Product and pricing decisions

Transcription

1 11 Product and pricing decisions Contents 11.1 Introduction 11.2 The dimensions of the internationa product offer 11.3 Deveoping internationa service strategies 11.4 The product communication mix 11.5 Product positioning 11.6 Brand equity 11.7 Branding decisions 11.8 Impications of the Internet for coaboration with customers on product decisions 11.9 Green marketing strategies Factors infuencing internationa pricing decisions Internationa pricing strategies Impications of the Internet for pricing across borders Summary Case study 11.1 Zippo Manufacturing Company Learning objectives After studying this chapter you shoud be abe to do the foowing: Discuss the infuences that ead a firm to standardize or adapt its products. Expore how internationa service strategies are deveoped. Discuss the chaenge of deveoping new products for foreign markets. Expain and iustrate the aternatives in the product communication mix. Define and expain the different branding aternatives. Expain what is meant by a green product. Discuss aternative environmenta management strategies. Expain how interna and externa variabes infuence internationa pricing decisions. Expain why and how prices escaate in export seing. Discuss the strategic options in determining the price eve for a new product. Expain the necessary saes voume increase as a consequence of a price decrease. Expain what is meant by experience curve pricing. Expore the specia roes and probems of transfer pricing in goba marketing. Discuss how varying currency conditions chaenge the internationa marketer. 301

2 Part IV Designing the goba marketing programme 11.1 Introduction The product decision is among the first decisions that a marketing manager makes in order to deveop a goba marketing mix. This chapter examines product-reated issues and suggests conceptua approaches for handing them. Aso discussed are internationa brand (abeing) strategies and service poicies. The pricing decision must be integrated with the other three Ps of the marketing mix. Price is the ony area of the goba marketing mix where poicy can be changed rapidy without arge direct cost impications. This characteristic, pus the fact that overseas consumers are often sensitive to price changes, resuts in the danger that pricing action may be resorted to as a quick fix instead of changes being made in other areas of the firm s marketing programme. It is thus important that management reaizes that constant fine-tuning of prices in overseas markets shoud be avoided and that many probems are not best addressed by pricing action. Generay, pricing poicy is one of the most important yet often east recognized of a the eements of the marketing mix. The other eements of the marketing mix a ead to costs. The ony source of profit to the firm comes from revenue, which in turn is dictated by pricing poicy. In this chapter we focus on a number of pricing issues of specia interest to internationa marketers The dimensions of the internationa product offer In creating an acceptabe product offer for internationa markets it is necessary to examine first what contributes to the tota product offer. Koter (1997) suggests five eves of the product offer that shoud be considered by marketers in order to make the product attractive to internationa markets. In the product dimensions of Figure 11.1 Figure 11.1 The three eves of a product 302

3 Chapter 11 Product and pricing decisions we incude not just the core physica properties, but aso additiona eements such as packaging, branding and after-saes service that make up the tota package for the purchaser. We can aso see from Figure 11.1 that it is much easier to standardize the core product benefits (functiona features, performance, etc.) than it is to standardize the support services, which often have to be taiored to the business cuture and sometimes to individua customers, i.e. personaization (Vesanen, 2007) Deveoping internationa service strategies We have seen from the definition of a product that services often accompany products, but products are aso an increasingy important part of our internationa economy in their own right. As Figure 11.2 shows, the mix of product and service eements may vary substantiay. Characteristics of services Before considering possibe internationa service strategies it is important to consider the specia nature of goba service marketing. Services are characterized by the foowing features: Intangibiity. As services such as air transport or education cannot be touched or tested, the buyers of services cannot caim ownership or anything tangibe in the Figure 11.2 Scae of eementa dominance Source: Czinkota and Ronkainen, Internationa Marketing, 4th edn, (1995), p

4 Part IV Designing the goba marketing programme traditiona sense. Payment is for use or performance. Tangibe eements of the service, such as food or drink on airines, are used as part of the service in order to confirm the benefit provided and to enhance its perceived vaue. Perishabiity. Services cannot be stored for future use for exampe, unfied airine seats are ost once the aircraft takes off. This characteristic causes considerabe probems in panning and promotion in order to match suppy and demand. To maintain service capacity constanty at eves necessary to satisfy peak demand wi be very expensive. The marketer must therefore attempt to estimate demand eves in order to optimize the use of capacity. Heterogeneity. Services are rarey the same because they invove interactions between peope. Furthermore, there is high customer invovement in the production of services. This can cause probems of maintaining quaity, particuary in internationa markets where there are quite different attitudes towards customer service. Inseparabiity. The time of production is very cose to or even simutaneous with the time of consumption. The service is provided at the point of sae. This means that economies of scae and experience curve benefits are difficut to achieve, and suppying the service to scattered markets can be expensive, particuary in the initia setting-up phase. Goba marketing of services There are some specific probems in marketing services internationay. There are particuar difficuties in achieving uniformity of the different marketing parameters in remote ocations where exerting contro can be especiay probematic. Pricing, too, can be extremey difficut, because fixed costs can be a very significant part of the tota service costs. Consumers abiity to buy and their perceptions of the service they receive may vary consideraby between markets, resuting in significanty different prices being set and profits generated. Moreover, preserving customer oyaty in order to obtain repeat business may prove difficut because of the need to provide personaized services. Categories of service A products, both goods and services, consist of a core eement that is surrounded by a variety of optiona suppementary eements. If we ook first at the core service products we can assign them to one of three broad categories depending on their tangibiity and the extent to which customers need to be physicay present during service production. These categories are presented in Tabe Categories of suppementary service The core service provider, whether a bed for the night or a bank account, is typicay accompanied by a variety of suppementary eements, which can be grouped into eight categories (Loveock and Yip, 1996): Information. To obtain fu vaue from any good or service, customers need reevant information about it, ranging from schedues to operating instructions, and from user warnings to prices. Gobaization affects the nature of that information (incuding the anguages and format in which it is provided). New customers and prospects are especiay information hungry and may need training in how to use an unfamiiar service. Consutation and advice. Consutation and advice invove a diaogue to probe customer requirements and then deveop a taiored soution. Customers need for 304

5 Chapter 11 Product and pricing decisions Tabe 11.1 Three categories of service Categories of service Characteristics Exampes (service provider) Possibiities of wordwide standardization (hence utiizing economies of scae, experience effects, ower costs) Peope processing Customers become part of the production process. The service firm needs to maintain oca geographic presence. Education (schoos, universities). Passenger transport (airines, car renta). Heath care (hospitas). Food service (fast-food, restaurants). Lodging service (hote). No good possibiities: because of customer invovement in production many oca sites wi be needed, making this type of service very difficut to operate gobay. Possession processing Invoves tangibe actions to physica objects to improve their vaue to customers. The object needs to be invoved in the production process, but the owner of the object (the customer) does not. A oca geographic presence is required. Car repair (garages). Freight transport (forwarding agent). Equipment instaation (e.g. eectrician). Laundry service (aunderette). Better possibiities: compared to peope-processing services, this invoves a ower degree of contact between the customer and the service personne. This type of service is not so cuture sensitive. Informationbased services Coecting, manipuating, interpreting and transmitting data to create vaue. Minima tangibiity. Minima customer invovement in the production process. Teecommunication services (teephone companies). Banking. News. Market anaysis. Internet services (producers of homepages on the WWW, database providers). Very good possibiities: of wordwide standardization from one centra ocation (singe sourcing) because of the virtua nature of these services. advice may vary widey around the word, refecting such factors as eve of economic deveopment, nature of the oca infrastructure, topography and cimate, technica standards and educationa eves. Order taking. Once customers are ready to buy suppiers need to make it easy for them to pace orders or reservations in the anguage of their choice, through teecommunications and other channes, at times and in ocations that are convenient to them. Hospitaity: taking care of the customer. We-managed businesses try, at east in sma ways, to treat customers as guests when they have to visit the suppier s faciities (especiay when, as is true for many peope-processing operations, the period extends over severa hours or more). Cutura definitions of appropriate hospitaity may differ widey from one country to another, such as the toerabe ength of waiting time (much onger in Brazi than in Germany) and the degree of persona service expected (not much in Scandinavia, but avish in Indonesia). Safekeeping: ooking after the customer s possessions. When visiting a service site customers often want assistance with their persona possessions, ranging from car parking to packaging and deivery of new purchases. Expectations may vary by country, refecting cuture and eves of affuence. Exceptions. Exceptions fa outside the routine of norma service deivery. They incude specia requests, probem soving, handing of compaints/suggestions/ compiments, and restitution (compensating customers for performance faiures). Specia requests are particuary common in peope-processing services, such as in the trave and odging industries, and may be compicated by differing cutura norms. Internationa airines, for exampe, find it necessary to respond to an array of medica and dietary needs, sometimes refecting reigious and cutura vaues. 305

6 Part IV Designing the goba marketing programme Probem soving is often more difficut for peope who are traveing overseas than it woud be in the famiiar environment of their native country. Biing. Customers need cear, timey bis that expain how charges are computed. With aboition of currency exchange restrictions in many countries bis can be converted to the customer s home currency. Hence currencies and conversion rates need to be carified on biing statements. In some instances prices may be dispayed in severa currencies, even though this poicy may require frequent adjustments in the ight of currency fuctuations. Payment. Ease and convenience of payment (incuding credit) are increasingy expected by customers when purchasing a broad array of services. Major credit cards and traveers cheques sove the probem of paying in foreign funds for many retai purchases, but corporate purchasers may prefer to use eectronic fund transfers in the currency of their choice. Copyright 1996, by the Regents of the University of Caifornia. Reprinted from Caifornia Management Review, vo. 38, no. 2. By permission of the Regents. Not every core service is surrounded by a eight suppementary eements. In practice the nature of the product, customer requirements and competitive pressures hep to determine which suppementary service must be offered. In many cases the provider of the suppementary services can be ocated in one part of the word and the services deivered eectronicay to another. For exampe, order taking/reservations and payment can be handed through teecommunication channes, ranging from voice teephone to the Web. As ong as appropriate anguages are avaiabe many such service eements coud be deivered from amost anywhere. In summary, the information-based services offer the best opportunities of goba standardization. The two other types of service (peope processing and possession processing) both suffer from their inabiity to transfer competitive advantages across borders. For exampe, when Euro Disneyand in Paris opened Disney suffered from not being abe to transfer the highy motivated staff of its US parks to Europe. The acceerating deveopment within information technoogy (the Internet/the Web) has resuted in the appearance of new types of information service (e.g. information on internationa fight schedues), which offer great opportunities for standardization. Service in the business-to-business market Business-to-business markets differ from customer markets in many ways: fewer and arger buyers, often geographicay concentrated; a derived, fuctuating and reativey ineastic demand; many participants in the buying process; professiona buyers; a coser reationship; absence of intermediaries; technoogica inks. For services in consumer markets an aternative for dissatisfied consumers is aways to exit from the suppier consumer reationship, as the number of firms offering the same kind of products is usuay high. Therefore it is easy to switch between products and firms. In the business-to-business market, however, bonds between the buyer and seer make the firms more unwiing to break the reationship. Of course the exit opportunity aso exists to some extent in the business-to-business market, but the oss of investment in bonds and commitment tends to create exit barriers, because the costs of changing suppier are high. Furthermore, it can be difficut to find a new suppier. 306

7 Chapter 11 Product and pricing decisions Professiona service firms, such as consuting engineering firms, have simiarities with typica business-to-business service firms, but they invove a high degree of customization and have a strong component of face-to-face interaction. The service frequenty takes the form of a hundred-miion-doar project and is characterized by the deveopment of ong-term reationships between firms, but aso the management of day-to-day reationships during the project. When a professiona service firm (whether it be an accountant, architect, engineer or management consutant) ses to its cients it is ess the services of the firm than the services of specific individuas that it is seing. As a consequence professiona service firms require highy skied individuas. Fiiatraut and Lapierre (1997) made a study of the cutura differences in consuting engineering projects between Europe (France) and North America (Canada). In North America the consuting engineering firms are generay smaer and they work in an economic environment coser (than in Europe) to pure competition. The contracts in Europe are very arge and often awarded by governments. The French consutants recognize that there is more fexibiity in managing in North America than in Europe. Subcontracting aso appears to be more popuar in North America The product communication mix Having decided upon the optimum standardization/adaptation route and the newness of the product, the next most important (and cuturay sensitive) factor to be considered is that of internationa promotion. Product and promotion go hand in hand in foreign markets and together are abe to create or destroy markets in very short order. We have considered above the factors that may drive an organization to standardize or adapt its product range for foreign markets. Equay important are the promotion or the performance promises that the organization makes for its product or service in the target market. As with product decisions, promotion can be either standardized or adapted for foreign markets. Keegan (1995) has highighted the key aspects of marketing strategy as a combination of standardization or adaptation of the product and promotion of eements of the mix, and offers five aternative and more specific approaches to product poicy. These approaches are shown in Figure Figure 11.3 Product/communication mode Source: Based on Keegan, 1995, pp and p. 498, Tabe

