Global Marketing Management, 5e
Chapter 12
Global Pricing
1
Chapter Overview
1.
2.
3.
4.
5.
6.
Drivers of Foreign Market Pricing
Managing Price Escalation
Pricing in Inflationary Environments
Global Pricing and Currency Fluctuations
Transfer Pricing
Global Pricing and Antidumping
Regulation
7. Price Coordination
8. Countertrade
2
Introduction
• Global pricing is one of the most critical and complex
issues in international marketing.
• Price is the only marketing mix instrument that
creates revenues. All other elements entail costs.
• A company’s global pricing policy may make or
break its overseas expansion efforts.
• Multinationals also face the challenges of how to
coordinate their pricing across different countries.
3
1. Drivers of Foreign Market Pricing
• Main drivers affecting global pricing:
– Company Goals
• Satisfactory ROI
• Market Share
• Specified Product Goal
– Company Costs
• Cost-Plus Pricing
• Dynamic Incremental Pricing
• Incremental Costs
4
Exhibit 12-1:
Retail Price Comparison across Cities
Please Insert Exhibit 12-1 Here
“Retail Price Comparison Across Cities”
5
1. Drivers of Foreign Market Pricing
• Customer Demand
• Competition
– Cross-Border Price Differentials
– Nonprice Competition
• Distribution Channels
– Variations in Trade Margins and Length of
Margins
– Issues of Everyday Low Prices (EDLP)
– Parallel Imports (Gray Market)
• Government Policies
6
Exhibit 12-2: Price Promotions in
Chinese Cultures with End-8 Prices
Please Insert Exhibit 12-2 Here
“Price Promotions in Chinese Cultures with
End-8 Prices”
7
Exhibit 12-3: Average Quarterly Sales & ExFactory Selling Prices of Antidepressants
Please Insert Exhibit 12-3 Here
“Average Quarterly Sales & Ex-Factory
Selling Prices of Antidepressants”
8
2. Managing Price Escalation
• Options to lower the export price:
1. Rearrange the distribution channel
2. Eliminate costly features (or make them
optional)
3. Downsize the product
4. Assemble or manufacture the product in
foreign markets
5. Adapt the product to escape tariffs or tax
levies
9
3. Pricing in Inflationary Environments
•
Ways to safeguard against inflation:
1. Modify components, ingredients, parts and/or
packaging materials.
2. Source materials from low-cost suppliers.
3. Shorten credit terms.
4. Include escalator clauses in long-term contracts.
5. Quote prices in a stable currency.
6. Pursue rapid inventory turnovers.
7. Draw lessons from other countries.
10
3. Pricing in Inflationary Environments
• Alternatives to price controls:
1. Adapt the product line
2. Shift target segments or markets.
3. Launch new products or variants of existing
products.
4. Negotiate with the government.
5. Predict incidence of price controls.
11
Exhibit 12-4: Exporter Strategies under
Varying Currency Conditions
Please Insert Exhibit 12-4 Here
“Exporter Strategies Under Varying Currency
Conditions”
12
4. Global Pricing and Currency
Fluctuations
• Currency Gain/Loss Pass Through (See Exhibits
12-5 and 12-6.)
– Pass-through issue
– Pricing-to-market (PTM)
– Local-currency price stability (LCPs)
• Currency Quotation
13
Exhibit 12-5: Numerical Illustration of PassThrough and Local Currency Stability
Please Insert Exhibit 12-5 Here
“A Numerical Illustration of Pass-Through
and Local Currency Stability”
14
Exhibit 12-6: Retail Price Changes during
Dollar Appreciation: Japanese and German
Exports to the U.S. Market
Please Insert Exhibit 12-6 Here
“Retail Price Changes During Dollar Appreciations:
Japanese and German Exports to the U.S. Market”
15
5. Transfer Pricing
• Sales transactions between related entities of the same
companies are called transfer prices.
