Sample Effects of Price Escalation

Costs and tariffs vary so widely from country to country, a hypothetical but realistic example is used. It assumes that a constant net price is received by the manufacturer that all domestic transportation costs are absorbed by the various middlemen and reflected in their margins and that the foreign middlemen have the same margins as the domestic middlemen. In some instances, foreign middleman margins are lower but it is equally probable that these margins could be greater. In fact, in many instances, middlemen use higher wholesale and retail margins for foreign goods than for similar domestic goods.

Notice that the retail prices range widely, illustrating the difficulty of price control by manufacturers in overseas retail markets. No matter how much the manufacturer may wish to market a product in foreign country for a price equivalent to US. $10 there is little opportunity for such control. Even assuming the most optimistic conditions, the producer would need to cut net by more than one third to absorb freight and tariff costs if the goods are to be priced the same in both foreign and domestic markets. Price escalation is everywhere: A man’s dress shirt that sells for $40 in the United States retails for $80 in Caracas. A $20 US electronic can opener is priced in Milan at $70 ; a $35 US made automatic toaster is priced at $80 in France. The Cadillac Catera, which sells in the United States for $30,000 sells for $46,644 in Switzerland.

Unless some of the costs that create price escalation can be reduced the marketer is faced with a price that may confine sales to a limited segment of wealthy price insensitive customers. In many market buyers have less purchasing power than in the United States and can be easily priced out of the market. Further, once price escalation is set in motion it can spiral upward quickly. When the price to middlemen is high and turnover is low, they may on higher margins defray their costs, which of course raises the price even higher. Unless price escalation can be reduced marketers find that the only buyers left are the wealthier ones. If marketers are to compete successfully in the growth of markets around the world, cost containment must be among their highest priorities. If costs can be reduced anywhere along the chain from manufacturer’s cost to retailers markups, price escalation will be reduced. A discussion of some of the approaches to reducing prices escalation follows:

Approaches to Reducing Price Escalation:

Three methods used to reduce costs and lower price escalation are lowering cost of goods, lowering tariffs, and lowering distribution costs.

Lowering Cost of goods:

If the manufacturer’s price can be lowered the effect is felt throughout the chain. One of the important reasons for manufacturing in a third country is an attempt to reduce manufacturing costs and thus price escalation. The impact can be profound if you consider that the hourly costs of skilled labor in a Mexican maquiladora is less than $3 an hour including benefits compared with more than $10 in the United States.

In comparing the costs of manufacturing microwave ovens in the United States and in Korea, the General Electric Company found substantial differences. A typical micro wave oven cost GE $218 to manufacture compared with $155 for Samsung, a Korean manufacturer. A breakdown of costs revealed that assembly labor cost GE $8 per oven, and Samsung only 63 percent. Perhaps the most disturbing finding for GE was that Korean laborers delivered more for less cost: GE produced four units per person, where as the Korean company produced nine.

Source: International Marketing