Pricing Issues in International Marketing - Apple Incorporation in China - Case Study Example

Name Course Tutor Pricing Issues in International Marketing: A case study of Apple Incorporation in China Introduction One of the most significant of the 4Ps is pricing in the international marketing because it generate the most revenue to a firm (Aulakh &Koatabe 17). A product pricing strategy changes as the product move from one stage of its life cycle to another. However, a company can use various strategies for price setting is skimming, which involves setting high initial prices to earn more revenue in the market. For instance, Apple launched iPad as a new electronic product. Apple is well-known for their price skimming as their marketing strategy. This approach is used by the company to have their products appeal the customers in the market. Price skimming is the practice of keeping a product price higher as a strategy to encourage perception among the consumers based on the price (Theodosiou 248). The method is intended to exploit fully the tendency for consumers with a perception that expensive products are an indication of exceptional quality and distinction. Apple sets its products prices higher that similar products in the market. This strategy is used to maximize profit in areas where the consumers, particularly if there are no substitutes. The effect of marketing is that the customers are will to spend more on the products and not for other substitutes. In other words, Skimming price is used to create a brand value for which makes the customers pay more for the product. There are ethical issues regarding price skimming involved in the Apple products. However, the prices should be maintained in such a way that it generates high demand to be profitable to the firm. The pricing issues are intensified at the international level. One of the pricing issues is government intervention, which prevent various competitive pricing strategies. Second, greater market diversity makes a company set different prices in different countries due to cost situations. Price escalation in exports forces companies to sell products to intermediaries at a lower price to minimize price escalation. Lastly, currency and prices changes in the market influence the pricing decisions in a foreign country. This paper will discuss the international pricing issues faced by Apple Incorporation in China and the solutions. Literature review Company Description Apple is one of the largest multinational companies established in 1976 in California. It manufactures a range of electronic products including computer software and hardware. However, it is best known hardware includes iPods, iPhones, iPods, and Macintosh computers. The software includes iWork suite, Mac OS X operating system, iTunes media browser iLife suite, and so on. Today, it is a fully established company in the electronic industry. Apple began by designing personal computers, the iMac, and it was a major success for the company. Apple marketed this product as a premium with its distinct characteristics such unique software suite and operating system that made it different from other personal computers in the market. Despite it high prices, Apple was able to sell hundred thousand iMacs within the first few months after it was launched. After its success, it expanded to other devices such as desktops and notebooks, media devices, and media receivers; however, the most successful devices were the iPhones and iPods Manufacturing operations are conducted in India and China, where these devices are assembled. This has allowed the company to optimize the costs of labor. Research indicates that manufacturing iPhones in China has allowed it to reduce the cost of the product by half as compared if it were assemble in the U.S. In addition, it has enabled flexibility in the production process, for instance, their partners in China such Foxconn can maintain residence allowing employees mobilization. Maintaining a good relationship with the contractors, Apple can make changes in the product designs and increasing production in cases of demand increase. Apple is known for skimmed price, but Apple used to be known for high priced, but sophisticated hardware. A skim price strategy is offering higher prices on new products to a smaller market before moving to a lower price for other customers. Apple is known for higher prices for its products including tablet computers, smartphones, and music players. Apple company products are initially sold to the American customers who are prepared to pay a higher price for the latest products in the market. For example, the Play station 3 was originally sold at $599 in the US market, but it has been gradually reduced to below $200. During iPod launch, there were many customers willing to acquire the new device. At this stage of a product lifecycle, the price elasticity is usually small. The early customers are fewer prices sensitive and influenced by other factors such as value, brand, fashion, and so on. When the customers buy the products at the skimmed price, they transfer the value to the company. Apple's price in international market The literature indicates that Apple adapts the price of their products for international products. This specific market is determined by importation and local taxes. Apple adopts a premium pricing strategy for its products to create and impression about quality to its customers. However, currently it is facing stiff competition after other smartphone manufacturing companies have introduced products with similar features at a lower price. Apple has maintained a strong brand image; therefore, they want to maintain quality of their products. In fact, they want to maintain an image of quality internationally. Apple's pricing issues Challenges in managing price escalation The escalation in the technology market in recent years has been extremely volatile, and this trend is expected to continue due to stiff competition ("Hodder Education" 6). This situation has caused uncertainty in the Apple Company. To compete in international markets, apple may be forced to sell its electronic products at a cheaper price to reduce price escalation. Price escalation occurs when the products and services move from the producer and the consumers. This may be caused by longer channel of distribution before the product reaches the consumer, for example, involving more intermediaries. Apple has fewer intermediaries in the distribution channels which can lead to creation of an environment of price escalation. Also, Apple faces a lot of challenges in increased cost such as import duties because their products are assembled in a different country. Apple's higher pricing has resulted in distribution