• Determinants of Transfer Prices:
1. Market conditions in the foreign country
2. Competition in the foreign country
3. Reasonable profit for foreign affiliate
4. U.S. federal income taxes
5. Economic conditions in the foreign country
6. Import restrictions
7. Customs duties
8. Price controls
9. Taxation in the foreign country
10. Exchange controls
16
5. Transfer Pricing
• Criteria for making transfer pricing decisions:
– Tax regimes
– Local market conditions
– Market imperfections
– Joint venture partner
– Morale of local country managers
17
5. Transfer Pricing
• Setting Transfer Prices:
– Market-based transfer pricing:
• Arm’s length prices
– Nonmarket-based pricing:
• Cost-based pricing
• Negotiated pricing
– Compliance with financial reporting norms, fiscal
and custom rules, and anti-dumping regulations
prompts use of market-based transfer pricing.
18
5. Transfer Pricing
– Government-imposed market constraints (e.g.,
import restrictions, price controls, exchange
controls) favor nonmarket-based transfer pricing.
– Most firms use a mixture of market-based and
non-market pricing procedures.
• Minimizing the Risk of Transfer Pricing Tax
Audits:
– Basic Arm’s Length Standard (BALS)
19
5. Transfer Pricing
• To minimize the risk of tax audits, consider these
five questions (Exhibit 12-7):
1. Do comparable/uncontrollable transactions exist?
2. Where is the most value added? Parent?
Subsidiary?
3. Are combined profits of parent and subsidiary
shared in proportion to contributions?
4. Does the transfer price meet the benchmark set
by the tax authorities?
5. Does the tax MNC have the information to
justify the transfer prices used?
20
Exhibit 12-7: Decision-Making Model for
Assessing Risk of TP Strategy
Please Insert Here Exhibit 12-7
“Decision-Making Model for Assessing Risk of TP
Strategy”
21
6. Global Pricing and Antidumping
Regulation
• Dumping occurs when imports are sold at an
“unfair” price.
• Voluntary Export Restraint (VER)
• To minimize risk exposure to antidumping actions,
exporters might pursue any of the following
marketing strategies:
– Trading up
– Service enhancement
– Distribution and communication
22
7. Price Coordination
• The following considerations will be necessary
when developing a global pricing strategy:
1. Nature of customers
2. Amount of product differentiation
3. Nature of channels
4. Nature of competition
5. Market integration
6. Internal organization
7. Government regulation
23
7. Price Coordination
• Global-Pricing Contracts –GPCs
Purchasers often demand GPCs from their suppliers.
– GPCs can also benefit suppliers.
– A GPC can offer the opening toward nurturing a
lasting customer relationship.
– Small suppliers can use GPCs as a differentiation
tool to get access to new accounts.
24
7. Price Coordination
• Aligning Pan-Regional Prices
• A Pricing Corridor (to find the middle ground by
upping prices in low-price countries and cutting them in
high-price countries) works as follows:
Step 1. Determine optimal price for each country.
Step 2. Find out whether parallel imports (“gray
markets”) are likely to occur at these prices.
Step 3. Set a pricing corridor.
(See Exhibit 12-8.)
25
Exhibit 12-8: Pan-European Price
Coordination
Please Insert Exhibit 12-8 Here
“Pan-European Price Coordination”
26
7. Price Coordination
•
Implementing Price Coordination: Global
marketers can choose from four alternatives to
promote price coordination within their
organizations:
1. Economic measures
2. Centralization
3. Formalization
4. Informal coordination
27
8. Countertrade
• Forms of Countertrade (See Exhibit 12-9.)
– Simple barter
– Clearing agreement
– Switch trading
– Buyback (compensation)
– Counterpurchase
– Offset
28
Exhibit 12-9: Classification of Forms of
Countertrade
Please Insert Exhibit 12-9 Here
“Classification of Forms of Countertrade”
29
8. Countertrade
• Motives behind Countertrade:
– Gain access to new or difficult markets
– Overcome exchange rate controls or lack of hard
currency
– Overcome low country credit worthiness
– Increase sales volume
– Generate long-term customer goodwill
30
8. Countertrade
• Shortcomings of Countertrade:
– No “in-house” use for goods offered by customers
– Timely and costly negotiations
– Uncertainty and lack of information on future prices
– Transaction costs
31
8. Countertrade
• Advice regarding countertrade:
1. Always evaluate the pros and cons of countertrade
against other options.
2. Minimize the ratio of compensation goods to cash.
3. Strive for goods that can be used in-house.
4. Assess the relative merits of relying on middlemen
versus an in-house staff.
5. Check whether the goods are subject to any restrictions.
6. Assess the quality of goods.
32