8 Part IV Designing the goba marketing programme Straight extension This invoves introducing a standardized product with the same promotion strategy throughout the word market (one product, one message wordwide). By appying this strategy successfuy major savings can be made on market research and product deveopment. Since the 1920s Coca-Coa has adopted a goba approach, which has aowed the company to make enormous cost savings and benefits from continua reinforcement of the same message. Whie a number of writers have argued that this wi be the strategy adopted for many products in the future, in practice ony a handfu of products might caim to have achieved this aready. A number of firms have tried and faied. Campbe s soups, for exampe, found that consumers taste in soup was by no means internationa. An exampe of successfu extension is Uniever s wordwide introduction of Organics Shampoo, which was first aunched in Thaiand in ate 1993 after joint deveopment work by Uniever s Hair Innovation Centres in Bangkok and Paris. By 1995 the brand was sod in over 40 countries, generating saes of 170 miion. You can see beow a two-page advertisement from a magazine, used during the product s introduction into Argentina. The basic advertising concept a over the word (incuding Argentina) has been Organics the first ever root-nourishing shampoo. Promotion adaptation Use of this strategy invoves eaving a product unchanged but fine-tuning promotiona activity to take into account cutura differences between markets. It is a reativey cost-effective strategy as changing promotion messages is not as expensive as adapting products. An exampe of this strategy is iustrated in the foowing Lux exampe. LUX soap (Uniever): the United Kingdom versus India The UK version of the LUX advertisement is based on the cassic transborder advertising campaign, the beauty soap of fim stars, which has been standardized to a high degree. In India the LUX campaign has been given a specia oca touch. Straight extension of Organics Shampoo to Argentina 308

9 Chapter 11 Product and pricing decisions Advertisements for Lux in UK and India The Indian version is one of three advertisements that trace LUX s association with fim stars from the past era to the current stars of today and the potentia fim stars of tomorrow. The advertisement focuses on three past egendary beauties of Indian cinema who have endorsed the brand. The creative statement is in a cinema poster stye, keeping the brand image in mind, and in a sepia coour tone to give it a nostagic fee. Product adaptation By modifying ony the product a manufacturer intends to maintain the core product function in the different markets. For exampe, eectrica appiances have to be modified to cope with different eectrica votages in different countries. A product can aso be adapted to function under different physica environmenta conditions. Exxon changed the chemica composition of petro to cope with the extremes of cimate, but sti used the Put a tiger in your tank campaign unchanged around the word. Dua adaptation By adapting both product and promotion for each market the firm is adopting a totay differentiated approach. This strategy is often adopted by firms when one of the previous three strategies has faied, but particuary if the firm is not in a eadership position and is therefore reacting to the market or foowing competitors. It appies to the majority of products in the word market. The modification of both product and promotion is an expensive but often necessary strategy. An exampe of dua adaptation is shown beow, with the aunch of Keogg s Basmati Fakes in the nascent breakfast cerea market in India. This product was speciay created to suit Indian tastes, India being a arge rice-eating country. The advertising campaign was a ocay adapted concept based on internationa positioning. Note that the product is avaiabe ony in the Bombay area. 309

10 Part IV Designing the goba marketing programme Keogg s dua adaptation for the Indian market Product invention Product invention is adopted by firms usuay from advanced nations that are suppying products to ess deveoped countries. Products are specificay deveoped to meet the needs of the individua markets. Existing products may be too technoogicay sophisticated to operate in ess deveoped countries, where power suppies may be intermittent and oca skis imited. Keegan (1995) uses a hand-powered washing machine as a product exampe Product positioning Product positioning is a key eement in the successfu marketing of any organization in any market. The product or company that does not have a cear position in the customer s mind consequenty stands for nothing and is rarey abe to command more than a simpe commodity or utiity price. Premium pricing and competitive advantage are argey dependent upon the customer s perception that the product or service on offer is markedy different in some way from competitive offers. How can we achieve a credibe market position in internationa markets? Since it is the buyer/user perception of benefit-generating attributes that is important, product positioning is the activity by which a desirabe position in the mind of the customer is created for the product. Positioning a product for internationa markets begins with describing specific products as comprising different attributes that are capabe of generating a fow of benefits to buyers and users. The goba marketing panner puts these attributes into bundes so that the benefits generated match the specia requirements of specific market segments. This product design probem invoves not ony the basic product components (physica, package, service and country of origin) but aso brand name, stying and simiar features. 310

11 Chapter 11 Product and pricing decisions Viewed in a mutidimensiona space (commony denoted as perceptua mapping ), a product can be graphicay represented at a point specified by its attributes. The ocation of a product s point in perceptua space is its position. Competitors products are simiary ocated (see aso Johansson and Thorei, 1985). If points representing other products are cose to the point of the prototype then these other products are cose competitors of the prototype. If the prototype is positioned away from its cosest competitors in some internationa markets and its positioning impies important features for customers, then it is ikey to have a significant competitive advantage. Country-of-origin effects The country of origin of a product, typicay communicated by the phrase made in [country], has a considerabe infuence on the quaity perception of that product. Some countries have a good reputation and others have a poor reputation for certain products. For exampe, Japan and Germany have good reputations for producing cars. The country-of-origin effects are especiay critica among eastern European consumers. A study (Ettensén, 1993) examined the brand decision for teevisions among Russian, Poish and Hungarian consumers. These consumers evauated domesticay produced teevision products much ower than western-made products, regardess of brand name. There was a genera preference for teevisions manufactured in Japan, Germany and the United States. Exhibit 11.1 Chinese piano manufacturers are experiencing the Country Of Origin (COO) effect The Chinese piano industry is a usefu exampe to show the opportunities and chaenges facing Chinese brands. China has overtaken Japan and South Korea to become the word s argest piano-producing nation. One of the brand manufacturers, Pear River, has become the word s argest piano manufacturer with annua saes of about 100,000 units. As piano making is sti a abour-intensive industry, Chinese manufacturers enjoy a big cost and price advantage. This aso motivates internationa deaers to stock Chinese pianos, because of a arger profit margin. However, the biggest branding diemma facing Chinese piano manufacturers is negative perceptions of made in China as a abe. It is difficut for individua firms to change this perception and requires the country to change its image in genera, which may take a generation. It has taken Japanese Yamaha more than 30 years to change its image from a cheap me-too product to a eading goba brand. An important buying infuence aso comes from music teachers, and many of them advise their students not to buy Chinese-made instruments. To overcome this difficuty, Chinese manufacturers coud try to ink their brands to Western-oriented vaues and names. For exampe, Longfeng Piano coud emphasize that its Kingsburg mode is designed by the wordrenowned German designer Kaus Fenner. Sources: Adapted from Fan (2007) The country of origin is more important than the brand name and can be viewed as good news for western firms that are attempting to penetrate the eastern European region with imports whose brand name is not yet famiiar. Another study (Johansson et a., 1994) showed that some products from eastern Europe have done we in the West, despite negative country-of-origin perceptions. For exampe, Bearus tractors have sod we in Europe and the United States not ony because of their reasonabe price but aso because of their ruggedness. Ony the ack of an effective distribution network has hindered the firm s abiity to penetrate western markets to a greater degree. When considering the impications of product positioning it is important to reaize that positioning can vary from market to market, because the target customers for the 311

12 Part IV Designing the goba marketing programme product differ from country to country. In confirming the positioning of a product or service in a specific market or region it is therefore necessary to estabish in the consumer s perception exacty what the product stands for and how it differs from existing and potentia competition. In deveoping a market-specific product positioning the firm can focus upon one or more eements of the tota product offer, so the differentiation might be based upon price and quaity, one or more attributes, a specific appication, a target consumer or direct comparison with one competitor Brand equity A study by Citibank and Interbrand in 1997 found that companies basing their business on brands had outperformed the stock market for 15 years. The same study does, however, note the risky tendency of some brand owners to have reduced investments in brands in the mid-1990s with negative impacts on their performance (Hooey et a., 1998, p. 120). The foowing two exampes show that brands add vaue for customers: 1 The cassic exampe is that in bind test 51 per cent of consumers prefer Pepsi to Coca-Coa, but in open tests 65 per cent prefer Coca-Coa to Pepsi: soft drink preferences are based on brand image, not taste (Hooey et a., 1998, p. 119). 2 Skoda cars have been best known in the United Kingdom as the butt of bad jokes, refecting a widespread beief that the cars are of very ow quaity. In 1995 Skoda was preparing to aunch a new mode in the United Kingdom, and did bind and seen tests of the consumers judgement of the vehice. The vehice was rated as better designed and worth more by those who did not know the make. With the Skoda name reveaed perceptions of the design were ess favourabe and estimated vaue was substantiay ower. This eads us from the reputation of the company to branding (Hooey et a., 1998, p. 117). Exhibit 11.2 Madame Tussauds a brand which brings peope coser to ceebrities on a goba basis The attraction s history is a rich and fascinating one with roots dating back to the Paris of It was here that Madame Tussaud earnt to mode wax ikenesses under the tuteage of her mentor, Dr Phiippe Curtius. Her skis were put to the test during the French Revoution when she was forced to prove her aegiance making the death masks of executed aristocrats. It was in the eary 19th century that she came to Britain, bringing with her a traveing exhibition of revoutionary reics and effigies of pubic heroes and rogues. The Tussauds Group strategy is to deveop an internationa entertainment business of successfu visitor attractions that are specia, imaginative and offer exceptiona visitor vaue. With over 13 miion guests a year, the Tussauds Group is today Europe s argest operator and deveoper of visitor attractions and is sixth argest in the word. In 1998 the Group was acquired by Charterhouse Deveopment Capita after 20 years of ownership by Pearson pc. In March 2005 the Tussauds Group, that owns Madame Tussauds, was sod to Dubai Internationa Capita, a private equity firm backed by the Dubai government and the Crown Prince of Dubai. They paid 800 miion to take contro. Brand experience The future for brands is about buiding memorabe consumer experiences. Experience-oriented companies ike Madame Tussauds need to have something that goes beyond the product. Madame Tussauds seing point is not about waxworks, it is about bringing peope coser to ceebrities and what they do in ife. 312

13 Chapter 11 Product and pricing decisions Robbie Wiiams (London) and the oca Chinese popstars (Twins) (Shanghai) Sources: Madame Tussauds London (eft) and Madame Tussauds Shanghai (right). Choice of new ocation The choice of a new ocation is based on many different criteria. Madame Tussauds has a product deveopment team that investigates how many tourists visit a city, whether they fit the profie of the attraction s visitors and whether there s enough space. Detaied research is vita to take a concept into a new market. After opening in Hong Kong Madame Tussauds recenty opened its second Asian branch in Shanghai. As China s argest and weathiest city with over 13 miion residents and neary 40 miion tourists a year, Shanghai represents a good opportunity for Madame Tussauds. Interactivity with the waxwork figures The new Shanghai branch has the most interactivity of a the attractions, with fewer waxwork figures and more to do around them. The Tiger Woods exhibit aows visitors to putt on the green and see their scores come up. The atest guest to have a hoe-in-one is recorded on the eaderboard. Visitors can aso go into a karaoke booth with modes of some famous Chinese popstars, caed Twins (see the photo), sing with them and view themseves on video. Peope can aso dress up ike Charie Chapin and see themseves on a movie screen in back and white. Baancing oca and goba branding The research of Madame Tussauds shows a 98 per cent brand recognition in the UK maket. However, in Asia, the term madame sometimes impies a bar or cub to many consumers, and saying that the brand is a wax attraction does not mean anything in the Asian market as there is no tradition of that type of museum there. For Madame Tussauds it is important to make sure the brand maintains a good mix of oca and goba content. This is a deicate baance: too much oca content does not fit with the idea of a goba brand, whie too itte emphasis on goba figures can disappoint internationa customers. The new Chinese venue overwhemingy features oca faces, such as actor Ge You, kung fu king Jackie Chan, the pop-group Twins and basketba superstar Yao Ming; it aso has goba figures such as David Beckham, Michae Jackson and Brad Pitt. The London attraction has a wide range of goba figures such as Angeina Joie, Beyonce Knowes and Robbie Wiiams (see the photo), but internationa tourists aso ove Margaret Thatcher, Princess Diana, Winston Churchi and the Queen. The photos iustrate the Madame Tussauds mixture of goba content (ike Robbie Wiiams) and oca content (ike the Twins). Expanding the Madame Tussauds brand on a goba scae is a chaenge, but when it comes down to the essentias, Madame Tussauds is not about waxworks it is about consumer experiences and bringing peope into interaction with the ceebrities. Sources: With kind permission from Madame Tussauds Group, especiay Goba Marketing Director Nicky Marsh from London ( and Cathy Wong, Externa Affairs Consutant from Shanghai ( Marsh, N. (2006) Transating experiences across the word, Brand Strategy, June, p. 11; Macaister, T. (2005) Madame Tussauds to open in Shanghai, The Guardian (London), 19 September, p