challenge of its new products. For this reason, Apple is forced to give the retailer a bigger margin as a strategy to persuade to stock its products reducing the improved margins that be brought by premium pricing. Transfer pricing Transfer pricing refers to the accounting practice by which a multinational company may charge some products to enable them distribute profits. For Apple Company, the primary challenge is using creative analysis of transfer pricing to transfer artificially profits to countries where the taxes are much lower. Apple has an offshore network of the company, in which it has negotiated a tax rate of less than 2%. Currently, Apple is facing problem intellectual property theft. Apple Company keeps its proprietary information privately to prevent a rival company from accessing their information. For this reason, Apple has been in many lawsuits with other technology companies. A recent report has indicated that Apple Company has transferred intellectual property rights with price sharing with one of its affiliates, China. Apple buys finished products from China manufacturing company, and later re-sells them to other affiliates at a higher price. This has facilitated the company to transfer billions of dollars globally to countries with no tax residency. Pricing and currency movements Firms selling their product across transnational borders face pricing problem such as fluctuating currency exchange rates that can reduce the products profits within a short period (Michael &Robert 86). As a result, many companies can decide to reset their pricing when the rates exceed the threshold. Others may also hold their prices to absorb the currency devaluing in reduced margins. Apple uses the strategy of holding the price steady to alter its pricing strategy. For example, Apple waited for approximately one year to wait when Japanese yen declined in 2012 to increase their prices in Japanese stores. Many foreign investment firms in China accounts for over half of their exports and imports. Apple products are assembled in China in a firm owned by the Taiwanese company. The value added by the Chinese employees to Apple products is estimated to be relatively compared the cost of producing one unit. Potential Competitors Even though Apple has launched new products in the market, it is still facing stiff competition from other firms for a larger market share. Competitors have introduced products, thus putting pressure on Apple products such as iPhone and iPods. The major smartphone brands in China are Lenovo Group and Huawei Technologies Ltd. However, the new Xiaomi is a new threat for Apple Incorporation in China. The smartphone brands have released new models offering features that are similar to iPhone at a much lower price. Currently, Apple sells approximately 4o millions iPhones per year in China, although these estimates are expected to continue growing. Most Chinese consumers go for cheaper handsets, which have made Xiaomi become the key smartphone player in the Chinese market. Their phone retails at approximately $375, which is much lower compared to iPhone which retails at $865. On the other hand, Apple uses skimming price. This has made the company to lose most of their market share due to higher prices. Apple benefited from the sales of iPhones through the partnership of one of the China carriers, China Unicom. Also, it benefits from being seen as a luxury brand by the Chinese, and its growth is expected to increase after the partnership with both China Unicom and China Mobile. On the other hand, Lenovo uses an Android system to provide their phones at a lower price. Apple price skimming may also slow down the sales volume and demand growth for its products. As a result, it gives the competitors time to design and develop substitutes to meet a customer who is price sensitive. It has attracted competitors into the market quickly due to the high margins. The slow rate of diffusion and adaptation as a result of premium pricing of Apple products has led to increased level of untapped demand. This has given the rival enough time to develop innovation or copy Apples products. For instance, iPad price higher left a door for other smartphone manufacturers, and the window of opportunity was lost. Solutions to Apple pricing issues at International market Apple chose to adopt price strategies for various reasons. The first factor is the customer because of purchasing power; Apple should find a fair price that can be accepted globally. The top management should establish price depending on the consumers’ revenue. Secondly, Apple should also consider competitors price when setting their product pricing. However, it can take advantage of the pricing strategy because it helps the company to remain competitive selling their products at a higher price. Apple can take advantage to sell their products at higher prices. To attract more customers, Apple should set price not too high or too low. However, even though there is no perfect pricing strategy, the company should be prepared to adopt when there are changes in the markets (Yaprak 26). However, other factors should also be considered such as transport and risks .Third, the apple prices are also affected a country’s economy. Finally, Apple should follow exchange rate and other trade regulations to ensure it remains profitable. Apple uses premium to control the price levels to ensure their products are the most highly priced. In other words, Apple has to ensure that it remains profitable internationals regardless of pricing issues. Therefore, Apple should maintain a higher price in developed countries and reduce the prices in developing countries to ensure they maintain and get new customers. Apple has a tendency of lowering the products prices after launching; this should be done at the right time. Otherwise, if these prices are reduced early, it would be unfair for the customers. As a result, the brand image would be ruined, and consumers will have a wrong perception about the company. Works Cited Aulakh, P.S and Koatabe, M. An Assessment of Theoretical and Methodological Development in International Marketing: 1980-1990. Journal of International Marketing 1.2 (1993): 5-28. Hodder Education. Introduction to the Marketing Mix - Pricing. Web 18 April 2015. Michael V. Mam and Robert L. Rosiello. Managing Price, Gaining Profit, Harvard Business Review (1992): 84–94. Print. Theodosiou, Marios. Factors Influencing Degree of International Pricing Strategy : An Empirical Investigation. Marketing in a Global Economy Proceeding. 2000. Print p. 246-53. Yaprak, Attila. Developing a Framework for International Price Setting from a Contingency Perspective. EMAC Annual Conference :Marketing in a Changing World. 2001. Print. Read More