Source: Global Marketing: Contemporary Theory, Practice and Cases, 2nd Edition By Ilan Alon, Eugene D. Jaffe, Christiane Prange, Donata Vianelli © 2016 – Routledge

Factors influencing pricing decisions There are several factors influencing international pricing decisions that can be categorized into five groups:  Competitive factors  Consumer and cultural factors  Product factors  Distribution channel factors  Country factors Also, company factors are important elements to consider, especially at a strategic level. Their role will therefore be underlined when considering international pricing strategies and objectives.

Competitive Factors The structure and intensity of competition varies significantly from country to country and therefore affects pricing strategy. In the beauty and personal care market in Turkey, for example, multinationals such as P&G, Avon, L’Oreal and Unilever have a strong power due to the huge investments in advertising and promotion. However they have to face the competition of leading local companies, for example Evyap Sabun Yag Gliserin (Geo Box 11.1) and Kopas Kozmetik Pazarlama, whose competitive advantage is based on a significant price advantage over the multinationals.1

Geo Box 11.1 about here In India, the competitive landscape is different if we consider different regions within the country. While Hindustan Unilever is the leading company in urban areas, domestic manufactures have a strong regional presence in areas where the consumers are highly price sensitive, especially due to their competitive and affordable price that favor market penetration.2 This is a situation that is facing also Coca Cola in China, where the company is leader in big cities but finds difficulties to develop a strong penetration in the populated rural areas of the country (Box 11.1).

Box 11.1 about here (Figure 11.1 is in this Box)

The intensity of competition is sometimes so high that many companies find difficult to price competitively. The bike department of some supermarkets in China is a clear example of how competitors can find hard time to differentiate one from each other (Figure 11.2). However it is important to emphasize how the power to determine a given price is strongly linked to the value that the company is able to create around its offer through different marketing mix variables. Companies that have been able to create differentiation relative to competition are the ones that are less subjected to price pressures.

Figure 11.2 about here Consumer and Cultural factors Globalization has not yet resulted in convergence of consumer perception. In fact factors linked to the consumer and its culture, that can influence price policies are very complex. From the company’s point of view, product unit price represents a clearly defined numeric value; however, from the consumer point of view, the concept of perceived price comes into play. For this reason, it is important to analyze consumers in relation to: - the perception of price: monetary, non monetary price and retail price ending; - price and perception of quality; - the use of internet on price evaluation.

Perception of price It is important to distinguish between two dimensions regarding the perceived price: monetary and nonmonetary. Monetary price represents the idea that a consumer has regarding a product’s price, for example, expensive or cheap. This idea often depends on the consumer’s past experience, on the information he or she has had access to, and competitive offerings. 3 Non-monetary price represents the sacrifice that a consumer must face when purchasing a product: taking into consideration, for example, the time necessary for the purchase, the effort necessary to learn how to use it, and the risks involved. 4 Also, in this case, perception of the non-monetary price will tend to vary significantly from country to country; for example, in cultures that can be defined as “time saving” rather than cultures where time economy is not important. Or it can depend on the importance the consumer attributes to the product, and therefore to the effort that he or she is willing to expend in order to be able to acquire it. The final price perception, therefore, will depend on a careful evaluation of costs (monetary and non-monetary) and benefits (tied to the obtainable advantages linked with the purchase of a product or service). Finally, the perceived functional and other product benefits will be balanced against costs of acquisition, internal costs (learning to use new product, lost time, disposal of previous product, etc.), and purchase risks (financial, social, and physical). 5 Consumer and cultural factors can also influence price-ending practices. A study in low context (Western countries) and high context cultures (non-Western countries) suggests that the perception of retail prices ending in 0.5 (even ending) and 9 (odd ending) is not homogeneous. Non-Western cultures seem to be less deceived by the cheapness or gain that an odd ending price wants to convey. In some cases they feel that someone is attempting to “fool” them.6

Differences in the perception of price are demonstrated by the results of the Pay-What-You-Want (PWYW) strategies that some companies implement in various cultural contexts (see Box 11.2).

