Chapter 13

Global Pricing

Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 1

Chapter Overview

1. Drivers of Foreign Market Pricing 2. Managing Price Escalation 3. Pricing in Inflationary Environments 4. Global Pricing and Currency Movements 5. Transfer Pricing 6. Global Pricing and Antidumping Regulation 7. Price Coordination Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 2

Chapter Overview (contd.)

8. Pricing Policies and the Euro 9. Countertrade Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 3

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 Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 5

1. Drivers of Foreign Market Pricing (contd.)

    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 Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 6

2. Managing Price Escalation

 Several options exist 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 Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 7

3. Pricing in Inflationary Environments

 Alternative ways to safeguard against inflation may include: 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.

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3. Pricing in Inflationary Environments (contd.)

7. Draw lessons from other countries.

 Companies faced with price controls can consider several alternatives: 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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4. Global Pricing and Currency Movements

 Currency Gain/Loss Pass Through (see Exhibit  13-3) Pass-through issue   Pricing-to-market (PTM) Local-currency price stability (LCPs)  Currency Quotation Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 10

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 Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 11

5. Transfer Pricing (contd.)

 8. Price controls 9. Taxation in the foreign country 10. Exchange controls Criteria for making transfer pricing decisions:      Tax regimes Local market conditions Market imperfections Joint venture partner Morale of local country managers Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 12

5. Transfer Pricing (contd.)

 Setting Transfer Prices:   Market-based transfer pricing:  Arm’s length prices Nonmarket-based pricing:   Cost-based pricing  Negotiated pricing A recent study shows that compliance with financial reporting norms, fiscal and custom rules, and anti-dumping regulations prompt companies to use market-based transfer pricing.

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5. Transfer Pricing (contd.)

  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) Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 14

5. Transfer Pricing (contd.)

 To minimize the risk of tax audits, decisions should center around the following five questions (see Exhibit 13-6): 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?

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5. Transfer Pricing (contd.)

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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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 Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 17

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 Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 18

7. Price Coordination (contd.)

 Global-Pricing Contracts –GPCs (see Exhibit 13-7):  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 (contd.)

 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.

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7. Price Coordination (contd.)

 Implementing Price Coordination: Global marketers can choose from four alternatives to promote price coordination within their organizations: 1.

2.

Economic measures Centralization 3.

4.

Formalization Informal coordination Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 21

8. Pricing Policies and the Euro

    As of January 1, 2002 , the euro is the common currency within the 12 EU member states.

Companies operating in the euro-zone will need to make strategic decisions in two areas: 1. Harmonization of Prices  The biggest impact is likely to be price harmonization.

2. Transfer Pricing  Prices within the European Union countries will become more transparent.

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9. Countertrade

  Forms of Countertrade:  Simple barter   Clearing agreement Switch trading    Offset Motives behind Countertrade:  Buyback (compensation) Counterpurchase Gain access to new or difficult markets Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 23

9. Countertrade (contd.)

  Overcome exchange rate controls or lack of hard currency Overcome low country credit worthiness   Increase sales volume Generate long-term customer goodwill  Shortcomings of Countertrade:  No “in-house” use for goods offered by customers  Timely and costly negotiations Chapter 13 Kotabe & Helsen's Global Marketing Management, Third Edition, 2004 24

9. Countertrade (contd.)

  Uncertainty and lack of information on future prices Transaction costs  Words of 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.

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9. Countertrade (contd.)

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.

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