chapter 11 pricing decisions. 11-2 introduction to pricing issues basic concepts target costing...
TRANSCRIPT
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Chapter 11 Pricing Decisions
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11-2
Introduction to Pricing Issues
Basic conceptsTarget costingPrice escalationEnvironmental issuesGray market goodsDumpingPrice fixingTransfer pricingCountertrade
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11-3
How to Set Price
The global manager must develop systems and policies that address
Price floor: minimum pricePrice ceiling: maximum priceOptimum prices: function of demand
Must be consistent with global opportunities and constraints
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11-4
Basic Pricing Concepts
Law of One Price would prevail in a truly global marketInternational trade helps keep prices low and low prices keep inflation in checkGlobal markets exist for certain products—integrated circuits, crude oilNational markets reflect costs, regulation, demand, competition—beer
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Global Pricing Objectives and Strategies
Managers must determine the objectives for the pricing objectives
Unit salesMarket shareReturn on investment
They must then develop strategies to achieve those objectives
Penetration pricingMarket skimming
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Market Skimming and Financial Objectives
Market skimmingCharging a premium priceMay occur at the introduction stage of product life cycle
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Penetration Pricing and Non-financial Objectives
Penetration pricing
Charging a low price in order to penetrate market quicklyAppropriate to saturate market prior to imitation by competitors
1979 Sony Walkman
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11-8
Companion Products
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.”
X-Box Game System and Sports Game
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11-9
The Target-Costing Process
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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?
Target Costing—Eight Questions
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11-11
Target Costing
Cost-based pricing is based on an analysis of internal and external costFirms 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
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11-12
Target Costing
Rigid cost-plus pricing means that companies set prices without regard to the eight foundational pricing considerationsFlexible cost-plus pricing ensures that prices are competitive in the contest of the particular market environment
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Terms of the SaleObtain export license if requiredObtain currency permitPack goods for exportTransport goods to place of departurePrepare a land bill of ladingComplete necessary customs export papersPrepare customs or consular invoicesArrange for ocean freight and preparationObtain marine insurance and certificate of the policy
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11-14
Terms of the Sale
IncotermsEx-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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IncotermsFAS (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 pointFOB (free on board)—seller’s responsibility does not end until goods have actually been placed aboard shipCIF (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 railCFR (cost and freight)—seller is not responsible at any point outside of factory
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Environmental Influences on Pricing Decisions
Currency fluctuationsInflationary environmentGovernment controls, subsidies, regulationsCompetitive behaviorSourcing
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11-17
U.S. Dollar versus Japanese Yen
January 2000 January 2002 December 2007 $1 = ¥101 $1 = ¥130 $1 = ¥113
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Currency Fluctuations
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Inflationary Environment
Defined as a persistent upward change in price levels
Can be caused by an increase in the money supplyCan be caused by currency devaluation
Essential requirement for pricing is the maintenance of operating margins
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Government Controls, Subsidies, and Regulations
The types of policies and regulations that affect pricing decisions are
Dumping legislationResale price maintenance legislationPrice ceilingsGeneral reviews of price levels
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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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11-22
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 traditional intermediaries in Japan to operate U.S.-style warehouse stores.
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Global Pricing: Three Policy Alternatives
Extension or ethnocentricAdaptation or polycentricGeocentric
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ExtensionEthnocentricPer-unit price of an item is the same no matter where in the world the buyer is locatedImporter must absorb freight and import dutiesFails 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 Vice President for Global Sales, Marketing, and Service
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Adaptation
PolycentricPermits affiliate managers or independent distributors to establish price as they feel is most desirable in their circumstancesSensitive to market conditions but creates potential for gray marketing
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Geocentric
Intermediate course of actionRecognizes that several factors are relevant to pricing decision
Local costsIncome levelsCompetitionLocal 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 markups
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Gray Market Issues
Dilution of exclusivityFree ridingDamage to channel relationshipsUndermining segmented pricing schemesReputation and legal liability
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DumpingSale of an imported product at a price lower than that normally charged in a domestic market or country of originOccurs 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 countriesTo prove, both price discrimination and injury must be shown
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Price FixingRepresentatives 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 highVertical 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 jurisdictionIntra-corporate exchanges
Cost-based transfer pricingMarket-based transfer pricingNegotiated transfer pricing
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CountertradeCountertrade occurs when payment is made in some form other than moneyOptions
BarterCounterpurchase or parallel tradingOffsetCompensation trading or buybackSwitch trading
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Barter
The least complex and oldest form of bilateral, non-monetary counter-tradeA direct exchange of goods or services between two parties