14 Part IV Designing the goba marketing programme Definitions of brand equity Bround equity A set of brand assets and iabiities, which can be custered into five categories: brand oyaty, brand awareness, perceived quaity, brand associations and other proprietary brand assets. Brand equity is the premium a customer/ consumer woud pay for the branded product or service compared to an identica unbranded version of the same product/service. Athough the definition of brand equity is often debated, the term deas with the brand vaue, beyond the physica assets associated with it manufacture. David Aaker of the University of Caifornia at Berkeey, one of the eading authorities on brand equity, has defined the term as a set of brand assets and iabiities inked to the brand, its name and symbo, that add to or subtract from the vaue provided by a product or service to a firm or to the firm s customers (Aaker, 1991, p. 15). Aaker has custered those assets and iabiities into five categories: 1 Brand oyaty. Encourages customers to buy a particuar brand time after time and remain insensitive to competitors offerings. 2 Brand awareness. Brand names attract attention and convey images of famiarity. May be transated to: how big a percentage of the customers know the brand name. 3 Perceived quaity. Perceived means that the customers decide upon the eve of quaity, not the company. 4 Brand associations. The vaues and the personaity inked to the brand. 5 Other proprietary brand assets. Incude trademarks, patents and marketing channe reationships. Brand equity can be thought of as the additiona cash fow achieved by associating a brand with the underying vaues of the product or service. In this connection it is usefu (athough incompete) to think of a brand s equity as the premium a customer/ consumer woud pay for the branded product or service compared to an identica unbranded version of the same product/service. Hence brand equity refers to the strength, depth and character of the consumer brand reationship. A strong equity impies a positive force that keeps the consumer and the brand together, in the face of resistance and tension. The strength, depth and character of the customer brand reationship is referred to as the brand reationship quaity (Marketing Science Institute, 1995) Branding decisions Cosey inked to product positioning is the question of branding. The basic purposes of branding are the same everywhere in the word. In genera, the functions of branding are as foows: to distinguish a company s offering and differentiate one particuar product from its competitors; to create identification and brand awareness; to guarantee a certain eve of quaity and satisfaction; to hep with promotion of the product. A of these purposes have the same utimate goas: to create new saes (market shares taken from competitors) or induce repeat saes (keep customers oya). As seen from Figure 11.4 there are four eves of branding decisions. Each aternative at the four eves has a number of advantages and disadvantages, which are presented in Tabe We wi discuss these options in more detai beow. 314

15 Chapter 11 Product and pricing decisions Figure 11.4 Branding decisions Source: Adapted from Onkvisit and Shaw, 1993, p Exhibit 11.3 Uniever s Snugge fabric softener an exampe of oca brands in mutipe markets An effective exampe of promotion adaptation is iustrated by Uniever s Snugge Fabric softener. The product was initiay aunched in Germany as an economy brand in a category dominated by Procter and Gambe. In order to counteract the negative quaity inferences associated with ow price, Uniever emphasized softness as the product s key point of difference. The softness association was communicated through the name, Kuscheweich, which means enfoded in softness, and this was iustrated through a picture of a teddy bear on the package. When the product was aunched in France, Uniever kept the brand positioning of economy and softness but changed the name to Cajoine, meaning softness in French. In addition, the teddy bear that had been inactive in Germany now took the centre stage in the French advertising as the brand symbo for softness and quaity. Success in France ed to goba expansion and in each case the brand name was changed to connote softness in the oca anguage whie the advertising featuring the teddy bear remained virtuay identica across goba markets. By the 1990s, Uniever marketed the fabric softener around the gobe with over a dozen brand names, a with the same product positioning and advertising support. More importanty, the fabric softener was generay number 1 or number 2 brand in each market. Source: Adapted from Keer and Sood (2001). Brand versus no brand Branding is associated with added costs in the form of marketing, abeing, packaging and promotion. Commodities are unbranded or undifferentiated products. Exampes of products with no brand are cement, metas, sat, beef and other agricutura products. Private abe versus co-branding versus manufacturer s own brand These three options can be graded as shown in Figure The question of consumers having brand oyaty or shop oyaty is a crucia one. The competitive strugge between the manufacturer and the retaier actuaizes the need for 315

16 Part IV Designing the goba marketing programme Tabe 11.2 Advantages and disadvantages of branding aternatives No brand Branding Private abe Co-branding/ ingredient branding Manufacturer s own brand Singe market, singe brand Singe market, mutipe brands Mutipe markets, oca brands (see aso Exhibit 11.4) Mutipe markets, goba brand Advantages Lower production cost. Lower marketing cost. Lower ega cost. Fexibe quaity contro. Better identification and awareness. Better chance for production differentiation. Possibe brand oyaty. Possibe premium pricing. Possibiity of arger market share. No promotiona probems. Adds more vaue to the brand. Sharing of production and promotion costs Increases manufacturer s power in gaining access to retaiers sheves. Can deveop into ong-asting reationships based on mutua commitment. Better price due to higher price ineasticity. Retention of brand oyaty. Better bargaining power. Better contro of distribution. Marketing efficiency. Permits more focused marketing. Eiminates brand confusion. Good for product with good reputation (hao effect). Market segmented for varying needs. Creates competitive spirit. Avoids negative connotation of existing brand. Gains more retai shef space. Does not harm existing brand s image. Meaningfu names. Loca identification. Avoidance of taxation on internationa brand. Aows variations of quantity and quaity across markets. Maximum marketing efficiency. Reduction of advertising costs. Eimination of brand confusion. Good for cuture-free product. Good for prestigious product. Easy identification/recognition for internationa traveers. Uniform wordwide image. Disadvantages Severe price competition. Lack of market identity. Higher production cost. Higher marketing cost. Higher ega cost. Severe price competition. Lack of market identity. Consumers may become confused. Ingredient suppier is very dependent on the success of the fina product. Promotion cost for ingredient suppier. Difficut for sma manufacturer with unknown brand. Requires brand promotion. Assumes market homogeneity. Existing brand s image harmed when trading up/down. Limited shef space. Higher marketing cost. Higher inventory cost. Loss of economies of scae. Higher marketing cost. Higher inventory cost. Loss of economies of scae. Diffused image. Assumes market homogeneity. Probems with back and grey markets. Possibiity of negative connotation. Requires quaity and quantity consistency. LDCs opposition and resentment. Lega compications. Source: Adapted from Onkvisit and Shaw Pubished with permission from Emerad Pubishing Ltd. a better understanding of shopping behaviour. Both actors need to be aware of determinants of shop choice, shopping frequency and in-store behaviour. Where manufacturers pay itte attention to the shopping behaviour of their consumers, this heps to anticipate the increasing power of certain retai chains. 316

17 Chapter 11 Product and pricing decisions Figure 11.5 The three brand options Private abe Retaiers own brand, e.g. Marks & Spencer s St Michae. Private abe Private abeing is most deveoped in the United Kingdom, where Marks & Spencer, for instance, ony se own-abe (private abe) products. At Sainsbury s own abes account for 60 per cent of the saes. Compared with the high share of private abeing in northern Europe, the share in southern Europe (e.g. Spain and Portuga) is no higher than 10 per cent. The retaier s perspective For the retaier there are two main advantages connected with own-abe business: 1 Own abes provide better profit margins. The cost of goods typicay makes up per cent of a retaier s tota cost (The Economist, 4 March 1995, p. 10). So if the retaier can buy a quaity product from the manufacturer at a ower price this wi provide a better profit margin for the retaier. In fact private abes have heped UK food retaiers to achieve profit margins averaging 8 per cent of saes, which is high by internationa standards. The typica figure in France and the United States is 1 2 per cent. 2 Own abes strengthen the retaier s image with its customers. Many retai chains try to estabish oyaty to their particuar chain of shops by offering their own quaity products. In fact premium private-abe products (e.g. Marks & Spencer s St Michae) that compete in quaity with manufacturers top brands have seen a growth in market share, whereas the share of cheap generics is tiny and decining. The manufacturer s perspective Athough private brands are normay regarded as threats for manufacturers there may be situations where private branding is a preferabe option (Herstein and Gamie, 2006): Since there are no promotiona expenses associated with private branding for the producer, the strategy is especiay suitabe for SMEs with imited financia resources and imited competences in the downstream functions. The private brand manufacturer gains access to the sheves of the retai chains. With increasing internationaization of the big retai chains this may aso resut in export business for the SME that has never been in internationa markets. 317

18 Part IV Designing the goba marketing programme There are aso a number of reasons why private branding is bad for the manufacturer: By not having its own identity, the manufacturer must compete mainy on price, because the retai chain can aways switch suppier. The manufacturer oses contro over how its products shoud be promoted. This may become critica if the retaier does not do a good job in pushing the product to the consumer. If the manufacturer is producing both its own brands and private brands there is a danger that the private brands wi cannibaise the manufacturer s brand-name products. Exhibit 11.4 shows an exampe with Keogg, which has moved from a brand strategy to a private brand strategy. Exhibit 11.4 Keogg is under pressure to produce under Adi s own abe In February 2000 Keogg (the cerea giant) made an own-abe dea with German supermarket chain Adi. It is the first time that Keogg has suppied own abe. A sogan on Keogg s cerea packets caims: If you don t see Keogg s on the box... it isn t Keogg s in the box. But now Keogg has negotiated a dea with Adi to suppy products in Germany bearing a different brand name. Reports in Germany say that the dea was made after Adi announced it woud no onger pay brand suppiers prices and threatened to cut top brands from its sheves. Source: Adapted from various pubic media. Quech and Harding (1996) argue that many manufacturers have over reacted to the threat of private brands. Increasing numbers of manufacturers are beginning to make private-abe products to take up excess production capacity. According to Quech and Harding (1996), more than 50 per cent of US manufacturers of branded consumer packaged goods aready make private-abe goods as we. Managers typicay examine private-abe production opportunities on an incrementa margina cost basis. The fixed overhead costs associated with the excess capacity used to make the private-abe products woud be incurred anyway. But if private-abe manufacturing were evauated on a fu-cost basis rather than on an incrementa basis it woud, in many cases, appear much ess profitabe. The more private-abe production grows as a percentage of tota production, the more an anaysis based on fu costs becomes reevant (Quech and Harding, 1996). Manufacturer s own brand From the Second Word War unti the 1960s brand manufacturers managed to buid a bridge over the heads of the retaiers to the consumers. They created consumer oyaty for their particuar brand by using sophisticated advertising (cuminating in TV advertising) and other promotiona techniques. Deveoping a goba brand is not an easy task. Firms must decide how to manage brands that span different geographic regions and product ines and determine who shoud contro the positioning and marketing of such brands. B2B brands are aso good candidates for goba branding. Often it is the seer s reputation combined with the buyer s own eve of awareness and degree of oyaty shown to the manufacturer (seer), that are important considerations in the purchasing decisions (Beverand et a., 2007; Koter and Pfoertsch, 2007). 318

19 Chapter 11 Product and pricing decisions Since the 1960s various socioogica changes (notaby the car) have encouraged the rise of arge, efficient retaiers. Nowadays the distribution system is being turned upside down. The traditiona suppy chain, powered by manufacturer push, is becoming a demand chain, driven by consumer pu. Retaiers have won contro over distribution not just because they decide the price at which goods are sod, but aso because both individua shops and retai companies have become much bigger and more efficient. They are abe to buy in buk and to reap economies of scae, mainy due to advances in transport and, more recenty, in information technoogy. Most retai chains have not ony set up computer inks between each store and distribution warehouses, they are aso hooked up with the computers of the firm s main suppiers, through an (eectronic data interchange) system. After some decades of absence private abes reappeared in the 1970s as generic products pioneered by Carrefour in France but were soon adopted by UK and US retaiers. Ten years ago there was a distinct gap in the eve of quaity between privateabe and brand-name products. Today the gap has narrowed: private-abe quaity eves are much higher than ever before, and they are more consistent, especiay in categories historicay characterized by itte product innovation. Co-branding/ingredient branding Despite the simiarities between co-branding and ingredient branding there is aso an important difference, as we sha see beow. Co-branding Form of cooperation between two or more brands, which can create synergies that create vaue for both participants, above the vaue they woud expect to generate on their own. Co-branding Co-branding is a form of cooperation between two or more brands with significant customer recognition, in which a the participants brand names are retained. It is of medium to ong-term duration and its net vaue creation potentia is too sma to justify setting up a new brand and/or ega joint venture. The motive for co-branding is the expectation of synergies that create vaue for both participants, above the vaue they woud expect to generate on their own (Bengtsson and Servais, 2005). In the case of co-branding, the products are often compementary, in the way that one product can be used or consumed independenty of the other (e.g. Bacardi Rum and Coca-Coa). Hence co-branding may be an efficient aternative to traditiona brand extension strategies (Figure 11.6). Figure 11.6 Iustration of co-branding and ingredient branding 319

20 Part IV Designing the goba marketing programme Exhibit 11.5 She s co-branding with Ferrari and Lego In She ran a 50 miion co-branding campaign with Ferrari and LEGO. Some peope might have thought that this was an attempt to persuade peope, mainy in the West, that She s controversia attempt to dump the Brent Spar oi patform in the North Sea was not a true refection of the company. However, it may be more accurate to say that She was seeking a brand image transfer. In the petro retaier market traditionay driven by price and more price promotions, She wanted both Ferrari s sexy, sporty image and the famiy vaues of LEGO. Furthermore She was and is no onger ony in the petroeum and ois business, where price promotions are the main focus of marketing activity. The company is aso invoved in food retaiing, where oyaty programmes are important. What were the benefits for Ferrari and LEGO? Ferrari gained sponsorship and royaty income from mode car saes, whie LEGO got improved goba distribution. The co-branding strategy invoved the use of ten excusive sma boxed toys and a big Ferrari LEGO car carrying a She ogo. She wanted to se between 20 and 40 miion units of LEGO gobay. It made She one of the word s argest toy distributors. Source: Adapted from various pubic media. Ingredient branding The suppier deivers an important key component to the fina OEM-product, e.g. Inte deivers its processor to the major PC-manufacturers. Ingredient branding Normay the marketer of the fina product (OEM) creates a of the vaue in the consumer s eyes. But in the case of Inte and NutraSweet the ingredient suppier is seeking to buid vaue in its products by branding and promoting the key component of an end product. When promotion ( pu strategy: see Figure 11.6) of the key component brand is initiated by the ingredient suppier the goa is to buid awareness and preference among consumers for that ingredient brand. Simutaneousy, it may be the manufacturer (OEM) that seeks to benefit from a recognized ingredient brand. Some computer manufacturers are benefiting from the quaity image of using an Inte chip. However, ingredient branding is not suitabe for every suppier of components. An ingredient suppier shoud fufi the foowing requirements: The ingredient suppier shoud be offering a product that has a substantia advantage over existing products. DuPont s Tefon, NutraSweet, Inte chips and the Doby noise reduction system are a exampes of major technoogica innovations, the resut of arge investments in R&D. The ingredient shoud be critica to the success of the fina product. NutraSweet is not ony a ow-caorie sweetener, but has a taste that is neary identica to that of sugar. Singe brand versus mutipe brands (singe market) A singe brand or famiy brand (for a number of products) may be hepfu in convincing consumers that each product is of the same quaity or meets certain standards. In other words, when a singe brand in a singe market is marketed by the manufacturer, the brand is assured of receiving fu attention for maximum impact. The company may aso choose to market severa (mutipe) brands in a singe market. This is based on the assumption that the market is heterogeneous and consists of severa segments. Loca brands versus a goba brand (mutipe markets) A company has the option of using the same brand in most or a of its foreign markets or of using individua, oca brands. A singe, goba brand is aso known as an internationa or universa brand. A Eurobrand is a sight modification of this approach, as it 320

