Discussion Exercises
Discussion Questions
Chapter 16 Pricing Strategies: Basic Decisions
- Explain how exchange rate and inflation affect the way you price your product.
The exchange rate has a great deal of impact in international marketing. When a seller's currency is strong and revalued, its price which may remain unchanged domestically loses competitiveness overseas. Its agent/customer abroad has to spend more money just to buy the same volume, forcing the agent to subsequently increase prices in order to pass along cost increases to consumers.
Inflation affects pricing by increasing production costs which must be passed along to middlemen and subsequently consumers. A marketer thus must compensate for inflation by adjusting prices periodically. Any installment plan based on a fixed price is probably not wise. If the marketer is unable to adjust prices frequently, it may have to initially overprice its product. In addition, it should insulate itself against the declining value of a depreciating local currency by posting its prices in terms of an appreciating hard currency.
- What is dumping? When does it become illegal? What can a seller do to circumvent antidumping regulations?
Dumping is the practice of charging different prices for the same product in similar markets. Usually, imported goods are sold at prices so low as to be detrimental to local producers of the same kind of merchandise.
Depending on local laws, dumping becomes illegal when the price charged drops below a specified level — at less than fair value or below its home-market price or production cost.
To circumvent antidumping regulations, a seller should differentiate the exported item from the item being sold in the home market so that price comparison is not possible or valid. This may involve product modification or multiple brands. Another method is to make competitive adjustments in nonprice items (e.g., terms of payment) when negotiating with affiliates and distributors.
- What methods can be used to compute a transfer price (for transactions between affiliated companies)?
There are four basic methods used to determine transfer prices. The first method involves transfers at direct manufacturing costs. The second technique involves a transfer at direct manufacturing cost plus a predetermined markup to cover additional expenses. The third course of action involves the use of a market-based transfer price. Finally, the fourth process employs an arm's length price.