Honda Pricing Strategy | Analysis
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Keywords: geocentric pricing example, pricing strategy analysis
Honda is considered as one of the largest manufacturers in motorcycle and automoblie industries with more than 14 million combustion each year Various products along with great after sale services and much more importantly the affordable price of it sproducts have resulted in obtaining compettive strategy for the company as well as becoming a big competitior for companies such as Toyota and Nissan throughout the world.
One of the most important challenging issues for companies such as Honda that tend to compete in the global market is the pricing decision,in which honda has overcome the good and bad situations created successfully. The reasons behind this success are adopting the best stratgy for entering between Ethnocentric,Geocentric and Polycentric as well as the good analysis of the environmetal infuences such as Infaltion Rate and Flactuation along with the problems of Gray Market Goods,Dumping and Transfer Pricing that have been taken into consideration. The mentioned marketing straegies as well as good adaptation of marketing mix elements has put the company in a profitable situation and considerable reputation. Counter trade issues such as barter,swich trading and offset in on hand along with mentioned pricing decisions issues on the other hand have been discuused in details in this essay with good and effective recommendations which have been given at the end of the report that can be considered as guildlines for obtaining more achievement for the company in the near future.
1.0 History of Honda
Honda is one of the largest manufacturer of the motorcycle since 1959 as well as world's biggest manufacturer of combustion engines by producing more than 14 millions combustion every year. In the case of automobile manufacturer in the united state Honda is fourth largest automobile manufacturer .Honda was founded by Soichiro Honda who had great interest in automobile and motorcycle. After many years of hard working, finally, the successes to produce the first car in august 1963 and named that car T 360 with 4 gasoline engine and 366 cc power. The company headquarter is in Tokyo and there are many plants which is located in different parts of the world such as Japan, Canada, England, India, Brazil, Belgium and China.
Today Honda by offering different types of product is one of the strong rivals for another manufacturer like Toyota and Nissan and according to the annual report of the company in 2008; Honda reported 1% sale increase while other competitors such as Toyota reported double-digit losses.
2.0 Three Worldwide Pricing Strategies
Each company or organization that wants to participate in the global market and actually want to be significant parts of that market should follow significant structure and strategy. One of those strategies which are very important is price strategy which means how this organization set the price for their product in the foreign country and global market in order to attract the consumer to buy their product and increase their profit. We can explain these strategies in three categories: 1. ethnocentric or extension 2. Polycentric or adaption and 3. Geocentric.
2.1 Ethnocentric or Extension
In general, ethnocentric is the propensity to believe that specific ethnic or cultural group is mainly important and all another group of people is measured in relation one's own. But In marketing ethnocentric means the price of each item will be the same in all parts of the world and there is no matter where the buyer is located and all of them will pay the same amount for the specific product. There are some advantages by using this strategy, but the important advantage is the extreme simplicity of this strategy which does not require information from rivals, so such organization is not forced to change or reduce their price because of their competitors. Manager of such company believes that they know what customer wants and willing pay for that, as a result they are trying to keep price constant in a different part of the world.
2.2 Polycentric or Adaption
Another important pricing strategy is polycentric or sometimes called adaption. This alternative is exactly opposite of ethnocentric and price of any item varies from one country to other. Manager of such organization set their own price which depends on several factors such as wages, tax, and advertising rate.
Geocentric is more dynamic than other two. geocentric pricing is based on the realization that unique local market factors should be recognized in arriving price decision, those factors including local market strategy as well as advertising rate.
2.4 Honda Pricing Strategy
According to these three strategies, Honda's pricing strategy is based on an ethnocentric alternative which means the price of the same product of Honda is approximately same all around the world. It is true that sometimes because of some fluctuation in currency the price will vary in a different country but in general, the base price of a similar product is same.
3.0 Environmental Influences on Pricing Decisions
As companies decide to step in global markets they face many challenges, one of the biggest challenges for a global company such as Honda is to overcome the environmental changes which have a direct influence on their pricing decision and their financial position in the market. The environmental factors are Currency Fluctuation, Inflation Rates, Government Control and Competitive Behaviour.
