International Pricing strategies & Consumers Observations

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As consumers we believe that German cars are the most expensive and provide the best service among automobiles, and we are willing to pay the highest prices for them. We also believe or expect to have the most innovated products from the US. On the other hand, we expect to have low quality and non-expensive goods from China. But how do pricing strategies affect our outlook? And can we change these observations?

Success for any company is measured by its profit, and profit is restrained by its pricing strategy. Pricing strategies are very critical when entering any market. It is what demonstrates how the product is going to be presented and how consumers are going to recognize this product. It seems like China is approaching an economic to a penetration pricing strategy seeking a bigger market share. That’s why their products are seen as low priced and low quality. There production cost is low, because of low labor cost and the type of products developed. On the other hand, Germany is applying a premium strategy offering high quality and high prices seeking profit and reputation. They charge high prices because of their high labor costs and brand name. Whereas the US is impending a skimming strategy, presenting good quality and high prices for goods and services seeking profit. But how do these factors affect international pricing for goods and services?

In addition to the pricing strategies mentioned we have another important factor, which is the geographical factor. The geographical factor allows companies to implement these pricing strategies in three different ways. First, polycentric meaning the company charges one price for its product all over the world. This is seen mostly by companies that offshore to make sure there production cost is low. Chinese products would be a good example for this strategy. Second, ethnocentric strategy, where the company charges one price for its product, however, the markup is related to the country’s specific data. What affect the price of the product could be taxation, tariffs, price controls, and inflation… Finally, the geocentric strategy allows companies to set up a region price for the company’s products. Income levels, competition and customers’ culture mostly affect this strategy.

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Recent drop in Oil prices; a coincidence or a strategy?

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The crude oil price collapsed in the past couple of months to a 4 year low of approximately $74/barrel. This price drop raised many questions about who is behind this price drop? Is it just simple supply and demand? Or is there sides that are benefiting from this price ?

According to Bloomberg, Saudi Arabia is the country to blame for this price drop.  “The world’s largest oil exporter is trying to protect its market share by keeping its production steady even as prices hit a four-year low. Energy producers in turmoil, such as Russia, Iran and Venezuela, stand to lose the most, U.S. shale drillers and other Saudi rivals will suffer and industrialized importing countries including Japan will get a boost from cheaper prices.”  However, Saudi Arabia has a price of $93/barrel in it’s forecasted budget for 2014. Which means that any price lower than that might cause a deficit on the long run.

The break-even point for other gulf countries according to some reports are $75/barrel in Kuwait, $70/barrel in UAE, and $63/barrel in Qatar.  However, these countries and others among OPEC are producing oil by the same pace exceeding the 30 million barrels/day ceiling by almost 700,000 barrels a day. This excess capacity can not be the reason behind the price drop, but there is some explanation to it. Countries like Algeria, Libya, and Iraq are back to production this year after the recent events that happened in each country.  An article in MarketWatch included ” Analysts at Goldman Sachs said a cut in OPEC production to 29.5 million barrels a day or less would likely be sufficient to push Brent prices back to a range of $85 to $90 a barrel.”  this article was published just two days before the “BIG MEETING” in the 27th of November.

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The article goes on “The bad news for OPEC is that even if members do agree to a significant cut, it would only encourage U.S. and other North American producers to keep pumping, while also providing them with a further opportunity to hedge against future price falls, the Goldman analysts wrote.”

Although it appears that the US might not have any hand in this, Financial Times argues that there is a huge benefit to the US. The oil production suffered and will continue to suffer from this price drop, but lower oil prices will eventually benefit the US economy.  Jason Bordoff, a former energy official with President Obama’s administration, now director of the Center on Global Energy Policy at Columbia University, said: “For the US economy and US consumers, lower oil prices are a great thing. They will create winners and losers in different places. There is a downside. But the upside is greater than the downside.”

The following video explains the geopolitical impact of oil prices falling below $90/barrel.

 

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How can hedging reduce the risk?

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Global companies are always exposed to the risk of price changes. Whether this risk is associated with their exports and imports or with the changing prices of commodities. Hedging against foreign exchange risk is one of the most common hedging tools used. This is because companies that mostly deal with exports and imports from different areas around the world are exposed to volatile currency exchange rates. When a company deals with long-term import or export contracts, it becomes risky to make payments in a foreign currency. If the rate of that currency drops before the payment is thru, the corporation may endure a large loss.