21 Chapter 11 Product and pricing decisions is a singe product for a singe market of 15 or more European countries, with an emphasis on the search for intermarket simiarities rather than differences. A goba brand is an appropriate approach when a product has a good reputation or is known for quaity. In such a case a company woud be wise to extend the brand name to other products in the product ine. Exampes of goba brands are Coca-Coa, She and the Visa credit card. Athough it is possibe to find exampes of goba brands, oca brands are probaby more common among big mutinationa companies than peope reaize. Boze and Patton (1995) have studied the branding practices in 67 countries a over the word of six mutinationa companies: 1 Cogate-Pamoive headquartered in the United States. 2 Kraft Genera Foods (now part of Phiip Morris) headquartered in the United States. 3 Nesté headquartered in Switzerand. 4 Procter & Gambe headquartered in the United States. 5 Quaker Oats headquartered in the United States. 6 Uniever headquartered in the United Kingdom and the Netherands. The findings of the research are summarized in Tabe Of the 1,792 brands found in the 67 countries, 44 per cent were ony marketed in one country. Ony 68 brands (4 per cent) coud be found in more than haf of the countries. Of these 68 brands, ony the foowing six were found in a 67 countries: Cogate, Lipton, Lux, Maggi, Nescafé and Pamoive. Hence these were the ony true word brands. Surprisingy, each of the six mutination corporations (MNCs) seems to foow the practice of mutipe brands in a singe market. No officia expanation was offered for this strategy, but a Nesté manager expained that he beieved it is a very important marketing advantage to provide a brand name not found in any other country, especiay those adjacent to the nation or bigger than it (Boze and Patton, 1995, p. 24). The use of umbrea brands varies a ot among the MNCs examined. Of the six MNCs Cogate is the most intensive user of its two company names: 1 Cogate. Mosty denta products: toothpaste, tooth powder, toothbrushes, denta foss, mouthwash, and shaving cream. 2 Pamoive. Hair products, shaving products, hand otion, tac, deodorant, sun screen, toiet soap, bath products, iquid detergent (dishes and fine fabrics) and automatic dishwasher detergent. It shoud be emphasized that the big MNCs prefer to acquire some oca brands instead of using a goba brand. Tabe 11.3 Brands of six mutinationa companies in 67 countries Company Tota no. of brands Brands found in 50% or Brands in ony more countries one country Number % of tota Number % of tota Cogate Kraft GF Nesté P & G Quaker Uniever Tota 1, Source: Boze and Patton, 1995, p. 22. Reproduced with kind permission from the Journa of Consumer Marketing, Emerad Group Pubishing Ltd. 321

22 Part IV Designing the goba marketing programme 11.8 Impications of the Internet for coaboration with customers on product decisions Firms are reaizing the importance of coaboration for creating and sustaining competitive advantage. Coaboration with partners and even competitors has become a strategic imperative for firms in the networked word of business. More recenty, schoars in strategy and marketing have focused on coaboration with customers to cocreate vaue (Prahaad and Ramaswamy, 2004). The Internet is an open, cost-effective and ubiquitous network. These attributes make it a goba medium with unprecedented reach, contributing to reduce constraints of geography and distance. The Internet enhances the abiity of firms to engage customers in coaborative innovation in severa ways. It aows firms to transform episodic and one-way customer interactions into a persistent diaogue with customers. Internetbased virtua environments aow the firm to engage in interaction with a much arger number of customers without significant compromises on the richness of the interaction (Evans and Wuster, 2000). Customization and coser reationships The new business patform recognizes the increased importance of customization of products and services. Increased commoditization of standard features can ony be countered through customization, which is most powerfu when backed up by sophisticated anaysis of customer data. Mass-marketing experts such as Nike are experimenting with ways of using digita technoogy to enabe customization. Websites that can dispay three-dimensiona images, for exampe, wi certainy boost the attractiveness of custom taioring. The chaenge is cear: to use IT to get coser to customers. There are aready many exampes of this. De is buiding a coser reationship with its end customer by etting them design their own PCs on the Internet. Customers who have ordered their computers from De can then foow their computers aong the various stages of the production process in rea time on their personaized website. Such experimentation is advisabe because the success of buid-to-order modes such as De s represents a chaenge to current buid-to-stock business patforms, which Compaq generay uses. A comparison of the business modes of De and HP shows that De s basic business principe is the cose reationship between the PC manufacturer and the end customer, without further intermediaries in the distribution channe. This aows De to individuaize the computers to customers specific needs. Computers can aso be remotey diagnosed and fixed over the network today; this may soon be true of many other appiances. Airines now communicate specia fares to preferred customers through e-mais and specia websites. Cars wi soon have Internet protoco addresses, which wi make possibe a range of persona, in-vehice information services. Customers can aso be invoved in the eary stages of product deveopment so that their inputs can shape product features and functionaity. Pharmaceutica companies are experimenting with the possibiity of anaysing patients genes to determine precisey what drugs shoud be administered in what dosages. The transformation in the business patform can be seen in university textbook pubishing. This industry which has seen itte innovation since the advent of the printing press is now in the midst of major changes. Pubishers are creating suppementary website inks to provide additiona ways for students and ecturers to be 322

23 Chapter 11 Product and pricing decisions connected during courses (e.g. and The pubisher s roe, which traditionay was seing textbooks at the beginning of term, is becoming that of an educationa consutant or vaue-adding partner throughout the term. Exhibit 11.6 Ducati motorcyces product deveopment through web communities Founded in 1926, Itaian Ducati buids racing-inspired motorcyces characterized by unique engine features, innovative design, advanced engineering and overa technica exceence. The company produces motorcyces in six market segments which vary in their technica and design features and intended customers: Superbike, Supersport, Monster, Sport Touring, Mutistrada and the new SportCassic. The company s motorcyces are sod in more than 60 countries wordwide, with a primary focus in western European, Japanese and North American markets. Ducati has won 13 of the ast 15 Word Superbike Championship tites and more individua victories than the competition put together. Ducati was quick to reaize the potentia of using the Internet to engage customers in its new product deveopment efforts. The company set up a web division and a dedicated website, in eary 2000, inspired by the internet saes of the MH900 evoution, a imited-production motorcyce. Within 30 minutes, the entire year s production was sod out, making Ducati a eading internationa e-commerce payer. Since then, Ducati has evoved its site to create a robust virtua customer community that had 160,000 registered users as of Juy Community management has become so centra at Ducati that management has repaced the words marketing and customer with the words community and fan. Ducati considers the community of fans to be a major asset of the company and it strives to use the Internet to enhance the fan experience. Ducati invoves its fans on a systematic basis to reinforce the paces, the events and the peope that express the Ducati ife stye and Ducati s desired brand image. The community function is tighty connected with the product deveopment and the fan invovement in the community directy infuences product deveopment. Virtua communities pay a key roe in heping Ducati to expore new product concepts. Ducati has promoted and managed ad hoc onine forums and chat rooms for over three years to harness a strong sense of community among Ducati fans. Ducati aso reaized that a significant number of its fans spend their eisure time not ony riding their bikes, but aso maintaining and personaizing them. As a resut, Ducati fans have deep technica knowedge that they are eager to share with other fans. To support such knowedge sharing, the company has created the Tech Café, a forum for exchanging technica knowedge. In this virtua environment, fans can share their projects for customizing motorcyces, provide suggestions to improve Ducati s next generation products, and even post their own mechanica and technica designs, with suggestions for innovations in aesthetic attributes as we as mechanica functions. Whie not a fans participate in the onine forums, those who do participate provide rich inputs for exporing new product concepts and technica soutions. These forums aso hep Ducati to enhance customer oyaty, because its fans are more motivated to buy products they heped to create. Ducati managers aso monitor vertica portas created for bikers, incuding Motorcycist.com and Motoride.com; and Ducati monitors other virtua communities that have ifestye associations with the Ducati brand. For instance, Ducati has entered into a partnership with the fashion company DKNY to tap into its community and interact with its members. To vaidate its insights, Ducati uses onine customer surveys to test product concepts and to quantify customer preferences. As a testimony to the abiity of Ducati to create an ongoing customer diaogue and create a sense of engagement with its fans, Ducati gets extraordinary response rates, often in excess of 25 per cent when it surveys its customers. Ducati uses customer feedback for activities that go beyond product deveopment. Ë 323

24 Part IV Designing the goba marketing programme Exhibit 11.6 continued Ducati aso pursues Internet-based customer coaboration at the back end of its NPD process. Virtua communities pay an important roe at the product design and market testing stages. For instance, in eary 2001, the community managers of Ducati.com identified a group of customers on its website that had particuary strong reationships with the company. They decided to transform such customers into active partners, invoving them in virtua teams that cooperate with Ducati professionas from R&D, Product Management and Design. These virtua teams of customers work with the company s engineers to define attributes and technica features for the next bike. Within the virtua community, current and future Ducati bike owners discuss and review proposed product modifications that can be tested onine in the form of virtua prototypes. They can even vote to reject proposed modifications, personaize products to their preferences, and can ask Ducati technicians for suggestions on personaizing their bikes to individua taste. Source: adapted from and Sawhney et a. (2005). Images from Ducati. 324 Dynamic customisation of product and services The second stage of the customer interaction vector focuses on the opportunities and chaenges in dynamicay customizing products and services. Competitive markets are rapidy eroding margins due to price-based competition, and companies are seeking to enhance margins through customized offerings. Dynamic customization is based on three principes: moduarity, inteigence, and organization. 1 Moduarity: An approach for organizing compex products and processes efficienty. Product or service moduarity requires the partitioning of a task into independent modues that function as a whoe within overa architecture. 2 Inteigence: Continuous information exchange with consumers aows companies to create products and processes using the best possibe modues. Website operators can match buyer and seer profies and make recommendations based on their shared interests. The resut is inteigent sites that earn their visitors (potentia buyers ) tastes and deiver dynamic, personaised information about products and services. 3 Organization: Dynamic customisation of products and services requires a customeroriented and fexibe approach that is fundamentay committed to operating in this new way. How can the Internet be integrated in the future product innovation? Figure 11.7 shows some of the impications of the Internet on future product innovation. The Internet is seen as the medium through which each box communicates with the R&D function in the company. Design. Data is gathered directy from the product and is part of designing and deveoping the product. New product features (such as new versions of software programs) may be buit into the product directy from the Internet. Service and support. The service department can perform troubeshooting and correction directy through the Internet set-up. For exampe a Mercedes car driving on the highway may be directy connected to the Mercedes service department. It wi monitor the main functions of the car and if necessary make onine repairs of, for exampe, the software of the car.

