dumping
- Dumping happens when a company sells its products in another country for a price much lower than
what it sells them for in its home country. The goal is usually to attract customers or get rid of
competition.

Why is Dumping a Problem?

- Selling goods too cheaply can hurt local businesses in the country where the products are sold. If the
government sees this as unfair, it may impose extra taxes on those products, called anti-dumping
duties, to protect local industries.

Legal Risks of Dumping

 Anti-Dumping Duties: Governments may add extra taxes on products that are dumped, making
them more expensive to buy. This protects local businesses from unfair competition.
 Legal Issues: Dumping is against the law in some countries. Companies can get into trouble if they
don’t follow the rules.

How to Avoid Dumping Accusations

 Ethical Pricing: Companies should set fair prices to avoid legal issues and maintain a good
reputation. This means selling at prices that are fair and not too low to harm local businesses.

Strategies to Avoid Dumping Issues:

1. Trading-up: Sell higher-value products instead of low-value ones to avoid dumping accusations.
2. Service Enhancement: Add extra services to the product to make it stand out, instead of just
lowering the price.
3. Distribution and Communication: Form alliances with local businesses to avoid the perception of
unfair competition.
4. Set up Local Units: Consider setting up a business in the foreign country instead of just selling
products there.

Summary:

Dumping is when companies sell products too cheaply in foreign countries, which can harm local
businesses. It can lead to extra taxes from governments to protect their industries. Companies should use fair
pricing strategies and follow the law to avoid legal problems.
VII. Price Quotations

- Detailed pricing breakdown

Include all costs in the price, like product price, shipping fees, and taxes. This makes it clear for the
customer to understand the total amount they need to pay.
- Clear quotations avoid issues
Write clear and easy-to-understand price quotes to avoid confusion or disagreements. This helps the
transaction go smoothly.
- Include key details
Add important information such as delivery terms (when and how the product will be delivered),
payment methods (cash, credit, bank transfer), and conditions that might affect the price (like taxes
or fees).
- Accurate quotes build trust
Honest and accurate pricing shows professionalism and helps build trust with customers and business
partners.

Why Price Quotations Matter:

When giving price quotes for international sales, include everything that affects the price, like freight,
insurance, credit terms, or currency to be used. Be specific because different countries might use different
measurements or have extra requirements. Clear and accurate quotes help avoid problems and strengthen
relationships with international clients.

VIII. Countertrades as a Pricing Tool

What is Countertrade?

a. Countertrade is when companies trade goods or services instead of using money.

b. It is often used in global trade where cash payments may not be possible or practical.

Why Use Countertrade?

c. Access new markets: Helps companies sell in countries with limited cash or strict currency
controls.
d. Lower financial risks: Reduces the need for upfront cash, making it safer for businesses.
e. Build relationships: Creates goodwill and trust with customers or partners.

Types of Countertrade:

f. Barter: Direct exchange of goods or services (e.g., trading palm oil for locomotives).
g. Compensation deals: Payment is a mix of cash and goods (e.g., 70% cash, 30% in products
like hides).
h. Counter-purchase: The seller agrees to buy something from the buyer’s country after selling
their product.
i. Buy-back: A company supplies machinery or builds a plant and gets paid with products
made from it.

Benefits of Countertrade:

j. Overcome cash problems: Useful in countries with weak currency or credit.

k. Increase sales: Helps businesses sell more by offering flexible payment options.
l. Expand markets: Opens doors to new countries and markets.

Challenges of Countertrade:

m. Complicated negotiations: Deals can take time and involve many details.
 n. Uncertain value: Future prices of traded goods can be unpredictable.
o. Extra costs: Managing these trades may involve higher transaction costs.

Examples of Countertrade:

p. PepsiCo and Russia: Pepsi traded its soft drinks for vodka in Russia, helping it expand its
business there.
q. Malaysia and General Electric: Malaysia paid for locomotives with palm oil over 30
months.

Key Takeaway:

Countertrade is a creative way to do business in international markets, especially where cash is limited. By
exchanging goods and services, companies can reduce risks, access new markets, and grow their global
presence. However, it requires careful planning and negotiation to ensure it works smoothly.

"Pricing smartly in international markets leads to competitive advantage and sustainable growth."