Pricing
Price Escalation in Exporting
If standard markups are used within the distribution channels, lengthening me channels or adding expenses somewhere within the system will increase
the price to the consumer by a greater amount than the initial increase. Assume that the markup is 50 percent and that a product costs $ 1.00 to produce. The price of the product would then be $1.50. If the cost of the production were to increase by $.20 to $1.20, the markup of 50 percent would then make the price of the product $1.80 instead of merely $1.70. In export sales, two things happen to escalate the price of goods to the consumer: First, channels of distribution are usually longer because of greater distances and because of the need to engage organizations that know export procedures and/or selling in the foreign market; second, tariffs are an additional cost that may be passed on to consumers in an escalated form.
There are several implications of price escalation. Many seemingly exportable products turn out to be noncompetitive abroad. Furthermore, to become competitive in exporting, a firm may have to sell its product to middlemen at a lower price to lessen the amount of escalation.
Currency Value and Price Changes
For firms accustomed to operating with one relatively stable currency, pricing m highly volatile currencies can be extremely troublesome. Pricing decisions should be made to assure that sufficient funds are received to replace the
inventory that has been sold and still make a profit. If this is not done, a firm may be making a "paper profit" while liquidating itself. In other words, what shows as a profit may result from failure to adjust for inflation while the merchandise is in stock. In addition to the effect of inflation on prices, a company also must consider that its income taxes may be based on the papa profits rather than on real profits. Table 18.1 illustrates a pricing plan to make a target profit (after taxes) of 30 percent on replacement cost. If the firm does not use a procedure similar to this one, it may quickly lack sufficient funds to operate. The longer the collection period, the more important it is for the firm to use a graduated pricing model. Because of Peruvian inflation in the late 1980s, Procter & Gamble had to raise its detergent prices 20 to 30 percent every two weeks. Meanwhile, P&G eliminated its 60-day free credit to retailers and instituted interest on 15- to 30-day payments.31
Two other pricing problems that occur because of inflationary conditions are: (1) the receipt of funds in a foreign currency that, when converted, wiD buy less of the firm's own currency than had been expected and (2) the constant readjustment of prices necessary to compensate for cost changes. In the first case the firm can sometimes (depending on competitive factors and governmental regulations) specify in sales contracts an equivalency in some hard
currency. For example, a sale of equipment from a U.S. manufacturer to a company in Uruguay may specify that payment be made in dollars or pesos at an equivalent price, in terms of dollars, at the time that payment is effected.
When it is necessary to change prices frequently because of inflationary conditions, it becomes more difficult to quote prices in letters or catalogues. Constant price rises even may hamper what would otherwise be a preferred distribution method. Vending machine sales, for example, make price increases difficult to effect because of the need to change machines in the process and to come up with coins or tokens that correspond to the percentage increase in price desired.
Currency value changes also affect pricing decisions for any product with potential foreign competition. For example, when the U.S. dollar becomes stronger, non-U.S.-made goods can be sold more cheaply in the U.S. market. In such a situation, U.S. producers may have to accept a lower margin in order to be competitive. When the dollar weakens, on the other hand, foreign producers may have to adjust their margins downward in order to remain competitive.
When companies sell similar goods in more than one country, price differences between the countries must not exceed by much the cost of bringing the goods in from a lower-priced country, or spillover in buying will occur. Soft-drink manufacturers can easily vary their prices by a large percentage from country to country, since the cost of transportation would render large-scale movements across borders impractical. However, consumers feasibly could buy abroad and import higher-priced items, such as cameras. For example, importers in the United States and France paid yen to buy Japanese cameras; consequently, the imported price in yen was the same in both France and the United States. But then the franc cheapened in relation to the dollar, so some U.S. dealers scurried to buy inventories located in France rather than buying from the official distributor. U.S. dealers could buy the Olympus OM-10 for $224.95 through the official distributor or for $152 from inventories already in France. Such movements, usually referred to as the gray market, could undermine the longer-term viability of the distributorship system or upset the capacity utilization balance among plants, so camera manufacturers cut camera export prices to the United States to prevent such product arbitrage from taking place. However, some companies take advantage of currency swings by switching exports from one location to another; for example, GAF does this with butane diol, a raw material used in plastic.32
Fixed versus Variable Pricing
There is substantial variation from country to country in the extent to which
manufacturers can or must set prices at the retail level. For instance, in Ven-
ezueia most consumer products must have prices printed on the label, r
whereas in Chile it is illegal for manufacturers either to suggest retail prices
or to put prices on labels.33 There is also a substantial variation in whetha consumers bargain in order to settle upon an agreed price. For instance, bargaining takes place in about 60 percent of the stores in India and Kenya but in less than 5 percent in the People's Republic of China and South Africa Bargaining is much more prevalent in purchases from street vendors in Indu than in Singapore, whereas bargaining in high-priced specialty stores is mon frequent in Singapore than in India.34
Countering International Competitors
As long as a firm faces local competitors that lack resources to expand intei nationally, pricing decisions in one locale will have little potential impa< elsewhere. However, firms are increasingly facing the same potential com petitors in more than one location, and in these cases pricing decisions mu: be examined in terms of global competitive strategy. For example, Procter i Gamble was concerned about the possible U.S. entry of the large Japanes consumer-products firm Kao. By selling detergent at a low price in the Jai anese market, Procter & Gamble was able to force Kao to freeze its prices ft 12 years below those of P&G.35 This move affected a much larger portion < Kao's profits than P&G's, thus greatly delaying a Kao entry into the Unite States.
A firm may also face the same industrial consumer in more than or market; therefore, the paint price to Toyota in Mexico may well affect tl ability to sell to Toyota in other countries as well.
