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earned revenue

Pricing to Capture Value

We have made significant progress in developing effective international marketing strategies. We have
identified where to expand, which customers to target, which products and services to offer, how to get
them to market, and how to communicate their value. So, what is left? We still need to determine a key
piece of the value equation—how to price the offerings to convey value to the customer and to capture
value for the firm. If the price is too low, the firm and its channel partners may not make sufficient
margins to consider the marketing effort successful. If the price is too high, the customer demand may
not materialize. Thus, like the other decisions we have studied, pricing requires careful analysis.

The economic concepts—integrating costs, margins, and contributions—encompass the science of

pricing. Concurrently, managers must tend to the art of pricing—how they position the brand and
convey its value. We will explore both the science and art of pricing in this chapter.

Pricing Primer
In most cases, managers consider three approaches to pricing, as illustrated in Exhibit 6.1 : cost-based,
competition-based, and customer value-based. Cost-based prices are calculated to make sure that
goods and services are priced to cover all of the firm's costs. A typical approach is to calculate a price
based on the variable costs and a desired margin that will cover fixed costs. The challenge for the
international marketer is being able to capture or estimate their fully landed costs in a new country
market and determine the margin percentage needed to cover all costs and yield a positive net
contribution.

EXHIBIT 6.1 - 3 MAIN PRICING STRATEGIES

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GROSS MARGINS AND CONTRIBUTION ANALYSIS

Analyzing gross margins is extremely helpful to determine if prices, relative to

units sold, are sufficient to drive profitability. View the Gross Margins and
Contribution Analysis video for your region to understand how gross margins
are calculated in CountryManager and how they correlate to net
contributions.

Competition-based prices are designed to be consistent with the overall positioning strategy. Do we
want to price lower than, the same as, or above the brands that customers are also likely to consider?
In this pricing approach, it is imperative to conduct research on brands currently available in the country
market(s) as well as the likelihood that other competitors may enter and compete against us.

The third major pricing strategy, customer value-based pricing, integrates cost savings or
revenuegenerating benefits of the firm's product relative to the competition. Does our computer
require less electricity to operate? Does our car offer more mileage between oil changes than the
competition? Does our online banking platform offer services that eliminate the need to physically visit
branch locations? If so, how much cost savings do these differentiating benefits add up to, and can we
communicate these benefits in a way that customers are willing to pay for them? In some cases, an
innovation may offer time savings that can be converted to revenue-generating opportunities, such as
a tool that allows a mason to lay bricks faster, thus enabling them to take on more jobs: The revenue-
generating opportunities may be figured into a customer value-based price.

PRICING

The pricing graphs in CountryManager provide an excellent means for

assessing your team's price positioning in each country. Where are Allsmile's
toothpaste prices positioned relative to your competitors? Are you priced in
close proximity to the local and regional competitors? If so, can you and your
channel partners generate high enough margins? Have you created a strong
brand presence (check your BEI!) that you can leverage to allow you to set
your price at or above the multinational competitors? Watch the
CountryManager Pricing video for your region for more insights on cost- and
competition-based pricing.

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COUNTRYMANAGER SIMULATION
VIDEO

Comparing Competitive Landscapes Across Markets

Two additional pricing concepts are useful for considering international pricing options. True Economic
Value (TEV) and Perceived Value (PV) are common and useful ways of understanding a product or
service's comparative value. However, like brands and value propositions, they don't always cross
borders so well. TEV is defined as the cost of the next best alternative plus the value of the performance
differential. Or, if inverted, TEV equates to how much more a customer should be willing to pay for this
option compared to their current option once they recognize that the new option is better than what
they currently purchase and use.

When considering the "next best alternative" in the home market, it is most often assumed to be
referring to a similar, yet less effective or less efficient, alternative. On the surface, such an assumption
makes sense. For example, a hedge trimmer used by a gardener or homeowner that has a longer blade
or better ergonomics will clearly "perform better" than its smaller-bladed, less ergonomic competitors.
The performance features—longer blade and better ergonomics—can be assumed to make the
machine cut more quickly, thus saving the user time and consequently generating less fatigue for the
user and requiring less fuel.

