11. Global Pricing
Chapter Overview
1.
2.
3.
4.
5.
6.
7.
Drivers of Foreign Market Pricing
Managing Price Escalation
Pricing in Inflationary Environments
Global Pricing and Currency Fluctuations
Transfer Pricing
Global Pricing and Antidumping Regulation
Price Coordination
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.
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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
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Exhibit 11-1:
Retail Price Comparison across Cities
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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
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Exhibit 11-2: Price Promotions in Chinese Cultures
with End-8 Prices
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Exhibit 11-3: Average Quarterly Sales & Ex-Factory
Selling Prices of Antidepressants
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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
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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.
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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.
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Exhibit 11-4: Retail Price Harley-Davidson Ultra
Electric Glide (In US $ Equivalent)
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4. Global Pricing and Currency Fluctuations
• Currency Gain/Loss Pass Through (See Exhibits 11-5 and
11-6.)
– Pass-through issue
– Pricing-to-market (PTM)
– Local-currency price stability (LCPs)
• Currency Quotation
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Exhibit 11-5: Exporter Strategies Under Varying
Currencies
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Exhibit 11-6: Numerical Illustration of Pass
Through and Local Currency Stability
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Exhibit 11-7: Retail Price Changes During Dollar
Appreciations
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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
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5. Transfer Pricing
• Criteria for making transfer pricing decisions:
–
–
–
–
–
Tax regimes
Local market conditions
Market imperfections
Joint venture partner
Morale of local country managers
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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.
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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)
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5. Transfer Pricing
• To minimize the risk of tax audits, consider these five
questions (Exhibit 11-7):
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?
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Exhibit 11-8: Decision-Making Model for Assessing
Risk of TP Strategy
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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
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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
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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.
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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 highprice 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 11-8.)
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Exhibit 11-9: Pan-European Price Coordination
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7. Price Coordination
•
Implementing Price Coordination: Global marketers
can choose from four alternatives to promote price
coordination within their organizations:
1.
2.
3.
4.
Economic measures
Centralization
Formalization
Informal coordination
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