25 Chapter 11 Product and pricing decisions Figure 11.7 Product innovation through the Internet Customer reations. Data gathered from the product may form part of statistics, comparisons between customers, etc. In this way the customer can compare the performance of their product (e.g. a car) with other customers product (a kind of benchmarking). This may aso strengthen an existing customer reationship. Logistics. Concurrenty with increasing demands for just-in-time deiveries, the Internet wi automaticay find the distribution and transport that wi take the goods from the subsuppier to the producer and then to the customers in the cheapest and most efficient way (and on time). A fundamenta shift in thinking is to repace the term suppy chain with demand chain. The critica difference is that demand-chain thinking starts with the customers and works backwards. This breaks away from parochia approaches that focus soey on reducing transport costs. It supports a mass customization viewpoint, in which bundes of goods and services are offered in ways that support customers individua objectives. This does not necessariy impy product differentiation. In fact the service aspects often require differentiation. For exampe, a company such as Uniever wi provide the same margarine to both Tesco and Sainsbury s. However, the ways in which the product is deivered, transactions are processed and other parts of the reationship are managed, can and shoud be different, since these two competing supermarket chains each have their own ways of evauating performance. The information systems required to coordinate companies aong the demand chain require a new and different approach to that required within individua companies. Some managers beieve that if they and their suppiers choose the same standard software package, such as SAP, they wi be abe to integrate their information systems. Link to other products. Sometimes a product is used as a subcomponent in other products. Through inks in the Internet such subcomponents may be essentia inputs for more compex product soutions. The car industry is an exampe of an industry that aready makes a targeted effort in this direction. New styish cars are 325

26 Part IV Designing the goba marketing programme inked together by the Internet. In the wake of this deveopment a new industry is created, the purpose of which is to provide integrated transport. In this new industry deveoping and producing cars is ony one of severa important services. Instead systems are to be deveoped that can diagnose cars (and correct the error) whie the car is running, systems for reguation of traffic, interactive systems that enabe drivers to have the desired transport at their disposa when and where they want it without tiresome renta agreements, etc. The music industry is aso undergoing a change. Today you can buy portabe payers that can downoad music from the Internet using the MP3 format, and subsequenty pay the music that is stored in the payer. The CD is skipped and so is the whoe distribution faciity. The music industry wi become competey atered through the different economic conditions. The strugge wi be about creating the best porta to the Internet, where the consumer can find the best information on music and the argest seection of music. The probems regarding rights are, however, sti being discussed, and the awyers and poiticians have to find a fina soution before the market can increase significanty. Thus innovative product deveopment of the future demands that a company possesses the foowing characteristics: Innovative product deveopment and strategic thinking. Product deveopment wi contain much technoogy and demand an interdiscipinary, strategic overview and knowedge in order to find out what new services are worth aiming at. Management of aiances. Few companies have a the necessary quaifications themseves innovative product deveopment and the resuting services demand that companies enter into aiances very dynamicay and yet in a structured way. New customer reations. The above-mentioned car industry exampe ceary shows that the customers are not car buyers any onger but buyers of transport services, and that is quite another matter. This means that companies have to focus on understanding the customers needs in a quite different way. Deveoping brands on the Internet Ceary consumer product companies such as Procter & Gambe, Cogate, Kraft Foods, and consumer durabes and business-to-business companies such as Genera Motors, Genera Eectric, Aied Signa and Caterpiar have crafted their business strategies by everaging physica assets and deveoping powerfu goba brands supported by mass advertising and mass distribution. But remote inks with customers appy equay we to these companies. Remote and continuous inks with customers become critica as the concepts of brand identity and brand equity are redefined by the Internet. Kraft Interactive Kitchen ( is an exampe of a consumer products company keeping in touch with its consumers by providing information-based services such as mea panners, recipes, tips and cooking techniques. Kraft s intention is to have remote connections and interactions with consumers in new ways. However, some companies find it difficut to transate a strong offine brand (such as Nike and Levi s) to the Internet, because many of the we-known brands are based on an extensive physica retai distribution system, and many of the retaiers are reuctant to support onine brands because of the fear of disintermediation (see section 11.5 for more discussion of this issue). In fact many sites that are run by top brands register minima onine traffic, according to a report by Forrester Research. Forrester studied brand awareness and web surfing behaviour among year-ods, whom advertisers consider to be strongy brand conscious. 326

27 Chapter 11 Product and pricing decisions Companies are taking a broad approach to branding, integrating it with an overa advertising and marketing strategy. On the net branding is more than ogos and coour schemes; it is about creating experiences and understanding customers. Consequenty web brand buiding is not cheap. Buiding a brand requires a persistent onine presence. For some brands that entais a mass-appea site; for others brand buiding requires a combination of initiatives, from banner ads to sponsorships Green marketing strategies Green marketing Integrating business practices and products that are friendy to the environment whie aso meeting the needs of the consumers. As understanding grows about the impact of human activity on the earth s ecosystems, consumer concern about the environment and its inks to heath and safety wi intensify. At the same time, humankind s passion for consumption wi persist. The chaenge for companies wi be to devise business practices and products that are friendy to the environment whie aso meeting the needs of consumers. Environmentaists were once considered the ony peope concerned about the depetion of natura resources, waste accumuation and poution. Environmentaists around the word are now becoming goba in their scope and scae of operations. Their aim is to increase peope s awareness of the importance of environmenta preservation on a goba scae and how the ack of it wi have a harmfu effect on our panet. Because ecoogica grassroot campaigns gain widespread recognition and support, and goba media networks such as CNN continue to report on environmenta issues and disasters, today s consumer is becoming more environmentay conscious. Various pos and surveys revea that many consumers are taking environmenta issues into consideration as they buy, consume and dispose of products. Consequenty there is a direct connection between a company s abiity to attract and keep consumers and its abiity to deveop and execute environmentay sound strategies. As consumer preferences and government poicies increasingy favour a baanced business approach to the environment, managers are paying more attention to the strategic importance of their environmenta decisions. Irresponsibe behaviour by some firms has ed to consumer boycotts, engthy awsuits and arge fines. Such actions may have harmed firms in ess direct ways, such as negative pubic reations, diversion of management attention and difficuty in hiring top empoyees. In Europe particuary the green consumer movement is arge and growing, and certain countries can be considered eaders and standard setters in green awareness. Of German consumers, for instance, 80 per cent are wiing to pay premiums for househod goods that are recyced, recycabe and non-damaging to the environment; in France 50 per cent of consumers wi pay more at the supermarket for products they perceive as being environmentay friendy. This trend is growing esewhere too: according to a European study, consumers throughout the OECD area are wiing to pay more for green goods (Vandermerwe and Oiff, 1991). Severa retaiers have aso committed themseves to marketing green products (green marketing). Ceary, faiing to consider the environmenta impact of strategic decisions may affect the financia stabiity of the firm and the abiity of that firm to compete with others in the industry. Strategic options Businesses reaize that they must be prepared to provide their customers with information on the environmenta impact of their products and manufacturing processes. 327

28 Part IV Designing the goba marketing programme Figure 11.8 Types of environmenta strategic posture Source: Adapted from Starik et a., (1996), Growing an environmenta strategy, Business Strategy and the Environment, 5, p. 17. Figure 11.8 presents four strategic options that are avaiabe for the firm with environmenta concerns. The choice of strategic environmenta posture wi depend on how an organization wants to create vaue for its green customers and how change oriented its approach is. As can be seen from Figure 11.8, if a firm is more oriented to cost reduction than to benefit enhancement for customers, poution prevention strategies (options 3 and 4) woud probaby be chosen in preference to the deveopment of green products: for exampe by using natura or recyced materias. If a firm is more proactive than accommodative, it tends to be more innovative than otherwise (options 1 and 3). Athough going beyond compiance (i.e. doing more than required according to environmenta egisation) is generay perceived as highy desirabe, SMEs may not have the resources to act proactivey, and hence need to focus on compiance and minor product modification (options 2 and 4). However, because consumers buy products and services primariy to fufi individua needs and wants, companies shoud continue to highight the direct benefits of their products. They shoud not forget to emphasize the traditiona product attributes of price, quaity, convenience and avaiabiity and make ony a secondary appea to consumers on the basis of environmenta attributes (Ginsberg and Boom, 2004). Green aiances between business and environmenta organizations Strategic aiances with environmenta groups (e.g. Greenpeace) can provide five benefits to marketers of consumer goods (Mendeson and Poonsky, 1995): 1 They increase consumer confidence in green products and their caims. It can be assumed that, if an environmenta group supports a firm, product or service, consumers are more ikey to beieve the product s environmenta caims. 2 They provide firms with access to environmenta information. It is in their roe as an information cearing house that environmenta groups may be of immense benefit to organizations with which they form strategic aiances. Manufacturers facing environmenta probems may turn to their strategic partners for advice and information. In some cases environmenta partners may actuay have technica staff who can be used to assist in soving organizationa probems or impementing existing soutions. 328

29 Chapter 11 Product and pricing decisions 3 They give the marketer access to new markets. Most environmenta groups have an extensive support base, which in many cases receives newsetters or other group maiings. Their members receive cataogues marketing a variety of icensed products, a of which are ess environmentay harmfu than other commercia aternatives. Environmenta group members represent a potentia market that can be utiized by producers, even if these groups do not produce speciaized cataogues. An environmenta group s newsetter may discuss how a firm has formed a strategic aiance with the group, as we as the firm s ess environmentay harmfu products. Incusion of this information in a newsetter is a usefu form of pubicity. 4 They provide positive pubicity and reduce pubic criticism. Forming strategic aiances with environmenta groups may aso stimuate increased pubicity. When the Sydney Oympic Bid Committee announced that Greenpeace was the successfu designer for the year 2000 Oympic Viage the story appeared in a major newspapers and on the nationa news. It is highy unikey that this pubicity woud have been generated if a more conventiona architect had been named as the designer of the viage. Once again the pubicity associated with the aiance was positive and credibe. 5 They educate consumers about key environmenta issues for the firm and its product(s). Environmenta groups are vauabe sources of educationa information and materias. They educate consumers and the genera pubic about environmenta probems and aso inform them about potentia soutions. In many cases the pubic views these groups as credibe sources of information, without a vested interest. Marketers can aso pay an important roe as providers of environmenta information through their marketing activities. In doing so they create environmenta awareness of specific issues, their products and their organizations. For exampe, Keoggs in Norway educated consumers and promoted its environmenta concern by pacing environmenta information on the packaging of its cereas reating to various regiona environmenta probems (Word Wide Fund for Nature, 1993). Choosing the correct aiance partner is not a simpe task, as environmenta groups have different objectives and images. Some groups may be wiing to form excusive aiances, where they partner ony one product in a given product category. Other groups may be wiing to form aiances with a products that compy with their specific criteria. The marketer must determine what capabiities and characteristics an aiance partner can bring to the aiance. As with any symbiotic reationship, each partner must contribute to the success of the activity. Poor definition of these characteristics may resut in the firm searching out the wrong partner. McDonad s offers an exampe of a company that gained credibiity through coaboration. The company s coaboration with EDF (Environmenta Defense Fund) in the eary 1990s over its decision to move from Styrofoam to paper packaging simiary aowed the company to increase its credibiity on environmenta issues with consumers (Argenti, 2004) Factors infuencing internationa pricing decisions An SME exporting for the first time, with itte knowedge of the market environment that it is entering, is ikey to set a price that wi ensure that the saes revenue generated at east covers the costs incurred. It is important that firms recognize that the cost structures of products are very significant, but they shoud not be regarded as soe determinants when setting prices. 329

30 Part IV Designing the goba marketing programme Pricing poicy is an important strategic and tactica competitive weapon that, in contrast to the other eements of the goba marketing mix, is highy controabe and inexpensive to change and impement. Therefore pricing strategies and action shoud be integrated with the other eements of the goba marketing mix. Figure 11.9 presents a genera framework for internationa pricing decisions. According to this mode, factors affecting internationa pricing can be broken down into two main groups (interna and externa factors) and four subgroups, which we wi now consider in more detai. Figure 11.9 Internationa pricing framework 330

31 Chapter 11 Product and pricing decisions Price escaation A cost factors (e.g. firms net ex-works price, shipping costs, tariffs, distributor mark-up) in the distribution channe add up and ead to price escaation. The onger the distribution channe, the higher the fina price in the foreign market. Firm-eve factors Internationa pricing is infuenced by past and current corporate phiosophy, organization and manageria poicies. The short-term tactica use of pricing in the form of discounts, product offers and reductions is often emphasized by managers at the expense of its strategic roe, and yet pricing over recent years has payed a very significant part in the restructuring of many industries, resuting in the growth of some businesses and the decine of others. In particuar, Japanese firms have approached new markets with the intention of buiding market share over a period of years by reducing price eves, estabishing the brand name, and setting up effective distribution and servicing networks. The market share objectives of the Japanese firms have usuay been accompished at the expense of short-term profits, as internationa Japanese firms have consistenty taken a ong-term perspective on profit. They are usuay prepared to wait much onger for returns on investments than some of their western counterparts. The choice of foreign market entry mode aso affects the pricing poicy. A manufacturer with a subsidiary in a foreign country has a high eve of contro over the pricing poicy in that country. Product factors Key product factors incude the unique and innovative features of the product and the avaiabiity of substitutes. These factors wi have a major impact on the stage of the product ife cyce, which wi aso depend on the market environment in target markets. Whether the product is a service or a manufactured or commodity good sod into consumer or industria markets is aso significant. The extent to which the organization has had to adapt or modify the product or service, and the eve to which the market requires service around the core product, wi aso affect cost and thereby have some infuence on pricing. Costs are aso hepfu in estimating how rivas wi react to the setting of a specific price, assuming that knowedge of one s own costs heps in the assessment of competitors reactions. Added to the above is the intermediary cost, which depends on channe ength, intermediary factors and ogistica costs. A these factors add up and ead to price escaation. The exampe in Tabe 11.4 shows that, due to additiona shipping, insurance and distribution charges, the exported product costs some 21 per cent more in the export market than at home. Through the use of an additiona distribution ink (an importer), the product costs 39 per cent more abroad than at home. Many exporters are not aware of rapid price escaation; they are preoccupied with the price they charge to the importer. However, the fina consumer price shoud be of vita concern because it is on this eve that the consumer can compare prices of different competitive products and it is this price that pays a major roe in determining the foreign demand. Price escaation is not a probem for exporters aone. It affects a firms invoved in cross-border transactions. Companies that undertake substantia intracompany shipment of goods and materias across nationa borders are exposed to many of the additiona charges that cause price escaation. The foowing management options are avaiabe to counter price escaation: Rationaizing the distribution process. One option is to reduce the number of inks in the distribution process, either by doing more in-house or by circumventing some channe members. Lowering the export price from the factory (firm s net price), thus reducing the mutipier effect of a the mark-ups. 331