3.1 Currency Fluctuation
Changes in currencies value has a huge impact on profit and cost for global companies which operate in foreign countries. As the value of currencies increases or decreases global companies face the different situation which they have to analysis and take an appropriate action to prevent any loss or losing their competitive position. If home country currency appreciates relative to the host country, this is an unfavorable turn for the exporter, and if home country currency depreciates relative to the host country, this is a favorable turn for the exporter. Honda Motor is a case in point; the company serves the entire European country with its single manufacture plant in the UK. In January 2006, the value of one £1 was equal to â‚¬1.03, on that time the price of Honda Civic a 1.8 engine car was set at â‚¬20,633, Honda had to convert this amount to British Pound in order to pay for its cost and expenses in the UK, after the money was converted it would give Honda £18,127, which was what the company expect in order to keep its profit margin, however things changed in September 2006, the value of Pound increased to £1 to £1.16, the unfavourable shift had a direct negative impact on Honda's profit because £20,633 now gives Honda company £17,787 which means £400 loss on each car sold, as result the company had no other choice to increase Honda Civic in Europe to recover the change in its profit (Zerotohundred, 2010).
3.2 Inflation Environment
Inflation is an upward change in price levels if inflation rates increases in a country this would cause products prices to increase in order to cover the rising cost for companies and manufacturers. A good example is Honda Motors in India, in 2010 the inflation rate in India dramatically increased to near 16% in comparison with 10% in 2009, this fluctuation caused materials and energy price to increase. (Continued)
Honda Motors which manufactures half of the motorcycles in India, was faced with high prices relative to last years the company had to pay more for material and energy for its manufacture plant in India, as a result Honda made a big change in its pricing decision and increased its product price nearly by 35%, this decision was made by Honda to maintain its operating margin (Zerotohundred, 2010).
3.3 Government Control
Government policies and regulation in different countries have a huge effect on pricing decisions, government actions that limit manager's ability to adjust prices can put pressure on margins. For example in Malaysia, the government has restricted price competition between car industries such as Honda, Toyota, and Kia. In addition, the government has also imposed high duties on imported cars based on their engine size. Since Honda does not have a manufacturing plant in Malaysia the company has to import cars into Malaysian market which means the company hast to pay duties to define by the Malaysian government. The imposed duties would increase the vehicle prices by 170% or even 300% in some cases. For instance, a Honda Civic which is priced at $16,000, if the car gets imported into Malaysia, the same car will have a price of $42,300 (World Honda, 2010).
"Duties for imported cars based on their engine size"
Under certain conditions, government action poses a threat to the profitability of companies such as Honda, which could result in financial problems for those companies and their position in a market. Other government polices and regulations are dumping legislation, release price malignance legislation, price ceiling and other general revision of price levels (World Honda, 2010).
3.4 Competitive Situation
Pricing decisions are not only limited by cost and the nature of demand but also by the competitive condition in different industries. For example, Honda has adopted a competitive-based pricing approach in some parts of the world like Europe, a case in point, Honda Jazz price was priced according to the price of other competitors in Europe such as Peugeot, Renault, Ford, and Opel. The Honda Jazz was pieced at £13,800 which was very close to the price of Honda's competitors in Europe according to figure below.
As it can be seen Honda used competitive-based pricing in Europe to be able to compete successfully with other rivals in Europe. Honda is also known for its pricing strategy for entry-level products, the company sets Price for low-unit margin and high-unit volume on an entry-level product, in order to gain high market share (Auto Spies, 2010).
4.0 Japanese vs. USA Pricing Decision
As mentioned in other parts of this report, companies in different countries adopt different pricing decisions according to environmental changes in that particular country. However some companies use their pricing decisions as competitive tool to maintain their position in market as low cost provider. In USA car manufacturers use top to bottom approach in determining their product price, while in Japan car manufacturer companies use bottom to top approach. The significant difference between these two approaches is ability to offer \product with lower price than other competitors in world (Auto Spies, 2010).
5.0 Issues in Pricing Decisions
Gray Market Goods, Dumping and Transfer Pricing can be considered as some of the most important pricing issues when pricing decisions come into play. In case of Honda Company these mentioned pricing issues have contributed to the company's success and enhancement in revenue in some cases while the company have been dumped by other companies in other cases that have put the company in the unprofitable situation which are going to be discussed in details.
