Environmental influences on pricing decisions are discussed like currency fluctuations, exchange rat clauses, effect of inflation , government policies, competition etc.
2. ENVIRONMENTAL INFLUENCES ON PRICING
DECISIONS
Currency Fluctuations
Exchange Rate Clauses
Pricing in Inflationary Environments
Government Control and Subsidies
Competitive Behavior
Price and Quality Relationships
4. CURRENCY FLUCTUATIONS
Price fluctuations due to currency.
Two extreme positions
One is to fix the price of products in country
target market
Fix the price of products in home country
currency
5. CURRENCY FLUCTUATIONS
Any appreciation or
depreciation of the value of
currency in the country of
production will lead to loss
and gain of seller.
Any appreciation or
depreciation of the home
country currency will result
in price increase or
decrease for customers with
no immediate
consequences for the seller.
Fix the price of products in
country target market
Fix the price of products in
home country currency
In practice pricing decisions should be
Consistent with company’s overall business and
marketing strategy
6. CURRENCY FLUCTUATIONS
Currency
Fluctuation
(Exporter
Country)
Resulting in
Appreciation in
the value of
currency of a
country
Accepting
currency
fluctuation s
lead to
unfavorable
impact on
operating
margin
Companies
double their
effort to
reduce costs
Short run: Lower margin enable the company to hold prices in target
market.
Long Run: Driving down of the cost helps the companies to improve its
operating margins
7. STRATEGIES UNDER VARYING CURRENCY
CONDITIONS
Stress, price benefits
Expand product line and add more
costly features
Shift sourcing and manufacturing
to domestic market
Exploit export opportunities in all
markets
Speed repatriation of foreign-
earned income and collections
Minimize expenditures in local,
host country currency
Buy needed services (advertising,
insurance, transportation
Engage in non-price competition by
improving quality, delivery, and after-
sale service
Improve productivity and engage in
vigorous cost reduction
Shift sourcing and manufacturing
overseas
Give priority to exports to relatively
strong-currency countries
Keep the foreign-earned income in
host country, slow collections
Maximize expenditures in local, host
country currency
Buy needed services abroad and pay
for them in local currencies
When Domestic Currency is
WEAK
When Domestic Currency is
STRONG
Source: S. Tamer Cavusgil, “Unraveling the mystique of export pricing,” Chapter 71 in Sidney J. levy, George R. Frerichs and Howard l. Gordon
(eds), The Dartnell Marketing Manager’s Handbook (Chicago: Dartell Corporation, 1994), Figure 2, p. 1362.
8. CURRENCY FLUCTUATIONS
Companies with a strong competitive
market position
Price increase can be passed to
customers without significant decrease in
sales volume.
9. CURRENCY FLUCTUATIONS
In more competitive market position
Companies in strong currency country will
absorb any price increase by maintaining
international market prices at pre-
revaluation levels.
The manufactures and distributor work together to
maintain the market share in international
markets.
10. CURRENCY FLUCTUATIONS- DISTRIBUTOR
AND MANUFACTURER ALTERNATIVES
One of them or both may choose to take a lower
profit percentage.
The distributor may purchase more product to
achieve volume discounts
Maintaining leaner inventories can also be done if
the manufacturer can provide just in time deliver
These approaches help in remaining competitive in
markets in which currency devaluation in the importing
country is a price consideration.
11. CURRENCY FLUCTUATIONS
If a country’s currency weakens relative to
its trading partner currency
A producer in weak currency country can cut the
export prices to hold the market share or leave
prices alone to get healthier profit margins.
13. EXCHANGE RATE CLAUSES
A contract between parties in two countries
leads to problems when there are exchange
rate fluctuations.
Exchange rate clauses are designed to protect
the buyer and seller from unforeseen large
swings in currencies.
An exchange rate clause allows the buyer and seller
to agree to supply and purchase at fixed prices in
each company's national currency.
An exchange rate fluctuation within a specified range do not affect
the pricing agreement that is spelled out in exchange rate clause.
14. EXCHANGE RATE CLAUSES
Basic Design of Exchange Rate Clause
Review exchange rates periodically
Compare the daily average during the review
period and the initial base average
If the comparisons produces fluctuations that are
outside the agreed range of fluctuation an
adjustment is made to align prices with the new
exchange rate.
Fluctuation above 10 % lead to renegotiation of prices.
16. PRICING IN INFLATIONRY
ENVIRONMENT
Inflation requires a periodic price adjustments
These adjustments are necessitated by rising
costs that must be covered by increased selling
prices.
In an inflationary environment
Maintenance of operating profit margins
FIFO: inappropriate for an inflationary situation
LIFO: Appropriate for inflationary environment
18. GOVERNMENT CONTROLS AND SUBSIDIES
Government actions limits the freedom of
management to adjust prices, the
maintenance of margins is definitely
compromised.
Country under severe financial difficulties
Government officials are under pressure to take
some type of action
Use of broad or selective price controls: When selective
controls are imposed foreign companies are more
vulnerable to control than local business.
19. GOVERNMENT CONTROL
Government control can also take the form
of prior cash deposit requirements imposed
on importers.
This is a requirements that a company has to tie
up funds in the form of a non interest bearing
deposit for a specified period of time it wishes to
import products.
Such requirements create an incentive for a company to
minimize the price of the imported product ; lower price
means smaller deposits
20. OTHER GOVERNMENT RESTRICTIONS
Profit transfer rules
High transfer price paid for imported goods by
an affiliated company can be interpreted as a
device for transferring profits out of a country.
Government subsidies can also force a
company to make strategic use of sourcing
to be price competitive.
22. COMPETITIVE BEHAVIOR
If competitors do not adjust their price in response
to rising costs, management- even if acutely aware
of the effect of rising costs on operating margins-
will be severely constrained.