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However, when introducing such new and improved technologies, especially in foreign markets where
the new product or service may be operated by a different set of users, the value of the "performance
differential" can be significantly different. For example, in more developed countries, homeowners
frequently purchase hedge trimmers and do their own landscaping. In contrast, homeowners in less
developed countries are often relatively wealthy within their nations, and they have low-cost laborers
such as gardeners who perform landscaping tasks. In this instance, if the operator is not the one who
buys the product, labor cost savings are not justified based on time savings. As such, much of the TEV
in the developed market evaporates in less developed economies.

PV is the willingness to pay for a product or service based on what the customer believes (i.e., what
they perceive) it to be worth. PV can be more or less than the TEV, and effective promotional and
marketing activities can and should affect the perceived value of a product or service.

Again, using the hedge trimmer example, we can see that PV may also change significantlywhen
crossing borders. Such a scenario might occur when a user in the home market, say the United States,
perceives the value of the machine to be more than just a functional tool to get a job done. Many
people in the United States like to work in their garden or do yardwork on their property. Being
physically active and maintaining a yard or garden has a recognized level of prestige that can be a source
of value to the user in many social circles. This social value can in turn increase the PV of the machine
itself. In a similar way, the US homeowner may view the trimmer's features as enabling them to
maintain or enhance their property value, thus offering economic value.

Contrarily, in countries where doing one's own physical labor tasks, even as a hobby, is not viewed
positively, the PV of the machine, along with any technical improvements that create a performance
differential, is reduced. In some countries, yardwork is not done for leisure or personal reward but
rather is delegated to others. Therefore, assuming that a customer will recognize and perceive technical
improvements to a product or service as more valuable is a risk in any environment. However, it is even
more complicated when crossing borders.

Needless to say, market research is recommended to better understand how value can be assessed and
integrated into pricing strategies when crossing borders, especially when cultures significantly differ.

International Price Escalation

Doing business internationally often leads to additional costs that should be incorporated into pricing
decisions. As you have seen in managing Allstar Brands, exporting products from a plant location to a
local market generates shipping and, where appropriate, tariff costs. If we were to use a distributor to
International Price Escalation
Doing business internationally often leads to additional costs that should be incorporated into pricing
decisions. As you have seen in managing Allstar Brands, exporting products from a plant location to a
local market generates shipping and, where appropriate, tariff costs. If we were to use a distributor to
help us get products from the plant location to the local market, we would also incur the cost of their
services (as you know, in CountryManager, we utilize our own marketing and sales subsidiaries rather
than foreign distributors).

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EXHIBIT 6.2 - INTERNATIONAL PRICE ESCALATION

As shown visually in Exhibit 6.2, it is often a challenge to price products abroad the same as we do at
home and still maintain sufficient margins. A product that costs $1.00 to manufacture (COGS, or cost of
golds sold) is priced to sell for $1.50 in the home market (33 percent margin: $1.00 cost / (1—0.33) =
$1.50). However, once shipping and tariff costs are added, the distributor's cost is now $2.00. If they
want to achieve the same 33 percent margin, they will price the product at $3.00. Thus, the price in the
imported market has doubled as a result of the additional shipping, tariff, and distributor costs!

Just as people get sick and need medical treatmentin established, economically
developed markets, so too do those in emerging markets. Although their
individual economies are small, the International Monetary Fund reports that
emerging markets collectively represent approximately 60 percent of the
world's GDP, with anticipated higher growth rates than developed markets.
As such, medical device manufacturers, such as companies that make
products for diagnosis (e.g. , ultrasound machines) and treatment (e.g.,
surgical supplies), are very focused on expanding their reach worldwide.