Box 11.2 about here Price and the perception of quality There are many studies demonstrating how cultural factors influence the relationship between price and the perception of quality.7 However, generalization of findings is difficult because this relation has to be analyzed for different product categories and brand strategies. In general, for luxury products, characterized by factors such as uniqueness, high quality and rarity, it is frequent to find a Veblen effect: a higher rather than a lower price can determine an increase in demand for a product.8 In Box 11.3 the perception of luxury products by Japanese and Chinese consumers clearly points out the dynamics between price and quality that in recent years have lead western luxury brands to increasingly invest in these attractive markets.

Box 11.3 about here For other products, the relation between price and quality is influenced by the perception of local and global brands. For example, a recent analysis carried out in Thailand for different product categories, points out that Thai consumers consider juice and airline local brands as superior and preferable to their foreign-owned counterparts; vice versa Thai-owned jeans and coffee shop brands are perceived inferior and less desirable to the foreign-owned alternatives. However, in this second case, if there is no price difference consumers maintain their foreign preferences. But if the prices of foreign alternatives are relatively higher, high-ethnocentric consumers more quickly switch their buying intentions to the local alternatives.9 The consumer culture should also be considered in terms of buying behavior distinguishing consumers of one country or region from those ones of other countries. For example, in western markets, for many products consumers expect a good quality even if the product price is low. The approach to pricing is similar in Mexico, where shoppers are cautious and price sensitive, and they appreciate outlets offering promotions all year long. It is not the same in Guatemala, where limitedtime offers are particularly popular. This is one of main the reasons of the slow development of Walmart Every Day Low Price (EDLP), recently introduced in Guatemala: consumers are more used to one-off, time-limited discounts. Hence, even if consumers’ perceptions are gradually changing, it is still hard to convince them that quality can be high even if the price is low. 10 It is also important to consider that the relation between low income consumers and affordable prices should not be generalized. For example, Coca-Cola entered the Philippines with a soft drink called “Sakto”, the Filipino word for “exactly”, at a very low price of 5 Philippine Pesos (US$0.12). The target was made up of consumers, such as students, who had very little pocket change and wanted “the exact amount of Coke at the exact price”. But the product was often ridiculed by some Filipino consumers, considering Satko as “exactly” what poor people could afford. The result was that students, which were considered by Coca-Cola one of the most important targets, viewed the product as a statement of poverty and used to avoid purchasing Satko amongst friends. 11

Product Factors An important variable to consider in pricing decisions is the stage of the product life cycle (PLC) that exists in different countries. As discussed in Chapter 10, each stage needs different management of marketing mix policies, including price choices in each country. For example, the price will be higher in countries where the product is in the introductory phase, and lower in countries where the product category is in its maturity stage. Another aspect that needs to be taken into consideration is the company’s ability to convey to consumers the real quality of the product, a goal that is not always easy to implement if the company operates in industries where competition relies mostly on the price variable rather than on differentiation strategies. It is in these circumstances that it often becomes important to support price with appropriate communication leveraging on product or company attributes that can be recognized on an international level, with the objective of transferring the product value to the target client. GranitiFiandre, for example, is a leading Italian company in the business-to-business luxury ceramic tiles industry. It distinguishes itself by premium price positioning. The company conveys the perception of its products’ value in an international context through the image of some of its customers who have used GranitiFiandre tiles for their luxury stores or their company sites. Among these are Ferrari, Armani, Benetton, Givenchy, and Porsche, all companies whose brand and reputation are well known by potential international clients. The company has been able to develop a high-quality perception coherent with a high price. Value creation is the focus of their communication, which describes tiles as the perfect combination of performance and aesthetics. When determining the final price of a product in international marketing, expenses for adapting, manufacturing, and selling a product, as well as export-related costs and a profit margin, are all essential elements for the product’s final price definition. Product costs to be taken into account are:  Variable costs (raw materials, labor, energy, etc.)  Marketing expenses (marketing research, communication, etc.)  Finance and bank charges  Export-related charges (translation, labeling, country-of-origin marking, packaging adaptation, documentation, insurance, tariffs, shipping costs, etc.) Most of the times product costs are higher when targeting low income countries where the company has often to invest in adapting the product, meeting local requirements, translating labels in different languages, etc. The paradox is that especially in these countries the final price should be lower because of the low purchasing power of the population.