If standard markups are used within the distribution channels, lengthening me channels or adding expenses somewhere within the system will increase
the price to the consumer by a greater amount than the initial increase. Assume that the markup is 50 percent and that a product costs $ 1.00 to produce. The price of the product would then be $1.50. If the cost of the production were to increase by $.20 to $1.20, the markup of 50 percent would then make the price of the product $1.80 instead of merely $1.70. In export sales, two things happen to escalate the price of goods to the consumer: First, channels of distribution are usually longer because of greater distances and because of the need to engage organizations that know export procedures and/or selling in the foreign market; second, tariffs are an additional cost that may be passed on to consumers in an escalated form.
There are several implications of price escalation. Many seemingly exportable products turn out to be noncompetitive abroad. Furthermore, to become competitive in exporting, a firm may have to sell its product to middlemen at a lower price to lessen the amount of escalation.
Currency Value and Price Changes
For firms accustomed to operating with one relatively stable currency, pricing m highly volatile currencies can be extremely troublesome. Pricing decisions should be made to assure that sufficient funds are received to replace the
inventory that has been sold and still make a profit. If this is not done, a firm may be making a "paper profit" while liquidating itself. In other words, what shows as a profit may result from failure to adjust for inflation while the merchandise is in stock. In addition to the effect of inflation on prices, a company also must consider that its income taxes may be based on the papa profits rather than on real profits. Table 18.1 illustrates a pricing plan to make a target profit (after taxes) of 30 percent on replacement cost. If the firm does not use a procedure similar to this one, it may quickly lack sufficient funds to operate. The longer the collection period, the more important it is for the firm to use a graduated pricing model. Because of Peruvian inflation in the late 1980s, Procter & Gamble had to raise its detergent prices 20 to 30 percent every two weeks. Meanwhile, P&G eliminated its 60-day free credit to retailers and instituted interest on 15- to 30-day payments.31
Two other pricing problems that occur because of inflationary conditions are: (1) the receipt of funds in a foreign currency that, when converted, wiD buy less of the firm's own currency than had been expected and (2) the constant readjustment of prices necessary to compensate for cost changes. In the first case the firm can sometimes (depending on competitive factors and governmental regulations) specify in sales contracts an equivalency in some hard
currency. For example, a sale of equipment from a U.S. manufacturer to a company in Uruguay may specify that payment be made in dollars or pesos at an equivalent price, in terms of dollars, at the time that payment is effected.
When it is necessary to change prices frequently because of inflationary conditions, it becomes more difficult to quote prices in letters or catalogues. Constant price rises even may hamper what would otherwise be a preferred distribution method. Vending machine sales, for example, make price increases difficult to effect because of the need to change machines in the process and to come up with coins or tokens that correspond to the percentage increase in price desired.
Currency value changes also affect pricing decisions for any product with potential foreign competition. For example, when the U.S. dollar becomes stronger, non-U.S.-made goods can be sold more cheaply in the U.S. market. In such a situation, U.S. producers may have to accept a lower margin in order to be competitive. When the dollar weakens, on the other hand, foreign producers may have to adjust their margins downward in order to remain competitive.
When companies sell similar goods in more than one country, price differences between the countries must not exceed by much the cost of bringing the goods in from a lower-priced country, or spillover in buying will occur. Soft-drink manufacturers can easily vary their prices by a large percentage from country to country, since the cost of transportation would render large-scale movements across borders impractical. However, consumers feasibly could buy abroad and import higher-priced items, such as cameras. For example, importers in the United States and France paid yen to buy Japanese cameras; consequently, the imported price in yen was the same in both France and the United States. But then the franc cheapened in relation to the dollar, so some U.S. dealers scurried to buy inventories located in France rather than buying from the official distributor. U.S. dealers could buy the Olympus OM-10 for $224.95 through the official distributor or for $152 from inventories already in France. Such movements, usually referred to as the gray market, could undermine the longer-term viability of the distributorship system or upset the capacity utilization balance among plants, so camera manufacturers cut camera export prices to the United States to prevent such product arbitrage from taking place. However, some companies take advantage of currency swings by switching exports from one location to another; for example, GAF does this with butane diol, a raw material used in plastic.32
Fixed versus Variable Pricing
There is substantial variation from country to country in the extent to which
manufacturers can or must set prices at the retail level. For instance, in Ven-
ezueia most consumer products must have prices printed on the label, r
whereas in Chile it is illegal for manufacturers either to suggest retail prices
or to put prices on labels.33 There is also a substantial variation in whetha consumers bargain in order to settle upon an agreed price. For instance, bargaining takes place in about 60 percent of the stores in India and Kenya but in less than 5 percent in the People's Republic of China and South Africa Bargaining is much more prevalent in purchases from street vendors in Indu than in Singapore, whereas bargaining in high-priced specialty stores is mon frequent in Singapore than in India.34
Countering International Competitors
As long as a firm faces local competitors that lack resources to expand intei nationally, pricing decisions in one locale will have little potential impa< elsewhere. However, firms are increasingly facing the same potential com petitors in more than one location, and in these cases pricing decisions mu: be examined in terms of global competitive strategy. For example, Procter i Gamble was concerned about the possible U.S. entry of the large Japanes consumer-products firm Kao. By selling detergent at a low price in the Jai anese market, Procter & Gamble was able to force Kao to freeze its prices ft 12 years below those of P&G.35 This move affected a much larger portion < Kao's profits than P&G's, thus greatly delaying a Kao entry into the Unite States.
A firm may also face the same industrial consumer in more than or market; therefore, the paint price to Toyota in Mexico may well affect tl ability to sell to Toyota in other countries as well.
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