10.18 Pricing strategy
Pricing is a very complex issue lending itself to a wide variety of approaches: for this reason, you are unlikely to find two textbooks which deal with pricing in the same way. We will stay with Hill's (2005) approach, but let's set the context in which we are to discuss pricing strategy by reference to two aspects of it.
International managers are concerned with two categories of pricing: foreign national pricing and international pricing.
Foreign international pricing is the pricing of goods in host countries. Prices may vary immensely from country-to-country for the following reasons:
- government price controls
- cost differentials on opposite sides of a border
- a subsidiary of an MNE may face heavy local competition and be restricted in the prices it can charge, whereas another subsidiary in a neighbouring market may have little competition and charge higher prices
- a product may not be at the same stage of its life cycle in neighbouring markets, and pricing may vary accordingly.
These are the underlying reasons for price discrimination - the practice of charging different prices for the same product in different markets. Two conditions are necessary for price discrimination to be profitable for an MNE:
- National markets must be kept separate so that goods purchased in a low price country cannot be shipped across borders to high price countries. An example given in your textbook is of the Ford Escort being sold at different prices in Belgium and Germany .
- There must be different price elasticities of demand in different countries. Price elasticity of demand is a measure of how responsive demand for a product is to changes in price. As a general rule, a firm can charge a higher price in a country where demand is inelastic.
Remember we are discussing how price discrimination can be profitable for an MNE, so let's stay with the Ford Escort. The Escort is cheaper in Belgium because generally wages are lower than in neighbouring Germany . Ford can charge a higher price in Germany (and be more profitable) because the elasticity of demand is lower.
International pricing involves the setting of prices for goods produced in one country and sold in another. The pricing of exports to unrelated customers (that is, outside the MNE) falls into this category, but there is another special form of exporting: intra-corporate sales. These are sales between units of an MNE which may, for example, produce engines in Australia to be mounted in car bodies produced in Germany (the situation with General Motors and its German subsidiary Opel). The price of a good sold by one unit to another is the transfer price. Hill (2005) discusses transfer pricing later in your textbook, so we will defer discussion until Chapter 12.
For now, let's return to price discrimination for a short exercise.
Activity 10.6
Turn to pages 598-560 of your textbook and work through the example of maximising profit under price discrimination until you fully understand it.
The second of our two aspects which set the context for pricing strategy is the interaction between marketing and the other functional areas. Thus:
- the finance people want prices that are both profitable and conducive to steady cash flow
- finance people are also concerned with the relationship between prices, profits and taxes
- the legal department is concerned about the legal implications of different prices for different customers
- production people want prices that lead to large sales volume and thus large production runs
- the domestic marketing manager wants import prices to be high enough to avoid competition with company products purchased for export and then re-channelled to the domestic market
So far in this section we have been discussing 'international pricing strategy'. We now turn our attention to 'strategic pricing' in the international context. If you have followed the plot in this unit thus far, the next study task should take you only half a minute.
Activity 10.7
What is the difference between international pricing strategy and strategic pricing in the international context?
Congratulations: you are quite right. International pricing strategy is part of the overall international marketing mix (the four Ps) and is not necessarily strategic in the sense of being long-term. Strategic pricing is not necessarily restricted to the international context, but is essentially long-term.
Strategic pricing has three aspects.
Predatory pricing is using price as a weapon to drive competitors out of a national market. A good example worldwide was the Japanese practice of selling motor vehicles at a loss in Europe and elsewhere in the 1970s and early 1980s to undercut the competition and establish a Japanese (for example, Toyota or Honda) presence. Another example cited in your textbook is that of Matsushita (National, Panasonic) using predatory pricing to enter the US television market.
Multipoint pricing is a term used to compare the effect that a firm's pricing strategy in one market may have on a rival's pricing strategy in another market. Read the example in your textbook (Hill 2005, pp. 601-602) which cites competition in the home markets of Kodak and Fuji Photo.
Experience curve pricing (remember the experience curve from Chapter 7) is aggressive pricing designed to increase volume and help the firm realise experience curve economies.
These three aspects of strategic pricing may involve huge losses initially in order to establish a strong base in the market. This philosophy was pursued by MITI - the Japanese Ministry of Trade and Industry - in the Japanese push to capture a share of international markets after World War II.
Strategic pricing often attracts intervention in two forms, which we now consider.
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