32 Part IV Designing the goba marketing programme Tabe 11.4 Price escaation (exampes) Domestic Foreign marketing channe channe (a) (b) (c) Firm Firm Firm Border Border Whoesaer Whoesaer Importer Retaier Retaier Whoesaer Consumer Consumer Retaier Consumer Firm s net price Insurance and shipping costs Landed cost Tariff (10% of anded cost) Importer pays (cost) 121 Importer s margin/mark-up (15% of cost) 18 Whoesaer pays (cost) Whoesaer /mark-up (20% of cost) Retaier pays (cost) Retai margin/mark-up (40% of cost) Consumer pays (price) (excusive of VAT) % price escaation over domestic channe Estabishing oca production of the product within the export market to eiminate some of the cost. Pressurizing channe members to accept ower profit margins. This may be appropriate if these intermediaries are dependent on the manufacturer for much of their turnover. It may be dangerous to overook traditiona channe members. In Japan, for exampe, the compex nature of the distribution system, which often invoves many different channe members, makes it tempting to consider radica change. However, existing intermediaries do not ike to be overooked, and their possibe network with other channe members and the government may make it dangerous for a foreign firm to attempt to cut them out. Environmenta factors The environmenta factors are externa to the firm and thus uncontroabe variabes in the foreign market. The nationa government contro of exports and imports is usuay based on poitica and strategic considerations. Generay speaking, import contros are designed to imit imports in order to protect domestic producers or reduce the outfow of foreign exchange. Direct restrictions commony take the form of tariffs, quotas and various non-tariff barriers. Tariffs 332

33 Chapter 11 Product and pricing decisions directy increase the price of imports uness the exporter or importer is wiing to absorb the tax and accept ower profit margins. Quotas have an indirect impact on prices. They restrict suppy, thus causing the price of the import to increase. Since tariff eves vary from country to country there is an incentive for exporters to vary the price somewhat from country to country. In some countries with high customs duties and high price easticity the base price may have to be ower than in other countries if the product is to achieve satisfactory voume in these markets. If demand is quite ineastic the price may be set at a high eve, with itte oss of voume, uness competitors are seing at ower prices. Government reguations on pricing can aso affect the firm s pricing strategy. Many governments tend to have price contros on specific products reated to heath, education, food and other essentia items. Another major environmenta factor is fuctuation in the exchange rate. An increase (revauation) or decrease (devauation) in the reative vaue of a currency can affect the firm s pricing structure and profitabiity. Market factors One of the critica factors in the foreign market is the purchasing power of the customers (customers abiity to pay). The pressure of competitors may aso affect internationa pricing. The firm has to offer a more competitive price if there are other seers in the market. Thus the nature of competition (e.g. oigopoy or monopoy) can infuence the firm s pricing strategy. Under conditions approximating pure competition price is set in the marketpace. Price tends to be just enough above costs to keep margina producers in business. Thus, from the point of view of the price setter, the most important factor is cost. The coser the substitutabiity of products, the more neary identica the prices must be, and the greater the infuence of costs in determining prices (assuming a arge enough number of buyers and seers). Under conditions of monopoistic or imperfect competition the seer has some discretion to vary the product quaity, promotiona efforts and channe poicies in order to adapt the price of the tota product to serve preseected market segments. Nevertheess the freedom to set prices is sti imited by what competitors charge, and any price differentias from competitors must be justified in the minds of customers on the basis of differentia utiity: that is, perceived vaue. When considering how customers wi respond to a given price strategy, Nage (1987) has suggested nine factors that infuence the sensitivity of customers to prices: 1 More distinctive product. 2 Greater perceived quaity of products. 3 Consumers ess aware of substitutes in the market. 4 Difficuty in making comparisons (e.g. in the quaity of services such as consutancy or accountancy). 5 The price of a product represents a sma proportion of tota expenditure of the customer. 6 The perceived benefit for the customer increases. 7 The product is used in association with a product bought previousy, so that, for exampe, components and repacements are usuay extremey highy priced. 8 Costs are shared with other parties. 9 The product or service cannot be stored. Price sensitivity is reduced in a these nine cases. In the foowing sections we discuss the different avaiabe pricing strategies. 333

34 Part IV Designing the goba marketing programme Internationa pricing strategies In determining the price eve for a new product the genera aternatives are as shown in Figure Skimming In this strategy a high price is charged to skim the cream from the top end of the market, with the objective of achieving the highest possibe contribution in a short time. For a marketer to use this approach the product has to be unique, and some segments of the market must be wiing to pay the high price. As more segments are targeted and more of the product is made avaiabe the price is graduay owered. The success of skimming depends on the abiity and speed of competitive reaction. Products shoud be designed to appea to affuent and demanding consumers, offering extra features, greater comfort, variabiity or ease of operation. With skimming the firm trades off a ow market share against a high margin. Probems with skimming are as foows: Having a sma market share makes the firm vunerabe to aggressive oca competition. Maintenance of a high-quaity product requires a ot of resources (promotion, aftersaes service) and a visibe oca presence, which may be difficut in distant markets. If the product is sod more cheapy at home or in another country grey marketing (parae importing) is ikey. Market pricing If simiar products aready exist in the target market, market pricing may be used. The fina customer price is based on competitive prices. This approach requires the exporter to have a thorough knowedge of product costs, as we as confidence that the product ife cyce is ong enough to warrant entry into the market. It is a reactive approach and may ead to probems if saes voumes never rise to sufficient eves to produce a satisfactory return. Athough firms typicay use pricing as a differentiation too the goba marketing manager may have no choice but to accept the prevaiing word market price. From the price that customers are wiing to pay it is possibe to make a so-caed retrograde cacuation where the firm uses a reversed price escaation to cacuate backwards (from market price) to the necessary (ex-factory) net price. If this net price can create a satisfactory contribution margin then the firm can go ahead. Figure Strategies for pricing a new product 334

35 Chapter 11 Product and pricing decisions Penetration pricing A penetration pricing poicy is used to stimuate market growth and capture market shares by deiberatey offering products at ow prices. This approach requires mass markets, price-sensitive customers and reduction in unit costs through economies of scae and experience curve effects. The basic assumption that ower prices wi increase saes wi fai if the main competitors reduce their prices to a correspondingy ow eve. Another danger is that prices might be set so ow that they are not credibe to consumers. There exist confidence eves for prices beow which consumers ose faith in the product s quaity. Motives for pricing at ow eves in certain foreign markets might incude the foowing: Intensive oca competition from riva companies. Lower income eves of oca consumers. Some firms argue that, since their R&D and other overhead costs are covered by home saes, exporting represents a margina activity intended merey to bring in as much additiona revenue as possibe by offering a ow seing price. Japanese companies have used penetration pricing intensivey to gain market share eadership in a number of markets, such as cars, home entertainment products and eectronic components. Price changes Price changes on existing products are caed for when a new product has been aunched or when changes occur in overa market conditions (such as fuctuating foreign exchange rates). Tabe 11.5 shows the percentage saes voume increase or decrease required to maintain the eve of profit. An exampe (the figure in bod type in Tabe 11.5) shows how the tabe functions. A firm has a product with a contribution margin of 20 per cent. The firm woud ike to know how much the saes voume shoud be increased as a consequence of a price reduction of 5 per cent, if it wishes to keep the same tota profit contribution. The cacuation is as foows: Before price reduction Per product saes price 100 variabe cost per unit 80 contribution margin 20 Tota contribution margin: = 2,000 After price reduction (5%) Per product saes price 95 variabe cost per unit 80 contribution margin 15 Tota contribution margin: = 1,995 As a consequence of a price reduction of 5 per cent, a 33 per cent increase in saes is required. If a decision is made to change prices, reated changes must aso be considered. For exampe, if an increase in price is required it may be accompanied, at east initiay, by increased promotiona efforts. When reducing prices the degree of fexibiity enjoyed by decision makers wi tend to be ess for existing products than for new products. This foows from the high probabiity that the existing product is now ess unique, faces stronger competition and is 335

36 Part IV Designing the goba marketing programme Tabe 11.5 Saes voume increase or decrease (%) required to maintain tota profit contribution Profit contribution margin (price variabe cost per unit as % of the price) Price reduction (%) Saes voume increase (%) required to maintain tota profit contribution Profit contribution margin (price variabe cost per unit as % of the price) Price increase (%) Max. saes voume reduction (%) required to maintain tota profit contribution Experience curve pricing Combination of the experience curve (owering costs per unit with accumuated production of the product) with typica market price deveopment within an industry. 336 aimed at a broader segment of the market. In this situation the decision maker wi be forced to pay more attention to competitive and cost factors in the pricing process. The timing of price changes can be neary as important as the changes themseves. For exampe, a simpe tactic of time agging competitors in announcing price increases can produce the perception among customers that you are the most customerresponsive suppier. The extent of the time ag can aso be important. In one company an independent survey of customers (Garda, 1995) showed that the perception of being the most customer-responsive suppier was generated just as effectivey by a six-week ag in foowing a competitor s price increase as by a six-month ag. A considerabe amount of money woud have been ost during the unnecessary four-and-a-haf-month deay in announcing a price increase. Experience curve pricing Price changes usuay foow changes in the product s stage in the ife cyce. As the product matures more pressure wi be put on the price to keep the product competitive because of increased competition and ess possibiity of differentiation. Let us aso integrate the cost aspect into the discussion. The experience curve has its roots in a commony observed phenomenon caed the earning curve, which states that as peope repeat a task they earn to do it better and faster. The earning curve appies to the abour portion of manufacturing cost. The Boston Consuting Group extended the earning effect to cover a the vaue-added costs reated to a product manufacturing pus marketing, saes, administration and so on. The resuting experience curves, covering a vaue chain activities (see Figure 11.11), indicate that the tota unit costs of a product in rea terms can be reduced by a certain percentage with each doubing of cumuative production. The typica decine in cost is 30 per cent (termed a 70 per cent curve), athough greater and esser decines are observed (Czepie, 1992, p. 149).

37 Chapter 11 Product and pricing decisions Figure Experience curves of vaue chain activities Source: Czepie, 1992, Competitive Marketing Strategy, pub. Prentice-Ha, p If we combine the experience curve (average unit cost) with the typica market price deveopment within an industry we wi have a reationship simiar to that shown in Figure Figure shows that after the introduction stage (during part of which the price is beow the tota unit cost), profits begin to fow. Because suppy is ess than demand prices do not fa as quicky as costs. Consequenty the gap between costs and prices widens, in effect creating a price umbrea, attracting new competitors. However, the competitive situation is not a stabe one. At some point the umbrea wi be foded by one or more competitors reducing the prices in an attempt to gain or retain market share. The resut is that a shake-out phase wi begin: inefficient producers wi be shaken out by rapidy faing market prices, and ony those with a competitive price/ cost reationship wi remain. Figure Product ife cyce stages and the industry price experience curve Source: Czepie, 1992, Competitive Marketing Strategy, pub. Prentice-Ha, p

38 Part IV Designing the goba marketing programme Pricing across products (product ine pricing) With across-product pricing the various items in the ine may be differentiated by pricing them appropriatey to indicate, for exampe, an economy version, a standard version and a top-of-the-range version. One of the products in the ine may be priced to protect against competitors or to gain market share from existing competitors. Products with ess competition may be priced higher to subsidize other parts of the product ine, so as to make up for the ost contribution of such fighting brands. Another strategy is price bunding (tota package price), where a certain price is set for customers who simutaneousy buy severa items within the product ine (one price for a persona computer package with software and printer). In a such cases a key consideration is how much consumers in different countries want to save money, to spend time searching for the best buy and so forth. Furthermore, some items in the product ine may be priced very ow to serve as oss eaders and induce customers to try the product. A specia variant of this is the so-caed buy in foow on strategy (Weigand, 1991). A cassic exampe of this strategy is the razor bade ink where Giette, for exampe, uses a penetration price on its razor (buy in) but a skimming pricing (reativey high price) on its razor bades (foow on). Thus the inked product or service the foow on is sod at a significant contribution margin. This inevitaby attracts hitchhikers who try to se foow-on products without incurring the cost of the buy in. The buy in foow on strategy is different from a ow introductory price, which is based on the hope that the customer (of habit) wi return again and again at higher prices. With the buy in foow on strategy saes of two products or services are powerfuy inked by factors such as ega contracts, patents, trade secrets, experience curve advantages and technoogica inks. Other exampes of the strategy are as foows: The price of a Poaroid instant camera is very ow, but Poaroid hopes that this wi generate saes of far more profitabe fims for many years. The teephone companies se mobie (ceuar) teephones at a near giveaway price, hoping that the customer wi be a heavy user of the profitabe mobie teephone network. Product-service bunde pricing Bunding product and services together in a system-soution product. If the customer thinks that entry price is a key barrier, service contracts can be priced higher, which aows for ower entry product pricing the practice in many software businesses. Product-service bunde pricing The structure and eve of pricing is perhaps the most crucia design choice in embedded services. To get pricing right, a company needs a cear grasp of its strategic intent and its sources of competitive advantage and must often make trade-offs between product penetration and the growth and margins of its service business. A company s strategic intent argey determines the appropriate extent of productservice bunding and the vaue attributed to services in such bundes. Companies that focus on enhancing or protecting core products shoud price their services to improve their product penetration. The pricing strategy to achieve such product pu-through varies according to customer purchasing decisions. Companies can raise the vaue of the product in use and increase its pu-through by bunding products and services into a higher-vaue soution. If the entry price is a key factor, service contracts can be priced higher, which aows for ower product pricing the practice in many software businesses. In some cases, companies can raise the price of maintenance service contracts to acceerate the rate of product upgrades. The strategic goa of product pu-through aso means that saes and fied agents shoud have some fexibiity and authority in the pricing of services. However, companies must sti activey manage pricing discipine by ensuring that these saespeope are accountabe for the tota profitabiity of the bundes they se. 338