Distribution Channel Factors Companies operating in a global context have to coordinate prices across countries, taking into consideration that the final price paid by consumers is the result of a process of value creation that involve intermediaries such as distributors, importers, retailers, etc. The company set a price to the first intermediary (sell in price), then all the intermediaries involved in the export channel charge a margin, resulting in a final price paid by the final clients (sell out price). It is not difficult to understand that control of pricing decisions in the distribution channel is particularly critical in international marketing, especially if the exporter has little control of the intermediaries’ behavior.

The length of the distribution channel (i.e. the number of intermediaries), together with export charges such as insurance, shipping, export documentation and tariffs, can determine a relevant increase of the final export price if compared to the domestic price. This phenomenon, known as price escalation, can be seen in Table 11.1, where two export scenarios are compared to a typical domestic situation.

Table 11.1 about here In the first case (Italy), only the retailer is present in the channel, allowing the company to charge a higher manufacturer’s margin (70 percent instead of 50 percent). In the second case (United States), the distribution channel has been lengthened with a foreign importer. The third scenario adds a wholesaler. Even if both the United States and Russia’s manufacturing margin is lower, the escalation is significant 40.34 percent and 82.35 percent, respectively. In order to avoid the risk that the final price ends up being out of the market, the company must implement some alternatives that would allow avoiding or limiting price escalation. 12 The first alternative would be to reduce the length of the distribution channel. This is the case of Nokia. After assessing India’s notoriously fragmented retail marketplace, management decided to bypass retailers and distributors altogether and began selling its phones directly to consumers via its own fleet of specially marked and equipped vans.13 Alternatively, it is possible to lower the producer’s net price eliminating, for example, expensive features or shifting production of the product or of some of its components to low-cost countries. Finally, it is evident that the possibility of limiting price escalation will strongly depend on the company’s power to control final prices, also imposing lower margins on channel members of each target country.

Country Factors Socioeconomic and political country characteristics are among the elements that can influence a company’s pricing strategies and policies. These factors are not controllable by the company, so it must adapt to them when selling its products to a specific country. Per capita income, for example, is an important factor to consider in emerging economies where many global companies want to penetrate to not only a minority of relatively rich consumers, but also target the mass market. Some companies opt for a low price strategy. In India, many leading food chains target lower- to middle-income customers with heavily value-focused menus. Domino’s was among the first to launch a Pizza Mania line, priced at Rs44 (US$0.70), supported by an advertising campaign promoting the idea that even young people in their first job can afford Domino’s. KFC and McDonald’s did the same with super low-priced menus aimed at students and other young people, and Pizza Hut is offering the lowest price of any pizza player with a 5-inch pizzas at a starting price of Rs29 (US$0.47). To maintain margins and stay competitive, all these companies have obviously to lower the operational costs .14 Many premium brand owners adopted the strategy of introducing second brands or product lines to access the low-priced markets of Eastern Europe, Middle East Africa, and Asia. In these cases, care must be taken to not cannibalize sales of existing brands or cheapen the brand’s image. Examples of tired pricing can be found in the pharmaceutical industry, where drug prices can vary in order to penetrate low and middle income markets.15 The main country factors which have to be considered in pricing decisions are:

- currency; - inflation; - Government regulations, tariffs and taxes.

