Environmental influences on pricing decisions


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Environmental influences on pricing decisions are discussed like currency fluctuations, exchange rat clauses, effect of inflation , government policies, competition etc.

Environmental influences on pricing decisions

  2. 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. 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. 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. 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. 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. 8. CURRENCY FLUCTUATIONS Companies with a strong competitive market position  Price increase can be passed to customers without significant decrease in sales volume.
  9. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.