Two of their biggest obstacles are the settings in which healthcare products
are used and the prices healthcare service providers can afford to pay.
Although large, technology-intensive hospitals are common in developed
countries, medical facilities tend to be much smaller in emerging markets.
Furthermore, a higher percentage of patients get treated at rural clinics in
emerging markets. Thus large, stationary medical equipment does not
physically fit into existing healthcare delivery settings in many countries.
Similarly, hospitals and clinics in these countries have much smaller budgets
and thus cannot afford the sophisticated equipment found in developed
countries.

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Evaluating the Profitability of Pricing Options
We just saw how price escalation, due to the additional shipping, tariff, and distribution-related costs,
can affect target market pricing in a significant way. There is, however, another consideration that is
easily overlooked and potentially more dangerous still—understanding the margin expectations of
channel partners. Unlike customers in the home market, channel partners in the new market do not
usually know the expanding firm. This lack of familiarity alone can be a cause for the intermediary
raising their margin expectations. After all, why should they take a risk with a newcomer and not be
compensated for it? Furthermore, the distribution partners will also have to work to make the new-
tomarket brand successful.

This often leads to misperceptions as to appropriate and expected channel or distribution margins. For
example, an expanding firm, especially one with mature commercial relationships in its existing markets,
could manage to get the home market partner to accept lower margins per unit as together, their
volume grew. When the firm then compares the margins their channel partners earn in the home
market to the expectations of the target foreign market distribution partners, it is easy to understand
why there is often disappointment and concern. Financial predictions made with faulty margin
assumptions that do not properly account for realistic expectations can derail new product
introductions. It is important to understand that regardless of how good the negotiation skills of the
sales team may be, if the expanding firm does not recognize the likely costs of the new market, and of
matching or beating local competitors, there is little chance of success.

The task of understanding and properly planning for margin expectations is a different one from the
more standard budgeting issue of identifiable distribution costs. For example, allowances and listing or
slotting fees for retail placement are common and can usually be ascertained through local research.
Other examples of predictable market access costs are advertisement allowances and training programs
typically found in industrial distribution environments. Both of these examples, however, differ from
the market entry costs associated with gaining access to and obtaining coverage in channels for a newly
entering firm with no legacy distribution know-how or relationships. In summary, the expanding firm
should not assume that the target foreign market distributors will accept the prevailing home market
margins.

DO RETAILERS LIKE HIGH MANUFACTURER PRICES?

A common misconception for new market entrants is that they should price
their products and services lower than prevailing competitors in order to
attract customers away from incumbent brands. Although this may be an
effective volume strategy, it may not be the most profitable...or even
profitable at all.
Think about your channel partners in CountryManager. You need to convince
retailers to buy Allsmile toothpaste and stock it on their store shelves so
customers can find and purchase it when they shop. What motivates or
incentivizes retailers to partner with a manufacturer like Allstar Brands? Put
another way, what convinces them to take a brand they are currently selling
off of their shelves and replace it with Allsmile toothpaste?
Like manufacturers, retailers are hoping to find the optimal combination of
volume and price that will generate the highest contribution in each store.
When a manufacturer approaches them, how will retailers react to higher
prices than they are used to paying? Are there scenarios in which retailers will
embrace increased manufacturer prices? And are there any scenarios in
which retailers will be concerned about manufacturers whose prices are being
lowered?

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It is imnerative. to man the nrevailing channel margin snlit in the target foreign market. More. often
than Price positioning goes hand in hand with competition-based pricing. The goal is to position the
brand's price equal to, less than, or above that of key competitors. Diversified companies utilize this
approach to differentiate their brands and product lines, such as global hotel chains like Accor, Marriott,
and Wyndham. A Courtyard by Marriott hotel room is priced higher than a Fairfield by Marriott room
to signify the difference in customer experience. The specific prices also take into account the room
charges for comparably positioned competitive brands. Thus, when analyzing pricing options abroad,
managers often strive to establish the same relative positioning across their own and competing brands
in the local market.

