Because of this, if Beats was to want to enter the Indian market, the best strategy for them to use would be the market skimming strategy. What are the ethical challenges posed by the cited pricing strategy and how would you manage those challenges?

Entrepreneurial Leadership, Creative Thinking, and the Global Startup Dr. Dre and Jimmy Iovine, Beats Electronics and Beats Music

Dr. Dre and Jimmy Iovine are entrepreneurs. Working as a team, they started a company, created a brand, developed an innovative product, and began to manufacture and market it. By applying the basic tools and principles of modern marketing, Dre and Iovine have achieved remarkable success. Along the way, they also became billionaires! As is true with many entrepreneurs, their breakthrough idea was based on their recognition of a problem that needed to be solved. Both were music industry veterans who identified an opportunity to develop high-quality consumer headphones that would enhance the music playback experience while also serving as a fashion accessory.

Dr. Dre (real name: Andre Young) is a well-known hip-hop recording artist who got his start in the music business as a DJ while growing up in the Compton, California, projects. After bursting into the public eye with gangsta rap pioneers NWA in the late 1980s, Dre started recording solo albums. His signature sound, a bass-heavy beat, had a significant impact on the burgeoning hip-hop scene. In addition to creating his own music, Dres resume includes starting Death Row Records and Aftermath Entertainment. As label chief, Dre helped launch the careers of Snoop Dogg, Tupac Shakur, Eminem, 50 Cent, and many other artists.

Dre identified a problem that grew out of the surging popularity of DJ culture on the music scene. He was frustrated with the low-fidelity audio that music fans experienced when they listened to music on mobile devices such as iPods and laptops. As Dre explains, I want to hear the music like I hear it in the clubs. I want to hear the same sounds the DJ hears.

Dres business partner, Jimmy Iovine, is a true music industry mogul. He founded Interscope Records in 1990; by 2014, after more than two decades of producing hit records and making deals, he was chairman of Interscope Geffen A&M records. Iovine was also well known to television viewers as a regular for three seasons on the popular American Idol talent search show.

Dre and Iovine shared a passion for sonic integrity in music playback. After disassembling the ear buds that were standard equipment with portable music players and smartphones, the duo recognized that cheap components were the root cause of the lo-fi sound. Dre and Iovine formed Beats Electronics in 2006 and set about designing a premium headphone that would deliver the sound they wanted. Although other high-end headphone brands were already on the market, they were niche products aimed at audiophiles.

In 2008, the young company introduced the Studio line of Beats by Dr. Dre on-ear headphones, priced at $299 and featuring an embossed lowercase b on each ear cup. The bottom line: They sounded great, and they looked great, too. Almost overnight, Beats caught on with celebrities as well as the general public. The following year, Hewlett-Packard launched the Envy line of laptops that incorporated Beats audio technology for improved sound.

By 2013, Beats by Dr. Dre had grown into a $1 billion-plus global business and had become the top-selling brand in dozens of countries (see Exhibit 11-4). Meanwhile, Dre and Iovine were turning their attention to streaming music. They acquired online music service Mog in 2012. In 2014, in conjunction with Nine Inch Nails frontman Trent Reznor, they launched Beats Music, a subscription streaming service. Why launch a new service in an industry space dominated by Pandora, Spotify, and other competitors? According to Iovine, the new service was designed to do a better job of helping music lovers decide what to listen to.

Beats Music began life as a $10-per-month subscription service that offers users access to millions of songs. A key feature is curation: In contrast to services that rely primarily on data-driven computer algorithms, Beats staffers and guest programmershuman beings with ears, in other wordsassist in the creation of playlists.

Who is responsible for performing these tasks? It depends on the terms of the sale. The internationally accepted terms of trade are known as International Commercial Terms, shortened to Incoterms. Incoterms are classified into four categories. Ex-works (EXW), the sole E-Term or origin term among Incoterms, refers to a transaction in which the buyer takes delivery at the premises of the seller; the buyer bears all risks and expenses from that point on. In principle, ex-works affords the buyer maximum control over the cost of transporting the goods. Ex-works can be contrasted with several D-Terms (post-main-carriage or arrival terms). For example, under delivered duty paid (DDP), the seller has agreed to deliver the goods to the buyer at the place the buyer names in the country of import, with all costs, including duties, paid. Under this contract, the seller is also responsible for obtaining the import license if one is required.