5.1 Gray Market
Gray Market Goods can be defined as the act of selling the trademarked goods and products by an unauthorized organization or a person which have been exported from the other country. There is a position statement which have been released by Honda Company regarding the Acura Genuine Parts that have failed to repair the vehicles and safety standards of the car as well its performance have been declined as a result since the parts were sold in Gray Market (Economictimes Indiatime, 2007).
According to American Honda the original parts are designed in a way that optimum performance and safety standards can be obtained only if the original parts are used to work together and the Honda Company Executives extremely insist on not buying the counterfeit or gray market goods even if they are compatible with the original ones. It is also necessary to mention that the warranty regarding the replacement of parts do apply only to those parts that have been purchased from an authorized Honda dealer, otherwise Honda will not take any responsibility for incurred costs that are as a result of utilizing the parts from unauthorized organizations or in other word Gray Market. The act of selling the parts in the Gray Market resulted in coming bad comments from consumers regarding the performance of the vehicles in which the Honda Company was not actually responsible but took time for them to represent their reputation as good as it was before in the automobile market (Economictimes. Indiatime, 2007).
By definition, Dumping as one of the most important pricing strategies issues is the act of selling the imported products at a lower price than the actual price of the product in the home country or even lower that what have cost the manufacture in the production process. After Honda Company introduced its cars to the US market, Volkswagen decided to dump its premium prices so that its vehicles could compete with the Japanese cars in that specific segment. Regarding this case, Toyota Corolla priced its entry-level cars 2010 at 16,200 after Honda Civic was introduced into the market for 16,405 including transportation costs. The competition enhanced when Volkswagen dumped its premium price to 16,000 dollars by the time that the price of its cars in the home country were much higher at about 18,435 dollars. This action resulted in generating much higher revenues for Volkswagen when Honda was suffering from unprofitability (Auto Spies, 2010).
5.3 Transfer Pricing
The last pricing issue that is going to be discussed is Transfer Pricing which played an important role in the Honda Company's success. Transfer pricing concerns intracorporate exchanges which can be defined as the act of pricing the goods and services that are sold and bought between sellers and buyers that are working in different operating units and divisions of the company as well as different locations but are under the same corporate name. Honda's subsidiary in UK is a case in point; Honda plant in London produces parts costing $2m with the market value of $7m, however the company decide to sell the part to other Honda subsidiary in Russia at price of $3m, meaning the part was sold under market price, however in Russia, Honda's subsidiary sells the same part at price of $7m and pays a little tax in compare with UK for Honda (See figure at below). By this approach Honda a made a huge profit both by paying little amount of tax and selling the part at market price (Economictimes Indiatime, 2007).
6.0 Counter Trade Transaction
Counter Trade occurs when a sale results in product flowing in one direction to a buyer and often flowing in the opposite direction is also created. Counter trade consists of six different but relative types. Different types of Counter Trade are barter, offset, counter purchase, compensation trading, cooperation agreements and switch trading. Barter is the direct exchange of goods and services between two parties.
6.1 Counter Trade
In order to understand this concept properly I will explain two cases. These cases are about food industry and are mentioned here for the purpose of better understanding of the concept. The first case is Padiberas National Bhd. (BERNAS) Vietnam Southern Food Corporation (VINAFOOD) National Company for Vegetable Oils, Aromas and Cosmetics of Vietnam (VOCARIMEX). This form of counter trade is one that involves 2 parties entirely from private sector. This case is an example of this form of counter trade where Padiberas National Bhd. (BERNAS) entered into with 2 companies in Vietnam in order to perform counter trade in palm oil and rice. The companies are Vietnam Southern Food Corporation (VINAFOOD) and VOCARIMEX. Base on the agreement (VINAFOOD) will supply Vietnamese rice to BERNAS while BERNAS Will Supply palm oil, including crude palm oil, crude palm stearins and RBD palm oil to VOCARIMEX (Economictimes Indiatime, 2007).