39 Chapter 11 Product and pricing decisions By contrast, companies aiming to create an independent, growth-oriented service business shoud price their offerings to achieve profitabe growth and set pricing targets as cose to the service s vaue to customers as competitive aternatives permit. These companies shoud set pricing guideines and deegate authority centray, with reativey imited freedom for saes and fied personne and cear rues for discounting. Bunding prices for services and products is usuay a bad idea for a growth patform in services, since within any given customer s organization, the person who buys the service might not be the one who buys the product. It is aso difficut to bunde prices whie hoding both product and service business units accountabe for their independent saes and margin targets. The source of competitive advantage scae or ski mainy affects pricing structures. If economies of scae drive a business, its pricing shoud be based on standard units (such as terabytes of storage managed) and it shoud offer voume discounts to encourage growth in usage. Such companies ought to make the price of any customized variation from their standard service offerings extremey high, since these exceptions push up costs throughout the business. By contrast, if a service business reies mosty on specia skis, it shoud base its prices on the costs its customers avoid by using its services or on the cost of the next-best aternative. Such vaue-based pricing requires a sophisticated anaysis of a customer segment s tota cost of ownership and a deep understanding of the cost structure of the service business. Competitive benchmarks and the cost of depoying the skis shoud determine the respective upper and ower bounds for these price eves. In the best case, companies can package this inteigence into pricing toos that aow saes and fied agents to estimate customer vaue more accuratey and thus improve fied-eve pricing decisions (Auguste et a., 2006). Pricing across countries (standardization versus differentiation) A major probem for companies is how to coordinate prices between countries. There are two essentia opposing forces: first, to achieve simiar positioning in different markets by adopting argey standardized pricing; and second, to maximize profitabiity by adapting pricing to different market conditions. In determining to what extent prices shoud be standardized across borders two basic approaches appear: 1 Price standardization. This is based on setting a price for the product as it eaves the factory. At its simpest it invoves setting a fixed word price at the headquarters of the firm. This fixed word price is then appied in a markets after taking account of factors such as foreign exchange rates and variance in the reguatory context. For the firm this is a ow-risk strategy, but no attempt is made to respond to oca conditions and so no effort is made to maximize profits. However, this pricing strategy might be appropriate if the firm ses to very arge customers, who have companies in severa countries. In such a situation the firm might be under pressure from the customer ony to deiver at the same price to every country subsidiary, throughout the customer s mutinationa organization. In Figure this is exempified, for exampe, by the internationa activities of arge retai organizations. Another advantage of price standardization incudes the potentia for rapid introduction of new products in internationa markets and the presentation of a consistent (price) image across markets. 2 Price differentiation. This aows each oca subsidiary or partner (agent, distributor, etc.) to set a price that is considered to be the most appropriate for oca conditions, and no attempt is made to coordinate prices from country to country. Cross-cutura empirica research has found significant differences in customer characteristics, 339

40 Part IV Designing the goba marketing programme Figure Structura factors of standardized versus differentiated pricing in European consumer goods markets Source: Reprinted from European Management Journa, Vo. 12, No. 2, Dier. H. and Bukhari, I. (1994) Pricing conditions in the European Common Market, p. 168, Copyright 1994, with permission from Esevier. preference and purchasing behaviour among different countries (Theodosiou and Katsikeas, 2001). The weakness with price differentiation is the ack of contro that the headquarters has over the prices set by the subsidiary operations or externa partner. Significanty different prices may be set in adjacent markets, and this can refect bady on the image of mutinationa firms. It aso encourages the creation of parae importing/grey markets, whereby products can be purchased in one market and sod in another, undercutting the estabished market prices in the process. The underying forces favouring standardization or differentiation are shown in Figure An internationa pricing taxonomy As we discussed previousy, pricing decisions in the internationa environment tend to be a function of the interpay between the externa, market-reated compexities that shape firm operations and the capabiities of the firm to respond effectivey to these contingencies. Soberg s (1997) framework captures this interface in a meaningfu way and eads to sufficienty important consequences for the export pricing behaviour of firms in foreign markets. Soberg suggests that firms internationa strategic behaviour is shaped primariy by two dimensions: (a) the degree of gobaism of the firm s industry (a measure of the market reated factors) and (b) its degree of preparedness for internationaization (a measure of the firm s abiities to respond to these factors). These two dimensions are discussed in Chapter 1 (Figure 1.2) with the purpose of suggesting under which circumstances the firm shoud stay at home, strengthen the goba position or something in between. In Figure an internationa pricing taxonomy is proposed aong these two dimensions (Soberg et a., 2006). A goba industry is dominated by a few, arge major competitors that rue their categories in word markets within their product category. Thus, the degree of gobaism aong the industry gobaism dimension is considered to vary between two extremes: a monopoy at one end (the right) and atomistic competition at the other (the eft). 340

41 Chapter 11 Product and pricing decisions Figure A taxonomy of internationa pricing practices Source: Adapted from Soberg et a., 2006, p. 31. In the origina artice Soberg has used the concept Gobaity instead of Gobaism. The strategic impication of this perspective is that the monopoistic and oigopoistic goba payer woud be the price setter, whereas the firm in the atomistic (mutioca) market setting woud be exposed to oca market forces, finding itsef needing to foow market prices in every case. Athough most firms fa into intermediate positions aong this continuum, we beieve that the everage of the individua internationa firm in setting its pricing strategy wi be greaty infuenced by the gobaism of the competitive environment in which it wi operate. On the other dimension, preparedness for internationaization, experienced firms find internationa pricing to be a more compicated matter, even though they devote additiona resources to coecting and processing greater amounts of information. These firms are found to have the internationa preparedness that is necessary to offset the effects of reduced prices when they penetrate new markets or respond to competitive attacks, to be more sef-confident in setting pricing strategies, and, in genera, to enjoy higher market shares in the export market. In contrast, smaer and more inexperienced firms seem to be too weak both in reation to their oca counterparts and in terms of generating oca market insight to be abe to determine effective price eves for their products in foreign markets. Therefore, they tend to possess smaer shares in their markets and to foow the pricing practices of their competitors or segment eaders. Looking through the ens of this framework we assume that arge, internationay experienced exporters wi be ikey to centraize their pricing decisions and wi prefer higher degrees of contro over those decisions, whereas smaer, often new-to-export, and internationay inexperienced firms wi be ikey to experiment with decentraized and often opportunistic modes of price-setting behaviour in their market. The foowing discusses the characteristics of each of the four strategic prototypes in Figure Prototype 1: The oca price foower firm In this ce the firm (manufacturer) wi ony have imited internationa experience, and consequenty, the firm s oca export intermediate (agent or distributor) wi serve as the key informant for the firm. This information asymmetry bears the danger that the export intermediate might misead the exporter by exercising opportunism or by pursuing goas that are in confict with those of the exporter. That may cause further transaction costs, and ead to internaization (see section 3.3 on transaction cost anaysis). 341

42 Part IV Designing the goba marketing programme Because of the imited market knowedge the exporter is prone to cacuate its prices crudey and most ikey on the basis of cost and the (sometimes insufficient or biased) information from its oca export intermediary. In the extreme case such an exporter woud respond ony to unsoicited offers from abroad, and wi tend foowing a pricing procedure based on interna cost information, thus missing potentia internationa business opportunities. Prototype 2: The goba price foower firm Firms that fa into the goba price foower ce have imited preparedness for internationaization. In contrast, however, goba price foower firms are often more motivated in expanding their internationa market invovement, as they are pushed by the goba market. Firms in this ce are expected to charge a standardized price in a countries because the interconnected internationa markets have more or ess the same price eve. Given their margina position in goba markets, such firms have imited bargaining everage and may be compeed to adopt the price eve set by goba market eaders, often very arge goba customers. The Prototype 2 firms are typicay under constant pressure from their more efficient distribution and gobay branded counterparts to adjust their prices. Prototype 3: The mutioca price setter firm Firms in this ce are we-prepared internationa marketers with we-entrenched positions in oca markets. Typicay they are capabe of assessing oca market conditions through in-depth anayses and evauation of market information, estabished market inteigence systems and/or deepy rooted market knowedge. They tend to have a tight contro of their oca market distribution networks through information and feedback systems. Prototype 3-firms adapt their prices from one market to the next in ight of the differentiated requirements of each oca market and manage the different market and pricing structures they cope with in their many (mutidomestic) markets with reativey high sophistication. In contrast to their oca price foower counterparts (Prototype 1), however, these firms are often the pricing eaders in their oca markets and base their pricing strategy primariy on oca market conditions in each market. Given their mutidomestic orientation, these firms tend to shift pricing decision-making authority to oca subsidiary managers, even though their headquarters personne cosey monitors saes trends in each oca market. Firms in this ce face chaenges from grey market imports in their oca markets that are motivated by the opportunity for cheaper producers to expoit price differences across markets. Prototype 4: The goba price eader firm Firms in this ce hod strong positions in key word markets. They manage smoothy functioning marketing networks, operating mainy through hierarchica entry modes or in combination with intermediate modes ike joint ventures or aiances in major word markets. Prototype 4-firms compete against a imited number of competitors in each major market, simiar to a goba (or a regiona) oigopoy. Typica of oigopoy payers, they tend to be chaenged by the cross-border transparency of the price mechanism; manage goba (or regiona) constraints, such as demand patterns and market reguation mechanisms; and set prices pan-regionay (i.e. across the EU). Goba price eaders tend to maintain reativey high price eves in their markets, though possiby not as effectivey as their mutioca counterparts. Compared with the goba price eader firm, the mutioca price setter more effectivey erects oca entry barriers, such 342

43 Chapter 11 Product and pricing decisions as brand eadership, has coser reationships with its oca distributors and a deeper understanding of oca conditions in each oca market, thus protecting itsef from the downside of internationa price competition (Soberg et a., 2006). Goba pricing contract A customer requiring one goba price (per product) from the suppier for a its foreign SBUs and subsidiaries. Estabishing goba-pricing contracts (GPCs) As gobaization increases the foowing sentence is heard frequenty among goba suppiers and goba customers: Give me a goba-pricing contract (GPC) and I consoidate my wordwide purchase with you. Increasingy, goba customers are demanding such contracts from suppiers. For exampe, in 1998 Genera Motor s Powertrain Group tod suppiers of components used in GM s engines, transmissions and subassembies to charge GM the same for parts from one region as they did for parts from another region. Suppiers do not need to ose out when customers gobaize. The most attractive goba-pricing opportunities are those that invove suppiers and customers working together to identify and eiminate inefficiencies that harm both. Sometimes, however, suppiers do not have a choice they cannot afford to shut themseves out of business with their argest and fastest-growing customers. Suppiers and customers have different advantages and disadvantages with gobapricing contracts and Tabe 11.6 iustrates some of these. Tabe 11.6 Goba pricing contracts (GPCs): advantages and disadvantages Advantages Disadvantages Customers Lower prices wordwide couped with higher eves of service. Standardization of products and services offered across markets. Efficiencies in a processes, incuding new product deveopment, manufacturing, inventory, ogistics and customer service Faster diffusion of innovations gobay. Customer might be ess adaptabe to oca market variance and changes over time. Suppier might not have capabiities to provide consistent quaity and performance across markets. Suppier might use customer s over-dependence to extract higher prices. Loca managers might resist goba contracts and prefer deaing with oca suppiers. Costs of monitoring goba contracts might outstrip the benefits. Suppiers Easiy gain access to new markets and grow the business. Consoidate operations and achieve economies of scae. Work with industry eaders and infuence market deveopment by using them as showcase accounts. Coaborate with customers and deveop strong reationships that are difficut for potentia competitors to break into. Rectify price and service anomaies in a customer reationship across country markets. Loca managers sometimes resist change, and suppier may get caught in the crossfire between customer s HQ and country managers. Suppier might ose the abiity to serve other attractive customers. Customer might not be abe to deiver on promises. Customer might take advantage of cost information shared in the reationship. Suppier might become over-dependent on one customer, even when there are other more attractive customers to serve. Suppier might have a confict with existing channes of distribution in the new markets. Source: Adapted from Narayandas et a., 2000, pp