Lets take an example of a car dealership that imports cars from Europe, Japan and South Korea. All countries deal with different currencies that rates change daily with the dollar rate. Lets say the US company imports 100 BMW cars every 3 months from Germany at a price of 40,000 euros each. This means the total net wroth of the imported cars is 4,000,000 euros. The dealership must pay the German manufacturer in Euros. However, how much should the dealership exchange dollars to euros? The price depends on euro daily prices. In order for the dealership to maintain a stable price or at least reduce the risk since it is a long term contract,  it should hedge. Hedging against foreign exchange can be done through short-term contracts “spot” or long-term contracts “derivatives”, which decreases the exposure to this type of risk.

Another example of hedging against commodity risk is fuel hedging. Fuel is a commodity that is affected generally by supply, demand, gas production levels…etc. Although we as small consumers do not feel this change, airline companies are highly affected. Large fuel consuming companies such as airline companies’, need to hedge as a protection against volatile fuel prices. As explained in the video below, Airline companies’ cost is from fuel itself. Because airlines know how many tickets they will sell in advance depending on the season and holidays they manage price risk in fuel by hedging fuel prices relative to the rates they want to charge clients.

http://www.youtube.com/watch?v=T-MCOH9HmxI

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Will Third Party Ownership Ban by FIFA affict players prices ?

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According to a press release by FIFA, in September 24th, third party ownership is to be banned over the next period.  Allowing for a transition period to settle the ongoing contracts. Third-party ownership, also known as TPO,  refers to the ownership of a professional player’s economic rights or some percentage of it by a third party other than the player or his club such as sport management companies, player agents, or any other investment firms in order to receive a share of the value of any future transfer of that player.

Third-party ownership is most commonly used in South America where clubs struggle to finance its operations and struggle to have an adequate financial resources to meet the club’s economic needs in a highly competitive industry where most revenues for such clubs are made by selling a star player every once in a while to one of the big European football clubs.

The reason behind the ban is that third-party ownership have raised player’s prices and this is against fair sporting competition where money should not be the only motivation according to some sporting community officials who are with banning this practice.

Although third-party ownership had delivered so many benefits for financially struggling clubs in terms of training and accommodating their young players, the question remains whether this move is going to affect players prices negatively or positively on the long run. Also, what would be the effect on the clubs who are relaying on this practice as the main revenue stream of their clubs  where sponsor-ships, TV rights, and memberships are not enough to meet the economic needs of such clubs.

Valued at $1.3 billion, the already banned practice in England and France, third-party ownership will surly impact the next transfer market prices next January and will also have a long term impact in the industry.

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Can companies ensure the same prices globally?

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Global prices are affected mostly by labor, taxes, currency exchange, competition  costs of goods sold and many other factors. But it differs from industry to another and from country to another. Starbucks, McDonalds, automobile companies, cell phones… for example charge various amounts for the same product in different countries. But I always wondered why don’t they figure out a strategy that ensures consumers the same price for the same product anywhere. Why is it difficult to come up with such a strategy? Aren’t companies shifting to outsourcing these days, then the cost of production should be the same. But why do we still see this difference in prices in different countries? The answer is simple even if they outsource, they still have to deal with many factors other than production cost. In the previous blog we explained how taxes were the main affect  on iPhone prices globally, but this is not always the case.


From the video we can see many explanations on the different prices Starbucks charges. In India for example they managed to have prices low because they source there coffee beans locally. The reason companies do that is because some country wages are not high as others so they manage to lower there production cost in order to enter this market and grab a market share.

Another factor that drew my attention and many of us sometimes don’t bare it much attention  is competition.  Companies often struggle with when dealing with global pricing. Starbucks for example charges a very cheap amount for a cup of coffee in Thailand “42% less than the same cup in the US”; this is due to the high competition on lowering there prices in this industry. On the other hand, Starbucks charges a high amount for the same cup of coffee in Ireland “9% higher than the US”; this is because the company deals with an oligopolistic market. Meaning that the market has small players that set the prices they wish. From all the cases we discussed and seen in the video Starbucks and any global company cannot charge a premium amount globally. This is because if they go higher or lower they might loose their market share and net profit in this market. Although competition is only one factor and is not related to the financials, but from the previous examples we can see how it largely affected Starbucks prices.

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