Second case that describes the term barter is Padiberas National Bhd (BERNAS)/Federal Flour Mill Bhd. (FFM)/China, P.R National Cereal Oils and Foodstuffs Import and Export Corporation (COFCO). Malaysian companies, namely, BERNAS and FFM Bhd., have entered into counter-trade arrangements with China, P.R National Cereal Oils and Foodstuffs Import and Export Corporation (COFCO) to buy rice and maize (corn) in exchange for palm oil. This exercise has helped China, P.R to export some of its surplus rice and maize. The import quota for this exercise was over and above the normal annual (import) quota given to palm oil by the Chinese Government. Second type of counter trade is Counter Purchase and Also Called Parallel Barter is distinguished from Other Forms in a way That Each Delivery in an Exchange is paid For in Cash. The example that we have chosen for this part is Malayan Railway Berhad / Ministry Of Transport (KTMB / MOT) (Economictimes Indiatime, 2007).
This case is related to our topic HONDA in a way that it is to the transportation industry and one of Honda's substitutes. In this case there was an agreement between KTMB/MOT and General Electric transportation systems. They agreed KTMB / MOT has agreed to purchase locomotives from General Electric Transportation Systems, valued at US$ 64.5million (RM 244.9 million). At the same time, PGEO Group Sdn. Bhd., on behalf of the Malaysian Government and a consortium of Malaysian palm oil exporters concluded a parallel counter-trade agreement with GE Trading. Under this counter-trade deal, payment will be made by GE Trading to the nominated consortium of Malaysian palm oil exporters by buying palm oil and palm kernel oil to the equivalent value of the locomotives.
Offset the third form of counter trade simply means a reciprocal Arrangement whereby the Government in the Importing Country Seeks to Recover Large Sums of Hard Currency. To understand this term better case of Ministry of Transport (MOT)/ MPOB /IRCON that happened between government of Malaysia and India Railway Company can be really helpful. This counter-trade deal involved the participation of the government of Malaysia and its related agencies/corporations. In this regard, MOT, on behalf of the government of Malaysia, agreed to offer the construction of a railway link in Tanjung Pelepas, Johor to the Indian Railway Company, i.e.IRCON International Ltd. (IRCON),a government of India undertaking. This rail construction project, valued US$ 120 million (RM 450 million), is to be completed within 30 months. Payments to IRCON will be done by supplying palm oil with the same value equivalent of the contract (Economictimes Indiatime, 2007).
The Ministry of Primary Industries (MPI), on behalf of the Malaysian Government involved in implementing this project, has appointed the Malaysian Palm Oil Board (MPOB) as its managing agent for disbursing payments to be made to selected Malaysian palm oil exporters for palm oil delivery to IRCON. Payments are disbursed based on work progress carried out under the works agreement. In order to have an efficient functioning of the agreement MOT had to transfer adequate funds based on progress payments into MPOB's account and MPOB, in turn, had to pay six selected Malaysian palm oil suppliers the equivalent value in Ringgit Malaysia.
6.4 Compensation Trading
Compensation trading is when one firm provides another with goods or services, and the other firm repays through the sale of those goods and services. One example of compensation trading would be when in 1980, German, Italian, French and British governments subsidized the manufacturing of a pipeline in the former Soviet Union. In order to compensate for this, the Soviet Union repaid the government by supplying them with the natural gas produced.
6.4 Cooperation Agreements
Cooperation agreements occur when one country or company can produce goods or services more efficiently than another. Thus, each party in the agreement will sell equal value of their product or service to the other as per the agreed amount. For example, Moscow had superior space technology expertise and decided to indulge in an agreement with Malaysia. According to this agreement, Malaysia would provide Moscow with palm oil and rubber equivalent to the value of expertise provided. This way both countries benefit with services that they were lacking previously (Economictimes Indiatime, 2007).
In switch trading, mostly 3 entities are involved. In this case, when company A provides services to company B and is not interested in company B's payment, it can redirect those goods to a third party to clear their outstanding with the third party. For example, Brazil had a large credit surplus with Poland as a result of previous trades. When Brazil traded with the UK, it financed the trade with the export of Polish goods to the UK, which the UK required.
To sum up, it can be concluded that pricing decision is the critical element of the marketing mix that reflects different factors including cost, competitive factors and customer perception regarding the value of the product. Most of the global companies adopt structures and strategies in pursuing their business to achieve profitability in their relevant industry. Global companies are faced with many issues in their pricing strategies, hence managers have to consider all possibilities and risks to be able to maintain their competitive position.
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