Global Marketing Management, 5e Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 1 Chapter 12 Global Pricing

Global Marketing Management, 5e

Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc.

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Chapter 12

Global Pricing

Chapter Overview

1. Drivers of Foreign Market Pricing2. Managing Price Escalation3. Pricing in Inflationary Environments4. Global Pricing and Currency Fluctuations5. Transfer Pricing6. Global Pricing and Antidumping Regulation7. Price Coordination 8. Countertrade


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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 ROIMarket ShareSpecified Product Goal

Company CostsCost-Plus PricingDynamic Incremental PricingIncremental Costs


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Exhibit 12-1: 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 12-2: Price Promotions in Chinese Cultures with End-8 Prices


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Exhibit 12-3: Average Quarterly Sales & Ex-Factory Selling Prices of Antidepressants

2. Managing Price Escalation

Options to lower the export price:1. Rearrange the distribution channel2. Eliminate costly features (or make them

optional) 3. Downsize the product4. Assemble or manufacture the product in foreign markets5. 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 line2. 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 12-4: Exporter Strategies under Varying Currency Conditions


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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


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Exhibit 12-5: Numerical Illustration of Pass-Through and Local Currency Stability


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Exhibit 12-6: Retail Price Changes during Dollar Appreciation: Japanese and German Exports to the U.S. Market


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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 pricingNegotiated 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 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?


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Exhibit 12-7: 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 customers2. Amount of product differentiation3. Nature of channels4. Nature of competition5. Market integration6. Internal organization7. Government regulation


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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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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.)


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Exhibit 12-8: Pan-European Price Coordination


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

1. Economic measures2. Centralization3. Formalization4. Informal coordination


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8. Countertrade

Forms of Countertrade (See Exhibit 12-9.) Simple barter Clearing agreement Switch trading Buyback (compensation) Counterpurchase Offset


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Exhibit 12-9: Classification of Forms of Countertrade


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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


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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


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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.


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Documents

Global Marketing Management, 5e Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 1 Chapter 12 Global Pricing