Another category of Incoterms is known as F-Terms or pre-main-carriage terms. Because it is suited for all modes of transport, free carrier (FCA) delivery is widely used in global sales. Under FCA, transfer from seller to buyer occurs when the goods are delivered to a specified carrier at a specified destination. Two additional F-terms apply to sea and inland waterway transportation only. Free alongside ship (FAS) named port is the Incoterm for a transaction in which the seller places the shipment alongside, or available to, the vessel upon which the goods will be transported out of the country. The seller pays all charges up to that point. The sellers legal responsibility ends once the goods have been cleared for export; the buyer pays the cost of actually loading the shipment. FAS is often used with break bulk cargo, which is noncontainerized, general cargo such as iron, steel, or machinery (often stowed in the hold of a vessel rather than in containers on the deck). With free on board (FOB) named port, the responsibility and liability of the seller do not end until the goodstypically housed in containershave cleared the ships rail. As a practical matter, access to the terminal and harbor areas in many modern ports may be restricted; in such an instance, FCA should be used instead.

Several Incoterms are known as C-Terms or main-carriage terms. When goods are shipped cost, insurance, freight (CIF) named port, the risk of loss or damage to goods is transferred to the buyer once the goods have passed the ships rail. In this sense, CIF is similar to FOB. However, with CIF, the seller has to pay the expense of transportation for the goods up to the port of destination, including the expense of insurance. If the terms of the sale are cost and freight (CFR), the seller is not responsible for risk or loss at any point outside the factory.

Table 11-1 is a typical example of the kind of export price escalation that can occur when some of these costs are added to the per-unit cost of the product itself. In this example, a Des Moinesbased distributor of agricultural equipment is shipping a container load of agricultural tires to Yokohama, Japan, through the port of Seattle. A shipment of tires that costs ex-works $45,000 in Des Moines ends up with a total retail price in excess of $66,000 in Yokohama. A line-by-line analysis of this shipment shows how price escalation occurs. First, there is the total shipping charge of $2,715, which is 6 percent of the ex-works Des Moines price. The principal component of this shipping charge is a combination of land and ocean freight totaling $1,475.

All import charges are assessed against the landed price of the shipment (CIF value). Note that there is no line item for duty in this example; no duties are charged on agricultural equipment sent to Japan, although duties may be charged in other countries. A nominal distributor markup of 10 percent ($4,925.46) actually represents 12 percent of the CIF Yokohama price because it is a markup not only on the ex-works price, but also on the freight and value-added tax (VAT) as well. Finally, a dealer markup of 25 percent adds up to $12,313.64 (27 percent) of the CIF Yokohama price. Like distributor markups, dealer markup is based on the total landed cost.

The net effect of this add-on, accumulating process is a total retail price in Yokohama of $66,493.67, or 147 percent of the ex-works Des Moines price. This example of price escalation is by no means an extreme case. Indeed, longer distribution channels or channels that require a higher operating margin, as are typically found in export marketing, can contribute to dramatic price escalation. Because of the layered distribution system in Japan, the markups in Tokyo could easily result in a price that is 200 percent of the CIF value.

An example of price escalation for a single product is shown in Table 11-2. A right-hand-drive Jeep Grand Cherokee equipped with a V8 engine ends up costing 5 millionroughly $50,000in Japan. The final price represents 167 percent of the U.S. sticker price of $30,000.

Price escalation was also a major issue in China. Jeep established the first joint U.S./China auto operation in 1983; however, production ceased in 2006. Until recently, the Compass, Wrangler, and Cherokee models were all shipped from the United States and were subject to a 25 percent import tariff. In dollar terms, the sticker price of a fully loaded Jeep Grand Cherokee SRT8 with a 6.4-liter V8 engine could top $200,000more than triple the U.S. price of $62,790! No wonder Fiat Chrysler Automobiles (FCA) opted to start local production in 2015 (see Exhibit 11- 5). FCA chief executive Sergio Marchionne has set a goal of tripling Jeeps sales in China to 500,000 units by 2018.11

Exhibit 11-5 Jeep enjoys high brand awareness in China, thanks in part to Jeep-branded clothing sold in specialty stores. Fiat Chrysler Automobiles market strategy for the brand includes restarting local production and doubling the number of dealers.

These examples of cost-plus pricing show an approach that a beginning exporter might use to determine the CIF price. The same approach could also be used for differentiated products such as the Jeep Cherokee for which buyers are willing to pay a premium. As noted earlier, experienced global marketers are likely to take a more flexible approach and view price as a strategic variable that can help achieve marketing and business objectives (see Exhibit 11-5).12

From a practical point of view, a working knowledge of Incoterms can be a source of competitive advantage to anyone seeking an entry-level job in global marketing. A former export