Firms choose to implement international strategies to create more value for their company by exploiting economies of scope. Value can be created for a company through the following examples: gaining access to new customers and gaining access to low-cost production. These are just a couple of the many factors of an international strategy that have a direct influence on the global pricing strategy of a firm.
Firms that plan on entering international markets to gain access to new customers for their current products should only do so if there is a demand for those products. In order to ensure that there is demand they need to conduct market research to find out the dynamics of the particular market. Assuming there is demand for their products they should choose a viable entry strategy that fits with their overall company strategy and culture. The firm should enter the market in order to capitalize on the demand and to increase their revenue. Global pricing strategy fits into this particular international strategy for a couple of reasons. First, with the increased overall revenue for their company they would have more flexibility to localize their products and prices rather than have standardized products and prices. Also, with more flexibility the firm could choose different pricing strategies to better compete with its competitors in the market. Most importantly, the company is adding value to itself by increasing their customer reach.
Another valuable aspect of international strategy is something that we briefly talked about before, gaining access to low-cost production. If a firm is able to produce their products more efficiently and effectively in a foreign market then they would be able to substantially reduce costs. Lowering the production costs of a firm can have a direct impact on pricing. The lower the production costs mean the more competitive a firm can be with their global pricing strategies.
Ultimately, firms that have an international presence are trying to create value for their company. This value can be spread out through many functions of a firm. Specifically for global pricing the value can increase flexibility for their global pricing strategy.
The article says that hundreds of millions of dollars are spent by companies to be global sponsors of the Olympics. Most companies aren’t even recognized by the general population as sponsors; only a select few like Coca-Cola get noticed. Other than the top companies who get noticed a company usually doesn’t get sufficient returns from being a sponsor. The unsuccessful companies are starting to realize that it might be a waste of money to keep on sponsoring the Olympics. The Olympics are truly global games which is why companies sponsor it. The major benefit of sponsoring the Olympics is the global exposure and reach that the games provide.
The less successful companies need to look at their overall global marketing strategy and see how the Olympics fit in with it. Even further, they need to take a look at their global pricing strategy to see if they are able to sustain their current strategy even though they are losing money by sponsoring the Olympics. It may very well be worth it for a company to sponsor the Olympics and lose money, especially if they are trying to increase their global brand awareness. It all depends on the goals of the company, but more importantly it depends on their flexibility.
McDonald’s is an example of a truly global company that needs to have many strategies in place in order to sustain a global competitive advantage. Particularly, this blog will dive into their global pricing strategy and how they’re able to be so successful in the highly competitive global market.
Prior to getting into the global pricing strategy of McDonald’s it would be wise to briefly discuss about their structure and organization. Most of McDonald’s restaurants are owned and operated by franchises. This means that McDonald’s makes most of its money through royalties, franchisee fees, and rent. There are McDonald’s owned and operated stores as well. Quality control is a huge issue for global franchises especially when there is a large distance between the home company and the foreign franchise. McDonald’s found a way to combat this issue by setting up many regional McDonald’s’ that are in charge of certain markets. McDonald’s has a very standardized menu that facilitates low costs. However, these regional franchise headquarters are able to make decisions that can adapt specific products to fit the needs of the consumers in their markets. That was just a brief synopsis of the McDonald’s organizational structure. It’s not the whole story, but this blog is supposed to be about global pricing strategies so it’s time to get back on topic.
An interesting topic to discuss McDonald’s global pricing strategy would be to look at the Big Mac Index that has been used as an aid to determine PPP between currencies for many years. There are McDonald’s locations in over 100 countries and most of them have the Big Mac on their menu. The price of each Big Mac is not the same in every country. For example, a Big Mac in Switzerland in 2010 was around 6.20 US dollars and in Thailand for the same time period a Big Mac was around 2.20 US dollars. As discussed in previous blogs, there are many factors that play a role in global pricing strategies. The factors affecting McDonald’s global pricing strategy include exchange rate differences, government regulations, economic climate, and the cost of living to name a few. For example, the minimum wage in Switzerland is much higher than the minimum wage in Thailand which is one of the reasons why they are able to charge around $4 more for a Big Mac. The number one factor affecting the variances in prices is the exchange rate differences which are directly related to a markets economic climate. In addition to the Big Mac index, McDonald’s joint-ventures and regional franchises play a large role in determining what the price of their products should be. This is vital to their strategy because they are actually in the market where they are selling products and have much better insight about their markets than an executive back in the United States who may not know specifics about foreign markets.