It is also common that individual country markets, and in some cases city markets, have established
price ranges within market segments. A classic illustration can be found in the annual Economist
publication's Big Mac Index as illustrated in Exhibit 6.3. The Big Mac burger sandwich is available in
many countries around the world at local McDonald's restaurants. Although the composition and
ingredients are the same (standardized) across markets, an interesting question is whether Big Macs
are priced the same in all locations. In other words, taking exchange rates into account (discussed in
the next section of this chapter), should we expect a Big Mac in the United States to be priced similarly
to one in Brazil or China? And if not, what would explain the price differences?

EXHIBIT 6.3 - BIG MAC INDEX

The Economist tracks the average price of a McDonald's GLOBAL PRICE OF A BIG MAC AS OF
Big Mac across the globe to give you a feel for whether a
JANUARY 2021, BY COUNTRY (in US dollars)
currency is under- or over-valued.
Countr
switzerland

United

The Big Mac index is a way of measuring Purchasing Power Parity Euro
(PPP) between different countries. By converting the average Australia
national Big Mac prices to US dollars, the same goods can be Denmark
informally compared. The Big Mac can also be a good indicator New
for the individual purchasing power of an economy since it exists Uruguay
worldwide in a standard size, composition, and quality.
Singapore
Thailand
Photo Source: stock.com /
Czech Republic 7.29
Massimo Gio:hett,;

As it turns out, in 2020, these were the average Big Mac prices in USD in these three
countries:

Big Mac Prices

Table 6.1 :
Average
Country USD

United States $5.66

Brazil $3.98

China $3.46

Why do McDonald's franchises in Brazil and China price their Big Macs so much lower than their
counterparts do in the United States? The price differences reflect disparities in local labor, ingredient,
packaging, delivery, and advertising costs, often referred to as factor costs. Also noteworthy is the price
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a Big Mac will bear in Brazil and China relative to the United States due to differences in consumer
tastes and preferences and what they expect to pay for other meals they would consider for the same

It is imperative to map the prevailing channel margin split in the target foreign market. More often than
not, distributor margins are higher in the new international market than in the home market because
in the latter, high volume allows for lower margins. Therefore, the expanding firm should not assume
that they will be able to get channel support for new product or brand introductions at the prevailing
home market rates. Doing so can lead to a misstep when building financial models (such as break-even
analyses) based on margin expectations. However, accepting the reality of margin expectations can be
hard, especially when viewed from the lens of the powerful expanding firm. Specifically, an expanding
firm might have to accept that the distributing intermediary will receive a significantly larger margin
than channel partners in the home market. What can make such a scenario particularly difficult is that
both sides can feel they are giving up too much—which will ultimately damage the market launch.
Proper planning is essential.

Global Versus Local Pricing

Just as we covered product, service, branding, and channel standardization vs. customization
considerations in previous chapters, these debates are pertinent for pricing as well. Two key dimensions
surround global vs. local pricing: (1) price positioning in support of the overall branding strategy and
(2) pricing to meet local market conditions and expectations.

INTERNATIONAL MARKETER VIDEO INTERVIEW

FERNANDO JIMENEZ-DELGADO, FORMER HEAD OF MARKETING
AND BRANDS IBERIA AT ELECTROLUX

Electrolux is the world's second largest manufacturer of kitchen and laundry

appliances. In addition to the Electrolux brand, the company also markets
many other leading brands: AEG, Frigidaire, Tappan, Kelvinator, Gibson, and
Zanussi, among others. With manufacturing facilities on every continent
(except Antarctica!) and over 47 ,OOO employees worldwide, the company
generates over $14 billion in annual revenue.

Getting pricing right is critical to ensuring that Electrolux's profitability is

optimized as well as to obtaining the desired brand positioning. Watch
Fernando Jimenez-Delgado, PhD, former Head of Marketing and Brands Iberia,
Electrolux, as he discusses how he developed pricing strategies for the Iberia
region.

