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Entering the Brazilian Market
Peak must decide on a pricing strategy for entering the Brazilian market. It has narrowed its options down to three: penetration pricing, skim pricing and cost-plus pricing. This report will evaluate the company, the market and each of these three options in order to determine the best choice of pricing strategy when entering the Brazilian market.
Concept/Theory: SWOT Analysis
The SWOT analysis is a tool whereby the company analyzes its internal strengths and weaknesses, and its external threats and opportunities, in order to provide some context for the decision that it is facing. The strategy that the company chooses should in some way reflect either leveraging strengths to take advantage of opportunities or to shore up weaknesses in order to defend against threats. In this case, where the company is determining a strategy for entering a new market, it will probably take into account how it can leverage its strengths to take advantage of this opportunity (Furgison, 2019).
There are a few different strengths that the company has in this situation, each of which adds value. First, Peak has a high quality harness, the Kilimanjaro, which falls into the premium segment in the United States. The quality of climbing harnesses probably does not change much around the world, for a couple of reasons. One is that climbing is an international sport, and two is that the safety standards for climbing gear are critical, and any gear that does not adhere to international-level safety standards simply won’t be purchased by serious climbers, as it would risk their lives to do so. So it is reasonable to assume that gear that is premium in the US would also be considered premium in Brazil.
The second strength for Peak is that they already have a distributor in the country, Amazonas. With a distribution already in place, they have the ability to approach their market entry in a few different ways. This provides built-in flexibility. They can do penetration pricing because they have the distribution to back up a volume sales approach, but they can also do premium pricing with this option.
A third strength is that the Brazilian market appears to be sophisticated, with many international competitions held in the country, and the country’s sizeable middle and upper classes who are able to pay for quality gear and who likely travel around the world to climb. The brand may already be known to many climbers in the country, and this maturity of market gives Peak the opportunity to treat it as any other sophisticated market, and gives the option for skim pricing.
Peak has a weakness is that it doesn’t know the Brazilian market well. It’s distributor in the country, Amazonas, does have some in-market knowledge but because it has a vested interest in what strategy Peak adopts, Amazonas may not be a source of unbiased information. So there is a need to trust Amazonas, or make a decision without sufficient data or market insight. This weakness manifests in particular in the idea of skim pricing – Peak doesn’t really know how this market will respond to skim pricing. It suspects Brazilian climbers are willing to pay a premium, but if they are also well-traveled the question is whether they’ll pay a premium to buy at home and also how much of a premium are they willing to pay.
Another weakness is that Peak only has a little bit of experience in Brazil, but they do seem to be dependent on their distributor, Amazonas.
Peak has a few different opportunities. They are moving into the Brazilian market to take advantage of what is believed to be a sophisticated market with strong growth potential over the next 24 months. The strong growth potential is speculative, but if the hunch is correct then it might guide Peak to penetration pricing. If the hunch about premium pricing is correct, Peak could go with the skim strategy. The good part for Peak is that the Brazilian opportunity is presenting itself in such a way that it has options when entering this market.
Another opportunity for Peak is to use Brazil as a springboard for the rest of South America. It’s the biggest market in the region, but there are other strong markets, in particular the Andean countries, which make up most of the rest of South America. Lessons learned in Brazil can probably be applied to other countries in the region.
There are also threats that Peak has to take into consideration. First is the threat of competition. Even if Peak can successfully differentiate from domestic competitors, there are other international competitors that are likely to enter the market. If the Brazilian market is as promising as it sounds, Peak will not be the only foreign company looking to enter the market. The threat of increased competition could impact any plans to do skim pricing, as it would allow a competitor to undercut the Kilimanjaro with an equivalent quality harness.
There is also the threat associated with foreign currency exchange risk. When exchange rates change, the value of the profits earned in a country can change as well. If Peak adopts penetration pricing, for example, that would leave it with slimmer margins. Those slimmer margins could evaporate, should the exchange rate of the Brazilian real fluctuate in the wrong direction. Peak has to consider what the impact of fluctuating exchange rates will be on its pricing strategy. The real is current in a partial float against the dollar, meaning that there will be some exchange rate risk associated with the Brazilian market (Downey, 2019).
Lastly, there is the threat associated with the dependence on Amazonas for distribution. While there is no reason to believe that Amazonas will be a bad partner, the reality is that it could happen, and Amazonas would have an advantage in any dispute, being more familiar with the Brazilian legal system. Recent changes…
…with the product’s actual quality, that opens up the risk that other competitors can enter the market. Rock climbers can reasonably be assumed to have high knowledge of the products that they use. While there is evidence that suggests Brazilians are willing to pay a premium for high end foreign products, climbers are climbers and they know the goods they use intimately – their lives depend on them. As such, any misalignment between price and quality will immediately be identified by the target market. That said, the argument for skim pricing is that the market has low price elasticity of demand and this can be leveraged for a higher profit. Another consideration with the skim strategy is that if the Kilimanjaro is priced too far above what it sells for in the US, then Brazilian buyers could simply but it online in the US and ship to Brazil – skim pricing done wrong creates the opportunity for arbitrage that would hurt the company’s attempts to establish a foothold in the Brazilian market.
Choosing between pricing strategies requires an understanding of what each strategy is deigned to do, and making sure that the choice of strategy has the best overall outcomes. If Peak is deciding between penetration pricing and skim pricing, then it seems that Peak does not really know what its strategic objectives are for the Brazilian market. But that decision can be made with simple arithmetic. Peak can estimate the size of the market with skim pricing and the size of the market with penetration pricing, knowing that as the market overall grows, the market for premium might not grow at the same rate. Peak can then calculate the per-unit profit at each price point and multiple that by the number of units it expects to sell at that price point. The math will probably show that penetration pricing makes more sense and delivers more profits in the long run. This is especially true because one of the market impacts of penetration pricing is that it increases the barrier to entry for other foreign companies, as they would have to compete with the same pricing strategy in order to match what Peak is doing.
Cost-plus in this situation makes little sense, largely because cost-plus is more suited for a mature industry with predictable demand, than for market entry. A market entry pricing strategy simply cannot ignore the impact of the competitive landscape. In that sense, cost-plus should be ruled out quite quickly. The other strategies leave Peak more vulnerable to foreign exchange rate risk but there are other ways to hedge that risk besides using a cost-plus strategy. Besides, cost-plus would also result in prices that change with exchange rates, which could also create confusion in the market with respect to positioning of the Kilimanjaro.
Overall, it seems that the best option for market entry is penetration pricing, which would create some risk financially. However, establishing market share is important strategically, given that much of the opportunity…
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