Objectives, strategies, and pricing policies There are a number of strategic alternatives or approaches to setting international prices:  Cost versus market-based approach  New product pricing: skimming versus penetration pricing  Standardization versus adaptation approach

Cost versus market-based approach

Cost based methods The cost-based methods focuses on setting prices by fixing a profit margin over established product costs and thus ensures a more stable, predictable profit. This method has a serious weakness because it ignores demand and competition in foreign markets. In fact, it is based on the equation: cost + margin = price The cost-based method includes three alternative options:16  Full-cost pricing  Incremental-cost pricing  Profit-contribution pricing Full-cost pricing represents the sum of total unit costs attributed to a product (direct production costs, direct marketing costs, allocated production, and other overheads) plus a profit margin. It is very easy to determine, and it guarantees that each sales transaction is profitable. However, indirect costs are arbitrarily allocated. Furthermore, ignoring demand and competition, it does not consider the price influence on sales volume. As a consequence, it fails to take into consideration the effect of price on production volume and therefore on total unit costs. Finally, if the determined price is not competitive, profit margins may be cut, with the result of obtaining a less-than full-cost price. Incremental-cost pricing distinguishes between variable costs and fixed costs. Based on this distinction, this approach takes into consideration production and marketing costs that the company must face when exporting. Incremental production and marketing costs plus a profit margin will determine the final price. Take into consideration a German company selling sport apparel in US. When the company entered US, they had to pay to translate the catalogue in English, adapt the product labels and packaging, etc. All these costs had to be considered. But if they successively decide to enter the Canadian market, they can use the same catalogues and package, and they can determine the final price just considering only the incremental costs of adapting the labels and the package with the integration of the French language that is required in Canada. Through this method, a company defines a floor price that cannot be lowered or it will result in a loss.

Profit-contribution pricing takes into consideration demand elasticity. The demand curve shape and demand elasticity abroad can significantly differ from the domestic market due to different preferences, buyer behaviors, and competition. A company must determine how total sales revenue will fluctuate in relation to price changes. Profit contribution represents the difference between incremental revenues and incremental cost of exporting in a foreign target market. The best price occurs when the highest profit contribution is generated (Table 11.3). In the example, the best price is 6,60€, corresponding to the highest profit contribution.

Table 11.3 about here Market- based methods The market-based methods require a much more dynamic approach that takes into consideration not only costs but also competitors’ prices and how much consumers are willing to pay. Hence this method is based on the equation: affordable unit price – margin = target cost. In this way, a company can calculate the maximum target cost backwards, starting from the affordable unit price (determined considering competition and consumers) and then determining a suitable profit margin. For example, a Belgian manufacturer selling beer found that the affordable unit price for Polish consumers was 3€ per bottle. Considering not only the profit margin for the Belgian company but also the margins due to the importer and the retailer, the manufacturer’s target costs should have been 1€ per bottle. If the costs (production, distribution, etc.) for the company were higher than €1 per bottle, the Polish market would have been unprofitable. If they are lower than €1, the Belgian company can also have an extra profit margin. Given the competitive environment in global markets, the latter approach is much more appropriate for exporting firms, 17 especially in countries where are the market and competition that drive the company in its price decisions.

New product pricing: skimming versus penetration pricing A skimming strategy is based on the concept that a company can charge some consumer segments higher prices for a product. Starting from the high end of the market, which represents the “cream” (i.e., consumers who are willing to pay more), price is successively lowered to reach all other segments, achieving maximum profitability from different target consumers. This strategy results in high margins, but there are numerous risks. High prices should be justified by distinctive product features, while competitors should not be aggressive. Furthermore, the company has to take the risk of creating a market easily conquered by other competitive products. Finally, if price is lower in the domestic market, there is always the possibility of favoring parallel imports. 18 An example of company using a skimming pricing is Apple. The average cost of a new iPhone is $609, compared with $249 for smart-phones globally. The Apple Watch has a starting price of $349. The company has the possibility to implement a skimming strategy for some main reasons. First of all thanks to the technological and