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VIDEO
COUNTRYMANAGER
INTERVIEW

Price positioning goes hand in hand with competition-based pricing. The goal is to position the brand's
price equal to, less than, or above that of key competitors. Diversified companies utilize this approach
to differentiate their brands and product lines, such as global hotel chains like Accor, Marriott, and
Wyndham. A Courtyard by Marriott hotel room is priced higher than a Fairfield by Marriott room Why
do McDonald's franchises in Brazil and China price their Big Macs so much lower than their counterparts
do in the United States? The price differences reflect disparities in local labor, ingredient, packaging,
delivery, and advertising costs, often referred to as factor costs. Also noteworthy is the price a Big Mac
will bear in Brazil and China relative to the United States due to differences in consumer tastes and
preferences and what they expect to pay for other meals they would consider for the same eating
occasion. The Big Mac example illustrates that the marketer cannot assume customers are willing to
pay the same amount for goods across markets.

MEDI-CULT: PRICING A RADICAL INNOVATION

Ideally, firms bring to market new, innovative products and services that
provide customers with benefits not found in existing offerings. In such
situations, marketing managers must carefully analyze a variety of pricing
strategies to ensure they strike the ideal balance of creating customer value
and providing economic value to the firm.

This is the situation facing Henrik Krogen and his colleagues at the Danish
biotech company Medi-CuIt. The company has developed an innovative new
fertility treatment. They have to evaluate options such as how to price the
IVM (In Vitro Maturation) product relative to existing offerings and whether
to adopt a global, standardized pricing approach or vary prices across
countries and regions. Help the Medi-CuIt team get their pricing strategy right.

Go to the case study at Medi-CuIt: Pricing a Radical Innovation.

Local Prices, Exchange Rates, and Consolidated Revenue

Even though customers today use credit, debit, and electronic payments with frequency, they still
expect to see prices denominated or stated in their local currency. In a few cases, such as the European
Union (EU), member countries have agreed to use a common currency, like the euro. Therefore, when
a company desires to begin selling products or services abroad, they must both establish prices in the
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local currency and, hopefully, repatriate local profits back to the home currency. The conversion from
one currency to another is facilitated by foreign exchange rates.

For many reasons, including financial reporting, tax management, and shareholder dividends, the firm
desires to have consistent and predictable conversion of the foreign market currency to its home market
currency. For example, although Michelin sells tires around the world, as a French-based enterprise, it
consolidates its financials in euros. The primary concern is that the local market currencies may devalue
and thus convert into fewer euros of revenues and contributions.

Foreign exchange rates fluctuate daily and are published daily in business publications and online. What
causes exchange rates to change? Common factors include differences in inflation rates, interest rates,
and current accounts (the balance of trade) between two countries. Fortunately, these are widely
known and monitored factors. However, a natural disaster (e.g., hurricane or typhoon), unexpected
government or regulatory change (e.g., military coup), or direct conflict between nations (e.g., border
dispute or human rights disagreement) may arise unexpectedly and have an immediate and potentially
lasting impact on exchange rates.

Let's return to Big Macs. Assume US $1.00 equals 6.48 Chinese Yuan Renminbi (CNY), meaning it takes
6.48 CNY to purchase US $1.00, and US $1.00 buys 6.48 CNY.

How does the US $5.66-priced Big Mac convert to CNY?

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dispute or human rights disagreement) may arise unexpectedly and have an immediate and potentially
lasting impact on exchange rates.

Let's return to Big Macs. Assume US $1.00 equals 6.48 Chinese Yuan Renminbi (CNY), meaning it takes
6.48 CNY to purchase US $1.00, and US $1.00 buys 6.48 CNY.

How does the US $5.66-priced Big Mac convert to CNY?

$5.66 x 6.48 CNY/USD = 36.68 CNY

Instead, we know the average Big Mac price in China equals US $3-46. This converts to 22.42 CNY ($3-
46 x 6.48 CNY/US$).

Of course, currencies can just as easily be converted in the other direction. If inflation in China increased
10 percent, and the Big Mac price was adjusted accordingly, what would be its US$ value?

