Global

Marketing
Pricing Decisions
WARREN J. KEEGAN MARK C. GREEN
Chapter 11
Ninth Edition, Global Edition
 Learning Objectives
• Review basic pricing concepts that underlie a successful global marketing
pricing strategy.
• Identify the different pricing strategies and objectives that influence
decisions about pricing products in global markets.
• Summarize the various Incoterms that affect the final price of a product.
• List some of the environmental influencers that impact prices.
• Apply ethnocentric/polycentric/geocentric framework to decisions
regarding price.
• Explain some of the tactics global companies can use to combat the
problems with gray market goods.
• Assess the impact of dumping on prices in global markets.
• Compare and contrast the different types of price fixing.
• Explain the concept of transfer pricing.
• Define countertrade and explain the various forms it can take.

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 Basic Pricing Concepts
• Law of One Price
– All customers in the market get the best product for the best
price
• Global markets
– Diamonds
– Crude oil
– Commercial aircraft
– Integrated circuits
• National markets
– Costs
– Competition
– Regulation
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 Basic Pricing Concepts
• The Global Manager must develop
systems and policies that address
– Price Floor: minimum price
– Price Ceiling: maximum price
– Optimum Prices: function of demand
• Must be consistent with global
opportunities and constraints
• Be aware of price transparency
created by Euro zone, Internet
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 Global Pricing Objectives
and Strategies
• Managers must determine the objectives
for the pricing objectives
– Unit Sales
– Market Share
– Return on investment
• They must then develop strategies to
achieve those objectives
– Penetration Pricing
– Market Skimming

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 Market Skimming and
Financial Objectives
• Market Skimming
– Charging a premium price
– May occur at the introduction stage of
product life cycle
– Luxury goods marketers use price to
differentiate products
• LVMH, Mercedes-Benz

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 Penetration Pricing and
Non-Financial Objectives
• Penetration Pricing
– Charging a low price in order to penetrate market
quickly
– Appropriate to saturate market prior to imitation by
competitors
– Packaged food product makers, with products that do
not merit patents, may use this strategy to get market
saturation before competitors copy the product

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 Companion Products or
“Razors and Blades” Pricing
• Products whose sale is dependent upon the sale of
primary product
– Video games are dependent upon the sale of the game
console
• “If you make money on the blades, you can give away
the razors.”
• Cellular service providers subsidize the phone and
make money on calling plans

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 Target Costing
• Use by Japanese companies to control costs,
save on production expense, & create
competitively priced global products
• Also called Design to Cost

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 The Target-Costing Process
• Determine the segment(s) to be targeted, as well as the prices
that customers in the segment will be willing to pay.

• Compute overall target costs with the aim of ensuring the

company’s future profitability.

• Allocate the target costs to the product’s various functions.

Calculate the gap between the target cost and the estimated
actual production cost.

• Obey the cardinal rule: If the design team can’t meet the
targets, the product should not be launched.
Copyright © 2017 Pearson Education, Ltd. 11-10
 Export Price Escalation

• Export price escalation is the increase in

the final selling price of goods traded
across borders.

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Export Price Escalation

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 Pricing Factors for Goods
That Cross Borders
1. Does the price reflect the product’s quality?
2. Is the price competitive given local market conditions?
3. Should the firm pursue market penetration, market
skimming, or some other pricing objective?
4. What type of discount (trade, cash, quantity) and
allowance (advertising, trade-off) should the firm offer
its international customers?
5. Should prices differ with market segment?
6. What pricing options are available if the firm’s costs
increase or decrease? Is demand in the international
market elastic or inelastic?
7. Are the firm’s prices likely to be viewed by the host-
country government as reasonable or exploitative?
8. Do the foreign country’s dumping laws pose a problem? 11-13
 Cost-Based Pricing
• Cost-based pricing is based on an analysis of
internal and external cost
• Firms using western cost accounting principles
use the Full absorption cost method
– Per-unit product costs are the sum of all past or
current direct and indirect manufacturing and
overhead costs
– Must include additional costs & expense when goods
cross national boarders

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 Cost-Plus Pricing
• Rigid cost-plus pricing means that
companies set prices without regard to
the eight pricing considerations
• Flexible cost-plus pricing ensures that
prices are competitive in the contest of
the particular market environment

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 Crossing International Borders
• Obtain export license if required
• Obtain currency permit
• Pack goods for export
• Transport goods to place of departure
• Prepare a land bill of lading
• Complete necessary customs export papers
• Prepare customs or consular invoices
• Arrange for ocean freight and preparation
• Obtain marine insurance and certificate of the
policy
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 Terms of the Sale
• Incoterms
– Ex-works – seller places goods at the disposal of the
buyer at the time specified in the contract; buyer
takes delivery at the premises of the seller and
bears all risks and expenses from that point on.
– Delivery duty paid – seller agrees to deliver the
goods to the buyer at the place he or she names in
the country of import with all costs, including
duties, paid

