International Pricing

International Pricing

1. Approaches to International Pricing:

* Full-cost versus variable cost pricing:

* Variable cost pricing:

* In variable cost pricing the firm is concerned only with the marginal or incremental cost of producing goods to be sold in overseas markets. Such firms regard foreign sales as bonus sales and assume that any return over their variable cost makes a contribution to net profit.

* Variable cost (or marginal-cost) pricing is a practical approach to pricing when a company has high fixed costs and unused production capacity. Any contribution to fixed cost after variable costs are covered is profit to the company.

* Full cost pricing:

* Philosophy insists that no unit of a similar product is different from any other unit in terms of cost and that each unit must bear its full share of the total fixed and variable cost.

* This approach is suitable when a company has high variable costs relative to its fixed costs. In such cases, prices are often set on a cost plus basis, that is, total costs plus a profit margin. Both variable-cost and full-cost policies are followed by international marketers.

* Skimming versus Penetration Pricing:

* Skimming:

* A company uses skimming when the objective is to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for the value received.

* If limited supply exists, a company may follow a skimming approach to maximize revenue and to match demand to supply. When a company is the only seller of a new or innovative product, a skimming price may be used to maximize profits until competition forces a lower price. Skimming often is used in markets with only two income levels: the wealthy and the poor.

* This was the policy of Johnson & Johnson’s pricing in Brazil before the arrival of P&G. Also, LVMH and other luxury goods marketers that target the global elite market segment use skimming...