McDonald’s is able to sustain a competitive advantage in the global market because they have an extremely viable global pricing strategy.
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We have discussed what a global pricing strategy is and the difficulties that are inherent with a global pricing strategy. This post will discuss the importance of having a viable global pricing strategy. Most importantly it is essential for a firm to have a viable global pricing strategy because it directly affects their bottom line. Firms have to take into consideration all of the difficulties and costs associated with operating internationally. There are many global pricing strategies to choose from, so firms need to choose one that is aligned with their mission, goals, and objectives. No matter which strategy a firm chooses their overall costs will be higher.
If a firm enters into a domestic market with a price penetration strategy than they will have to keep costs minimized in order to make a profit. That should not be too difficult because they can use economies of scale and efficient distribution channels to do so. However, if a firm enters into a foreign market with a global price penetration strategy they will have to keep costs even lower if they want to make a profit. This is because of the additional costs that a company incurs when exporting their goods to a foreign market. In addition to the exporting and transportation costs the firm will have to price their good lower than any other good in their market if they want to gain a lot of market share. They are at a distinctive disadvantage to the domestic producers because their costs are higher and prices lower thus making their margin smaller. It is important for a firm to know exactly how they want to price their goods or services compared to their competition to know what strategy they should pursue.
That was just a general example of what it would look like for a firm to choose penetration pricing as their global pricing strategy. As you can see, their margins were squeezed because of the higher costs and lower prices of their products. However, it is possible for a firm to combat these higher costs by producing their products in the foreign country. They could set up their own manufacturing plant or buy a company that already exists in the foreign market. After doing a PESTLE analysis of the foreign country they would be able to know if moving production there would even be a good idea. If in fact it is a viable marketplace to manufacture their goods then they should do it. This would allow them to have better competing prices, directly affect their global pricing strategy, and most importantly improve their bottom line.
There are many factors that go into having a good global pricing strategy, and there is no one right answer for the best one. In fact, firms need to have different global pricing strategies for different foreign markets because of all the political, economic, technological, cultural, and legal differences between countries. Remember, the bottom line will be directly affected depending on the global pricing strategy used so do the research and due diligence necessary before implementing a new strategy!
Stay tuned for our next blog!
Understanding Global Pricing Strategies
A pricing strategy can be defined as a process companies use to price their services or products. The majority of companies, regardless of size, base the price of their products on labor, advertising, and production expenses. Then they add on a certain amount of money depending on the profit they are seeking per unit sold. There are many different pricing strategies, such as price skimming, penetration pricing, discount pricing, and competitive pricing. Price skimming is when the price of a product or service is initially set very high, and then it decreases over time. Penetration pricing is when the price of a product or service is set very low to gain market share. Discount pricing is similar to penetration pricing, but instead of always keeping the prices low discount prices only keep low prices for a certain amount of time. Competitive pricing is when a company sets the price of its product or services based on what the competition is selling their products for. Choosing the correct strategy is essential for the brand of a company. For example, a high quality brand name such as Ferrari or Lamborghini would never choose penetration pricing as their strategy because then they would lose their status of being very high class and high quality. On the contrary, a new company selling bars of soap may want to choose penetration pricing as their strategy to initially attract a large portion of customers who are price sensitive and would switch over brands merely based on price.
Pricing strategies are already very complex, but when a company wants to do business in a foreign market they need to have a global pricing strategy. A global pricing strategy can be defined the same as a pricing strategy then add in export costs, currency differences and fluctuations, legal and political issues within the foreign market, the economy of the foreign market, and tariffs. There are a plethora of factors that are involved in the decision making process of a company’s global pricing strategy. The same pricing strategies are relevant in foreign markets (penetration pricing, competitive pricing, etc.), however the difference is companies need to be more cost effective and efficient in order to be able to compete in the foreign markets due to the extra costs added by the additional factors.
Having well-planned global pricing strategies are critical for companies that operate at any capacity in markets other than in their home market. It is essential for companies to perform an analysis of the foreign markets (PESTLE analysis or something similar) so they can familiarize themselves with the new market. This will give them insight into the new foreign market regarding everything ranging from political issues to environmental issues. As a side note, a PESTLE analysis is also a good place to start to find out if the new market will even be a viable option for the company.
This blog post was a crash course in understanding global pricing strategies. Stay tuned for our next blog discussing the difficulties of global pricing.