Global pricing is more complex than setting prices in a domestic environment. The added complexity is primarily introduced through the differing environmental factors discussed above and the need to take interactions between different country markets into account, e.g., to reduce the risk of parallel imports. However, the basic methods of arriving at a price are unchanged. Below, we briefly discusscost-plus pricing, parity pricing, as well as market penetration and market-skimming pricing.
6.3.1 Cost-Plus Pricing
Cost-plus pricing is the most commonly used international pricing strategy, partic-ularly when firms are just beginning to globalize. This also reflects the fact that many pricing managers adopt a rather risk-averse attitude when it comes to global price setting. Cost-plus pricing also has the advantage of being relatively transparent.
However, rigid cost-plus pricing may lead to pricing that is out of line with the market prices in the overseas target market. In particular, additional transport costs and added or higher distributor margins often lead to price escalations. In contrast, prices may also be too low for the market conditions in the overseas market.
Another drawback of rigid cost-plus pricing is that many companies fail to incorporate the value of knowledge when defining a price based on the cost of a product. A company does not only sell the product as such but also know-how, R&D, branding and technical expertise, which all add to the value to the product.
Consequently, not the physical manifestation but the overall value of a product should be considered. To this end, cost-plus can be used to determine a price floor.
However, in order to determine a price ceiling, the value the product provides to the customer might be more suitable and so called value-based pricing is usually more appropriate.
33Jung-a (2008).
6.3.2 Parity Pricing
In country markets where companies have limited industry control and a rather smaller market share, they often apply parity pricing. Thus, companies set prices in a range that seems acceptable for most customers. Parity pricing is often driven by the concern that stronger competitors would gain an even stronger standing with the customers if prices were increased.34
In global marketing, parity pricing is most often applied by companies that perceive their pricing possibilities as rather inflexible compared to their more powerful competitors, who price based on their cost, value, demand forecast etc.35Parity pricing enforces the perception of customers that there are no crucial differences between products. Thus, companies choosing a differential price strat-egy focus their marketing efforts on distinguishing from parity-priced products. In contrast, low price suppliers concentrate on encouraging parity perceptions as a viable choice in comparison to parity-priced products.36Consequently, it might be argued that pricing at parity limits the differentiation of a product significantly and can decrease the purchasing probability for a product.37
6.3.3 Market Penetration Pricing Versus Market Skimming
The aim of penetration pricing is to increase or expand market share quickly, often in order to prevent new competitors from entering the market.38Frequently, only variable costs and international marketing costs are recovered, while overheads are only partly added. Thus, penetration pricing uses price as a competitive weapon. To this end, it may mean that products are sold at a loss for a certain length of time.
This puts manufacturers in danger of being accused of dumping (see below) and, consequently, in danger of legal sanctions.
Companies applying a market penetration strategy have high potential in markets where the perceived brand parity is high. To this end, low price strategies are mostly applied for so-called commodity products—products that are seen as interchangeable.
Market skimming works in the opposite direction to penetration pricing. While penetration pricing introduces products in an overseas market with low prices, which are then successively increased, market skimming introduces products at a relatively high price, which is then gradually lowered over time. Thus, market
34Forman and Hunt (2005).
35Chernev (2006).
36Iyer and Muncy (2005).
37Chernev and Kivetz (2005).
38Kehagias and Skourtis (2009).
skimming attempts to reach market segments willing to pay a premium price in order to have first access to a product. Market skimming is often used in the introductory phase of the product life cycle, when production capacity and compe-tition are still limited. To this end, it can maximize profit on restricted volume and match the demand to the limited supply. Market skimming also reinforces customers’ perceptions of high product value.39
6.3.4 Countertrade
Countertrade deals represent a less conventional form of trading arrangement where payments, either partially or in full, are made in the form of goods and services.
Countertrade arrangements are most often used when companies are dealing with less developed markets where customers may have limited access to hard currencies. Governments may also see countertrade deals as a means to foster the creation of new jobs in their countries. For example, Boeing sold aircraft to the British Ministry of Defence on the basis that the equivalent purchase price would be spent on British goods.40 The term countertrade is an umbrella term that encompasses a wide variety of different transactions. The London Countertrade Roundtable (LCR), established in 1988 as a “focal point for all those involved in countertrade, offset and related activities”, points out that the terms for these different transactions are often used interchangeably, which causes confusion.
Notwithstanding this limitation, the LCR lists the following as the most common forms of countertrade and the terms most often applied41:
Offset: This is traditionally used by governments around the world when they make major purchases of military goods. There are two distinct types: (1) direct offset, where the supplier agrees to incorporate components or sub-assemblies from the importing country; (2) indirect offset, where the purchaser requires suppliers to enter into long-term co-operation and investments, but these are unconnected to the supply contract.
Counter-purchase: A foreign supplier promises to buys goods and services from the purchasing country as a condition of securing the order.
Tolling: Manufacturers in regions such as the former Soviet Union may sometimes be unable to service customers because they lack the foreign exchange to buy raw materials. In a tolling deal, a supplier provides the raw material and hires capacity from the factory of the buyer to turn it into finished goods. These are then bought by a final customer, who pays the supplier in cash. Throughout this
39Keegan and Schlegelmilch (2001).
40Doole and Lowe (2012).
41The London Countertrade Roundtable (2011).
procedure, the supplier retains ownership of the material as it is processed by the factory.
Barter: In a barter deal, the principal export is paid for with goods (or services) from the importing market. A single contract covers both flows and in the simpler cases, no cash is involved. In practice, however, the supply of the principal export is often released only when the sale of the bartered goods has generated sufficient cash.
Buyback: Here, suppliers of capital plant or equipment agree to be paid by the future output of the investment concerned. For example, exporters of equipment for a chemical plant may be repaid with part of the resulting output from the factory. Buyback arrangements tend to be much longer term and for larger amounts than counter-purchase or barter deals.
Switch Trading: Imbalances in long-term bilateral trading agreements sometimes lead to the accumulation of trade surpluses. For example, at one time Brazil had a large surplus with Poland. These surpluses can sometimes be tapped by third countries so that, for example, UK exports to Brazil could be financed from the sale of Polish goods to the UK or elsewhere. Such transactions are known as
‘switch’ or ‘swap’ deals because they typically involve exchanging the docu-mentation (and destination) of goods while in transit.
6.3.5 Incoterms
The International Commercial Terms, usually referred to as Incoterms, are an important aspect of global pricing practice. The Incoterms are published by the International Chamber of Commerce (ICC) in Paris and regulate the transfer of tasks, costs, and risks from the seller to the buyer.42 To this end, Incoterms are regularly incorporated in international sales contracts. Sellers tend to favor price quotes that reduce their risks and responsibilities as much as possible (for example FOB: free on board), whereas buyers prefer terms where the seller carries as many of the costs and responsibilities as possible (for example CIF: cost, insurance, freight). However, pricing which is more market-oriented tends to be based on Incoterms where the seller carries most of the costs and liabilities during transport.
The ICC publishes two groups of Incoterms—those that specifically apply to sea or inland waterway transport, such as the already mentioned FOB, CIF and others, and those that can be applied to any mode of transport, such as DDP, which stands for delivery duty paid.
42Ramberg (2011).