design appeal that differentiates its products from competitive products. For example, the Apple watch is a triumph of design and technology: its tiny device contains sensors that measure the user’s pulse to help in fitness activities, and people can communicate by sending their heartbeat as a new sort of expressive message to other watch-wearers. Secondly, Apple had been able to target a “luxury global niche” of loyal consumers that are willing to buy the new products despite the high introductory price. Finally, Apple consumers use software and services that locks into the firm’s platform for life. Obviously, the risk of this strategy is high because rivals like Samsung, Huawei, Lenovo and LG, with their cheaper phones, and Google’s Android operating system, which runs on 71% of the world’s smart-phones, can erode the segment of Apple’s loyal consumers. 19 On the other hand, penetration pricing sets a low price for the new product in order to enter a foreign market, and often tends to base its communication campaign on this same strategy. Penetration pricing allows the company to quickly penetrate the market and obtain a significant market share, hence gaining market awareness and economies of scale related to production and distribution. This strategy is efficient when consumers are price sensitive, enabling the company to gain a competitive advantage against competition. The attractiveness of a penetration price must be evaluated not only as a strategy to gain market share, but also how it affects the company’s overall global business strategy. For example, there are 886 million active mobile subscriptions in India, i.e. a cellular penetration rate of 70 percent. However, India has only 243 million Internet users and this is offering a big opportunity to smart-phone producers that can penetrate the market with low-cost products. This is what local competitors are doing, continuing to gain market share at the expense of both Samsung and Apple. In fact, the Indian mobile brands Micromax, Karbonn, and Spice, are collaborating with Google, that is pushing smartphones that cost as little as 6,399 rupees (about $105). But the cheapest price goes to the new phones from Mozilla that recently introduced unveiled Firefox smartphones costing as little as 1,999 rupees.20

Standardization versus adaptation of pricing policies (COSTI DI ADATTAMENTO) When entering foreign markets, a company can set the same price in different markets or adapt pricing policies to local market conditions. Price standardization implies the same price positioning strategy across different markets. Factors that are potentially important in influencing the price standardization level are the economic and legal environment, distribution infrastructure, customer characteristics and behavior, and product life cycle stage. 21 Basically, a standardization strategy is possible when the company operates in global sectors. It often becomes necessary when the company sells to global retailers. The retailers expect the product to be delivered at the same price in each country. If this does not happen, they would concentrate their purchases in the country where the product is offered at the lowest price. For example, a multinational company discovered that one of its most important brands of deodorant had a price difference between Switzerland and Portugal of 80 percent, and that European retailers could very conveniently buy the product in Portugal and sell it in other countries. The company immediately reacted, reducing the price gap to a maximum of 20 percent. This difference doesn’t enable opportunistic behavior, because the price advantage for the retailer is eliminated by higher transportation costs. In general, it is necessary to negotiate a global-pricing contract between the supplier and the customer.

Price adaptation occurs when a company is compelled to adopt a different price positioning strategy, owing to heterogeneities in consumers’ preferences, product perception, the intensity of competition, and country-of-origin effect. Global giants such as IBM and Coca-Cola have been adamant about maintaining consistent pricing for their distributors across the world. However, they and many other large companies have modified their strategy in low-income but emerging markets such as India and China, much to the dismay of their distributors in developed countries.22 Adaptation can be evaluated not only in relation to the final listed price, but also in reference to the entire transaction. Managing transaction pricing means determining which discounts, allowances, payment terms, bonuses, etc., should be applied to single transactions. To this end, the behavior of companies can be different, as described below. Some companies opt for one fixed discount scale based on the overall quantity ordered by the client /distributor (for example, a 3 percent discount if the client buys more than a certain quantity). Following this approach can be easy to apply and transparent with clients/distributor, because they all benefit of the same discounts if they reach the goals. The main problem is that, considering the foreign markets target by a company, big clients/distributors are favored because they easily get the discounts. On the other side, in countries where the market potential is still small and for this reason it would be more important to strengthen the investment, small distributors can find difficulties to grow. To overcome the limits of a fixed discount, some international companies apply a pay per performance approach. With this method, whose main goal is to improve the performance of clients/distributors, the discount depends on different variables. For example, it can vary from 0 to 4 percent in relation to:  0.5% - Total sales in the country /geographical area  1.0% - Sales growth  0.5% - Market share  0.5% - Number of clients  0.5% - % of Key clients  0.5% - In-store activities developed by the client/distributor  0.5% - Assortment growth Since the goal of the discount is to improve the performance with clients/distributors, the transaction price will be different (adaptation) not only country by country but also among clients/distributors operating in different geographical areas within the same country.

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