44 Part IV Designing the goba marketing programme One chemicas manufacturer concentrated on reationships with a few seect customers. It had decided that its strength ay in vaue-added services but that potentia customers in emerging markets were fixated on price. The seect customers, however, were interested in money-saving suppy and inventory management initiatives deveoped jointy with the suppier. Goba customers demands for detaied cost information can aso put suppiers at risk. Toyota, Honda, Xerox and others force suppiers to open their books for inspection. Their stated objectives: to hep suppiers identify ways to improve processes and quaity whie reducing costs and to buid trust. But in an economic downturn the goba customer might seek price reductions and suppementary services. European pricing strategy In 1991 price differentias for identica consumer goods across Europe were around 20 per cent on average, but much greater differences were apparent in certain products (Simon and Kucher, 1993). In another study (Dier and Bukhari, 1994) there were aso considerabe price differences for identica take-home ice-cream products. The causes of price differentias are differences in reguations, competition, distribution structures and consumer behaviour, such as wiingness to pay. Currency fuctuations can aso infuence short-term price differences. The pressures of regionaization are acceerating the move to uniform pricing, but Simon and Kucher (1993) warn that this is a potentia time bomb, as the pressure is for uniform pricing to be at the owest pricing eves. Europe was a price differentiation paradise as ong as markets were separated. But it is becoming increasingy difficut to retain the od price differentias. There are primariy two deveopments that may force companies to standardize prices across European countries: 1 Internationa buying power of cross-european retai groups. 2 Parae imports/grey markets. Because of differentiated prices across countries, buyers in one country are abe to purchase at a ower price than in another country. As a resut there wi be an incentive for customers in ower-price markets to se goods to higher-price markets in order to make a profit. Simon and Kucher (1993) suggest a price corridor (Figure 11.15). The prices in the individua countries may ony vary within that range. Figure is aso interesting in the ight of the euro, which had been fuy impemented by January However, price differences that can be justified by transportation costs and short-term competitive conditions, etc., may sti be maintained. They recommend that business in smaer countries shoud be sacrificed, if necessary, in order to retain acceptabe pricing eves in the big markets such as France, Germany, the United Kingdom and Itay. For exampe, for a pharmaceutica manufacturer it is more profitabe not to se in the Portuguese pharmaceutica market than to accept a price reduction of 10 per cent in the German market due to parae imports from Portuga. Transfer pricing Prices charged for intracompany movement of goods and services. Whie transfer prices are interna to the company, they are important externay for cross-border taxation purposes. Transfer pricing Transfer prices are those charged for intracompany movement of goods and services. Many purey domestic firms need to make transfer-pricing decisions when goods are transferred from one domestic unit to another. Whie these transfer prices are interna to the company they are important externay because goods being transferred from country to country must have a vaue for cross-border taxation purposes. The objective of the corporation in this situation is to ensure that the transfer price paid optimizes corporate rather than divisiona objectives. This can prove difficut 344

45 Chapter 11 Product and pricing decisions Figure Deveopment of prices in Europe Source: Simon and Kucher, 1993, p. 26. Copyright ESOMAR. when a company internationay is organized into profit centres. For profit centres to work effectivey a price must be set for everything that is transferred, be it working materias, components, finished goods or services. A high transfer price for exampe, from the manufacturing division to a foreign subsidiary is refected in an apparenty poor performance by the foreign subsidiary (see the high mark-up poicy in Tabe 11.7), whereas a ow price woud not be acceptabe to the domestic division providing the goods (see the ow mark-up poicy in Tabe 11.7). This issue aone can be the cause of much mistrust between subsidiaries. The best of Tabe 11.7 s two mark-up poicies seen from the consoidated point of view is to use a high mark-up poicy, since it generates a net income of $550, as against Tabe 11.7 Tax effect of ow versus high transfer price on net income ($) Manufacturing Distribution/seing Consoidated affiiate affiiate company (division) (subsidiary) tota Low mark-up poicy Saes 1,400 2,000 2,000 Less cost of goods sod 1,000 1,400 1,000 Gross profit ,000 Less operating expenses Taxabe income Less income taxes (25%/50%) Net income High mark-up poicy Saes 1,700 2,000 2,000 Less cost of goods sod 1,000 1,700 1,000 Gross profit ,000 Less operating expenses Taxabe income Less income taxes (25%/50%) Net income Note: Manufacturing affiiate pays income taxes at 25%. Distribution affiiate pays income taxes at 50%. Source: Adapted from Eiteman and Stonehi, Mutinationa Business Finance, 4th edn, pub. Addison Wesey. 345

46 Part IV Designing the goba marketing programme $475 from using a ow mark-up poicy. The best soution depends on the tax rates in the countries of the manufacturing and distribution affiiates (subsidiaries). There are three basic approaches to transfer pricing: 1 Transfer at cost. The transfer price is set at the eve of the production cost and the internationa division is credited with the entire profit that the firm makes. This means that the production centre is evauated on efficiency parameters rather than profitabiity. The production division normay disikes seing at production cost because it beieves it is subsidizing the seing subsidiary. When the production division is unhappy the seing subsidiary may get suggish service, because the production division is serving more attractive opportunities first. 2 Transfer at arm s ength. Here the internationa division is charged the same as any buyer outside the firm. Probems occur if the overseas division is aowed to buy esewhere when the price is uncompetitive or the product quaity is inferior, and further probems arise if there are no externa buyers, making it difficut to estabish a reevant price. Nevertheess the arm s-ength principe has now been accepted wordwide as the preferred (not required) standard by which transfer prices shoud be set (Fraedrich and Bateman, 1996). 3 Transfer at cost pus. This is the usua compromise, where profits are spit between the production and internationa divisions. The actua formua used for assessing the transfer price can vary, but usuay it is this method that has the greatest chance of minimizing executive time spent on transfer-price disagreements, optimizing corporate profits and motivating the home and internationa divisions. A senior executive is often appointed to rue on disputes. A good transfer-pricing method shoud consider tota corporate profie and encourage divisiona cooperation. It shoud aso minimize executive time spent on transfer-price disagreements and keep the accounting burden to a minimum. Currency issues A difficut aspect of export pricing is the decision about what currency the price shoud be quoted in. The exporter has the foowing options: the foreign currency of the buyer s country (oca currency); the currency of the exporter s country (domestic currency); the currency of a third country (usuay US doars); a currency unit such as the euro. If the exporter quotes in the domestic currency then not ony is it administrativey much easier, but aso the risks associated with changes in the exchange rate are borne by the customer, whereas by quoting prices in the foreign currency the exporter bears the exchange rate risk. However, there are benefits to the exporter in quoting in foreign currency: Quoting in foreign currency coud be a condition of the contract. It coud provide access to finance abroad at ower interest rates. Good currency management may be a means of gaining additiona profits. Customers normay prefer to be quoted in their own currency in order to be abe to make competitive comparisons and know exacty what the eventua price wi be. Another difficut probem that exporters face is caused by fuctuating exchange rates. A company in a country with a devaued currency can (a other things being equa) strengthen its internationa competitive position. It can choose to reduce prices in foreign currencies or it can eave prices unchanged and instead increase profit margins. 346

47 Chapter 11 Product and pricing decisions When the Itaian ira dropped by per cent in vaue against the German mark it gave the Itaian car producer Fiat a competitive advantage in pricing. The German car exporters, such as Vokswagen, were adversey affected and had to ower its ist prices. In this respect the geographic pattern of a firm s manufacturing and saes subsidiaries compared with those of its main competitors becomes very important, since a oca subsidiary can absorb most of the negative effects of a devauation Impications of the Internet for pricing across borders Europe s singe currency, the euro ( has finay become a reaity after more than a decade of panning and preparation. In one stroke the singe currency has created the argest singe economy in the word, with a arger share of goba trade and a greater number of consumers than in the United States. The impication is that Europe suddeny became a singe market by the end of 2000, and peope can purchase from another country as easiy as they can from a shop across the road. The same currency wi be used; ony the anguage issue remains. Opinion in Europe is that, as more of the popuation goes onine, and as Europe starts using its new singe currency, onine shopping wi experience a tremendous growth. Most of this growth has been fueed by aggressive price cutting from internet service providers (ISPs). A number of UK companies, for exampe, are now offering free internet access or pay-as-you-go modes, which have encouraged new sections of the popuation to try the Internet for the first time. A European singe currency was a ong-hed ambition for members of the European Union. The idea was first considered in the 1970s, but knocked off-course by oi price rises. It re-emerged in the eary 1980s and was finay agreed to in the 1992 Maastricht Treaty. There were many accounting criteria to be met by each country, such as the contro of the rate of infation and the debt/gdp ratio. Most countries have met these criteria and were permitted to join the European Monetary Union. The euro is now the currency of 13 European Union member states: Begium, Germany, Greece, Spain, France, Ireand, Itay, Luxembourg, the Netherands, Austria, Portuga, Finand and Sovenia. Other member states are ooking to adopt the euro in the near future. The United Kingdom being outside the euro region wi be quite inconvenient for many US companies who trade heaviy with UK companies or have UK subsidiaries. The main detaied impications of the euro wi be that it wi: ower prices for consumers by making prices transparent across Europe; create a rea singe market by reducing friction to trade caused by high transaction costs and fuctuating currencies; enhance competition by forcing companies to concentrate on price, quaity and production instead of hiding behind weak currencies; benefit SMEs and consumers by making it easier for the former to enter foreign markets and aowing the atter, increasingy via the internet, to shop in the owest priced markets; estabish infation and interest rate stabiity via the new European Centra Bank; and ower the costs of doing business through ower prices, ower interest rates, no transaction costs or oss through exchanging currencies, and the absence of exchange rate fuctuations. 347

48 Part IV Designing the goba marketing programme In short, the singe currency wi significanty increase competition, ower transaction costs, and bring about greater certainty. These new forces wi bring about structura reforms in Europe. Amost every aspect of Europe s business and poitica environment wi be affected. Perhaps most importanty, marketing and pricing strategies need rethinking. Because the euro wi aow easy price comparison across Europe (especiay via the Internet), it wi revea the differences between higher and ower priced markets. For those seing via the Internet the euro wi make it easier to do business and give encouragement to companies seing to European customers. Since Europeans wi now be abe to shop and compare prices at the cick of a mouse they wi aso be more favouraby incined towards e-commerce. In any singe European country there is not usuay much competition for a given product, since purchasing habits have aways been oca (in one s own country). Now that Europeans wi be abe to shop internationay via the Internet they wi become aware of other choices and prices for the same product that were not previousy known. Competition wi heat up for the buyer s euro, and this shoud put a downward pressure on prices. However, recent research has aso shown that the Internet is not creating a state of perfect competition with decreasing prices as a resut. In fact, in some cases, onine prices are higher than those of conventiona retai outets. Research has aso shown that onine consumers are not as price sensitive as had previousy been thought. Consumers become ess price sensitive and more oya as the eve of quaity information on a site increases (Kung and Monroe, 2002) Summary In deciding the product poicy abroad, it is important to decide what parts (product eves) shoud be standardized and what parts shoud be adapted to the oca environment. This chapter has discussed the variety of factors that are reevant to this decision. A very important issue is the question of branding. Different branding aternatives have been discussed. For exampe, because arge (often transnationa) retai chains have won contro over distribution, they try to deveop their own abes. For the retaier, private abes provide better profit margins and strengthen the retaier s image with its customers. Because of the power shift to the retaiers the percentage of retai grocery saes derived from private brands has increased in recent years. This chapter has aso discussed issues that are experiencing increasing interest: for exampe, green marketing strategies, incuding the need for product adaptation in a green direction. Consumers, sharehoders and society at arge a stand to benefit when a company integrates environmenta friendiness into its marketing strategy. If propery impemented, green marketing can hep to increase the emotiona connection between consumers and brands. Being branded a green company can generate a more positive pubic image, which can, in turn, enhance saes and increase stock prices. A green image may aso ead consumers to have an increased affinity for a company or a specific product, causing brand oyaty to grow. The major pricing issues covered in this chapter incude the determinants of price, pricing strategy, how foreign prices are reated to domestic prices, price escaation, the eements of price quotation, and transfer pricing. Severa factors must be taken into consideration in setting price, incuding cost, competitors prices, product image, market share/voume, stage in the product ife 348

49 Chapter 11 Product and pricing decisions cyce and number of products invoved. The optimum mix of these ingredients varies by product, market and corporate objectives. Price setting in the internationa context is further compicated by such factors as foreign exchange rates, different competitive situations in each export market, different abour costs and different infation rates in various countries. Aso oca and regiona reguations and aws in setting prices have to be considered. CASE STUDY 11.1 Zippo Manufacturing Company: Has product diversification beyond the ighter gone too far? History Zippo ( was founded in Bradford, Pennsyvania in 1932 when George G. Baisde decided to create a ighter that woud ook good and be easy to use. Baisde obtained the rights for an Austrian windproof ighter with a removabe top, and redesigned it to his own requirements. He made the case rectanguar and attached the id to the bottom with a weded hinge, and surrounded the wick with a windhood. Fascinated by the sound of the name of another recent invention, the zipper, Baisde caed his new ighter Zippo, and backed it with a Lifetime Guarantee. Source: zippo.com. The 70-year od brand s fame took off during the Second Word War, when Zippo s entire production was distributed through commercia outets run by the US miitary. Today Zippo has produced over 375 miion windproof ighters since its founding in Except for improvements in the fint whee and modifications in case finishes, Baisde s origina design remains virtuay unchanged. The Lifetime Guarantee that accompanies every Zippo ighter sti guarantees that It works or we fix it free. Athough the windproof ighter is the most popuar Zippo product, Zippo has been hurt by the antismoking campaigns. Its business is fundamentay tied to smokers, and it has suffered from US tobacco reguations. Cigarette makers order thousands of Zippos to promote their brands, distributing them to smokers in exchange for coupons. One of the company s recent advertising campaigns suggested 101 ways to use your Zippo. Warming your hands and de-icing car ocks were on the ist; ighting a cigarette was not. The success of this product ed Zippo to expand the ine to its current product famiy of tape measures, pocket knives, money cips, writing instruments, key hoders and its newest product, the Muti- Purpose Lighter. A of these items can be imprinted with company ogos or trademarks. In 1993 Zippo icensed its name to Itochu Fashion System Co., a arge cothing manufacturer in Japan. Zippo eather jackets, Zippo jeans and Zippo goves are now avaiabe in Tokyo, and Zippo may icense cothes in the United States too. Today Japan is sti the biggest export market for Zippo. Zippo has expanded its saes operations nationay and internationay through a wide network of saes representatives. In more than 120 countries throughout the word Zippo is synonymous with US-made quaity and craftsmanship. Zippo windproof ighters enjoy a widespread and enviabe reputation as vauabe coectibes. The 349 Ë