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 Incoterms

• FCA (free carrier) sale occurs when goods are delivered to the
carrier
• FAS (free alongside ship) named port of destination – seller
places goods alongside the vessel or other mode of transport
and pays all charges up to that point
• FOB (free on board) – seller’s responsibility does not end until
goods have actually been placed aboard ship
• CIF (cost, insurance, freight) named port of destination – risk
of loss or damage of goods is transferred to buyer once goods
have passed the ship’s rail
• CFR (cost and freight) – seller is not responsible at any point
outside of factory
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 Inflationary Environment
• Defined as a persistent upward change in
price levels
– Can be caused by an increase in the money
supply
– Can be caused by currency devaluation
• Essential requirement for pricing is the
maintenance of operating margins

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 Low Inflation Environment
• Should make it possible to raise prices but consider
the global competitive environment
• U.S. inflation rate in the 1990s was low and strong
demand had factories at capacity
• However, mid-1990s Europe had high
unemployment, Asia was in recession
• By the end of the decade, globalization, the
Internet, low-cost products from China, and cost-
conscious consumers became other constraining
factors
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 Government Controls,
Subsidies, and Regulations
• The types of policies • Foreign governments
and regulations that may:
affect pricing – require funds to be
decisions are: noninterest-bearing
accounts for a long
– Dumping legislation time
– Resale price – restrict profits taken
maintenance out of the country and
legislation limit funds paid for
– Price ceilings imported material
– General reviews of – Restrict price
price levels competition
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 Competitive Behavior

• If competitors do not adjust their prices in

response to rising costs it is difficult to adjust
your pricing to maintain operating margins
• If competitors are manufacturing or sourcing in a
lower-cost country, it may be necessary to cut
prices to stay competitive

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 Using Sourcing as a Strategic
Pricing Tool
• Marketers of domestically manufactured finished
products may move to offshore sourcing of certain
components to keep costs down and prices
competitive
• China is “the world’s workshop”
• Rationalize the distribution system—Toys ‘R’ Us
bypasses layers of intermediaries in Japan to operate
U.S. style warehouse stores

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 Global Pricing:
Three Policy Alternatives
• Extension or Ethnocentric
• Adaptation or Polycentric
• Geocentric

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 Extension Pricing
• Ethnocentric
• Per-unit price of an item is the same no
matter where in the world the buyer is
located
• Importer must absorb freight and import
duties
• Fails to respond to each national market

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 Extension Pricing
"In the past, Mercedes vehicles would be priced for
the European market, and that price was
translated into U.S. dollars. Surprise, surprise:
You're 20 percent more expensive than the Lexus
LS 400, and you don't sell too many cars.”

-Joe Eberhardt, Chrysler Group Executive VP

for Global Sales, Marketing, and Service

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Adaptation or Polycentric Pricing
• Permits affiliate managers or
independent distributors to establish
price as they feel is most desirable in
their circumstances
• Sensitive to market conditions but
creates potential for gray marketing

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 Geocentric Pricing
• Intermediate course of action
• Recognizes that several factors are relevant
to pricing decision
– Local costs
– Income levels
– Competition
– Local marketing strategy

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 Gray Market Goods
• Trademarked products are exported from
one country to another where they are sold
by unauthorized persons or organizations
• Occurs when product is in short supply,
when producers use skimming strategies in
some markets, and when goods are
subject to substantial mark-ups

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 Gray Market Issues
• Dilution of exclusivity
• Free riding
• Damage to channel relationships
• Undermining segmented pricing schemes
• Reputation and legal liability

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 Dumping
• Sale of an imported product at a price lower than that
normally charged in a domestic market or country of
origin
• Occurs when imports sold in the U.S. market are
priced at either levels that represent less than the
cost of production plus an 8% profit margin or at
levels below those prevailing in the producing
countries
• U.S. law, the Byrd Amendment, provides for payment
to companies harmed by dumping
• To prove, both price discrimination and injury must be
shown
Copyright © 2017 Pearson Education, Ltd. 11-31
 Price Fixing
• Representatives of two or more companies secretly
set similar prices for their products
– Illegal act because it is anticompetitive
• Horizontal price fixing occurs when competitors
within an industry that make and market the same
product conspire to keep prices high
• Vertical price fixing occurs when a manufacturer
conspires with wholesalers/retailers to ensure
certain retail prices are maintained

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 Transfer Pricing
• Pricing of goods, services, and intangible
property bought and sold by operating units or
divisions of a company doing business with an
affiliate in another jurisdiction
• Intra-corporate exchanges
– Cost-based transfer pricing
– Market-based transfer pricing
– Negotiated transfer pricing

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 Countertrade
• Countertrade occurs when payment is made in
some form other than money
• Options
– Barter
– Counterpurchase or parallel trading
– Offset
– Compensation trading or buyback
– Switch trading

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