22.42 CNY x 1.1 = 24.66 CNY

24.66 CNY / 6.48 CNY/USD = $3.81

As a US-based company, McDonald's must consolidate its revenues in US dollars. If 500,000 Big Macs
are sold in China, and franchisees pay McDonald's 5 percent of their sales revenue, what will be the
proceeds to McDonald's corporate?

24.66 CNY x 500,000 = 12,330,000 CNY Big Mac Revenue

12,330,000 x 5% = 616,500 CNY Big Mac Proceeds

616,500 CNY / 6.48 CNY/USD = US 95,139

Finally, what happens when the value of CNY changes relative to USD? For example, if interest rates rise
10 percent in the United States while remaining unchanged in China, the United States becomes a more
attractive location to foreign investors. As a result, the exchange rate will likely rise 5 percent. Put
another way, the USD appreciates 5 percent relative to the Chinese Yuan Renminbi. If the exchange rate
had been US $1.00 to 6.48 Chinese Yuan, the 5 percent currency appreciation would translate to US
$1.00 = 6.81 CNY. Now how much in proceeds is repatriated to the US headquarters?

616,500 CNY / 6.81 CNY/USD = US $90,529

The dollar's rise in value means it now takes more CNY to purchase USD. Thus, fewer dollars are
repatriated. Another way to think about this is that the Chinese Yuan Renminbi fell in value or
depreciated relative to the dollar, and as such, it now takes more CNY to buy US $1.00.

ARGENTINA CURRENCY DEVALUATION

What happens when an unexpected event creates a currency exchange rate

shift between two countries—one in which a company is marketing its
products or services, and one where it consolidates its earnings? This
happens anytime the exchange rate changes between the country where the
company is headquartered and another where it is generating revenue.
In the Argentina Currency Devaluation case-in-brief, you can assess how an
unforeseen political conflict causes instability in the Argentine peso and how
it might affect Allstar Brands' ability to repatriate profits in USD.

Go to the case study at Argentina Currency Devaluation.

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Price Sensitivity
Another important concept for the global marketing manager is price sensitivity. This is the extent to
which consumer demand is sensitive to or influenced by the product or service price. Often, price
sensitivity is taken into account when considering price changes. How much might we expect sales to
go up if we lower prices? How many fewer units will we sell if prices are increased? Of course, if we can
increase prices with little to no offset in volume, that translates into higher margins and profits.
Unfortunately, this is not a scenario we experience very often!

In most countries and in most years, inflation occurs. This means that factor costs such as labor,
materials, and professional services, which are all required to do business, increase year to year. If costs
rise, we hope to raise prices accordingly to protect our margins. This is referred to as "passthrough"
pricing—that is, we hope to pass our cost increases on to the customer. However, this may not be
feasible if price sensitivity is high, lest we risk seeing a drop in demand. The question then becomes:
which is strategically and economically more important in the local market—maximizing unit margins
or maximizing unit volumes? In the end, the best answer is the one, or combination, that enables the
firm to maximize profitability.

PRICING AND FOREIGN EXCHANGE RATES

A US manufacturer is exporting small appliances to European markets. Until

recently, it sold all of its products through distributors. Each distributor sets
the prices in local currency for each market. To gain more control over their
international operations, the company has recently established its own
European sales and marketing subsidiary. One of the major challenges facing
the new European marketing manager is how to manage local prices when
exchange rate changes occur.

Complete the Pricing and Foreign Exchange Rates analytic assignment to help
the manager determine how to manage prices for products sold in Germany
under different exchange rate scenarios.

Summary
Setting the right price is critical to international financial success. However, as we have seen, pricing
decisions are complex. The marketer benefits greatly from research on landed costs, competitive
offerings, and customers' assessments of the value of their offerings. As the saying goes, "chance favors
the prepared mind." Doing the necessary groundwork to analyze the 5 Cs—company offerings,
competition, customers, collaborators, and context/culture—will pay real dividends when making
pricing decisions.

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