Global Pricing Strategy

Introduction u Global pricing is one of the most critical and complex issues in international marketing. u Price is the only marketing mix instrument that creates revenues. All other elements entail costs. u A company’s global pricing policy may make or break its overseas expansion efforts. u Multinationals also face the challenges of how to coordinate their pricing across different countries.

Pricing Basics I u The Role of Costs –The standard pricing procedure for exporting consists of F A cost-plus formula F Price escalation: The added costs in exporting mean that export prices tend to escalate over the domestic prices. u Experience Curve Pricing –Use of cost-based pricing has increased due to the “experience curve” effect F The experience curve shows how unit costs go down as successively more units of a product are produced F Experience curve pricing has been adopted primarily by companies entering an existing market in the maturity stage, because of the need to be competitive.

Pricing Basics II u Competition –The premium price differential refers to the degree to which the firm might be granted a higher price by the market because of the particular strengths of its product. –Because of competition, prices in foreign market are sometimes lower than at home, contrary to the price escalation effect. u Demand –The strength of demand tends to vary with the PLC stage, the growth stage typically showing strongest demand. –Demand and supply: Whether or not price can be high in a strong demand market, is also determined by the supply from competitors.

UNIT COST P** BREAKEVEN TIME PROFIT MARGIN < 0 PROFIT MARGIN > 0 ACCUMULATED PRODUCTION = q The Experience Curve Effect

SETTING A PRICE PREMIUM ON THE BASIS OF DIRECT COMPARISONS WITH COMPETITION (Caterpillar example) $ 20,000 IS THE COMPETITOR’S PRICE $ 3,000 IS THE PREMIUM FOR SUPERIOR DURABILITY $ 2,000 IS THE PREMIUM FOR SUPERIOR RELIABILITY $ 2,000 IS THE PREMIUM FOR SUPERIOR SERVICE $ 1,000 IS THE PREMIUM FOR LONGER WARRANTY $28,000 IS THE TOTAL VALUE $ 4,000 DISCOUNT $24,000 FINAL PRICE Competitive Value Pricing

Major Considerations in Setting Price

Drivers of Foreign Market Pricing I u Main drivers affecting global pricing: –Company Goals F Satisfactory ROI F Market Share F Specified Product Goal –Company Costs F Cost-Plus Pricing F Dynamic Incremental Pricing F Incremental Costs

Drivers of Foreign Market Pricing II u Customer Demand u Competition –Cross-Border Price Differentials –Nonprice Competition u Distribution Channels –Variations in Trade Margins and Length of the Channels –Issues of Everyday Low Prices (EDLP) –Parallel Imports (Gray Market) u Government Policies

EXPORT PRICING MULTINATIONAL PRICING CURRENCY RISK, CREDIT RISK EXCHANGE RATES, HEDGING TARIFFS, PRICE ESCALATION TRANSFER PRICE DUMPING COUNTERTRADE, SYSTEMS PRICING SKIMMING VS. PENETRATION PRICING PRICE COORDINATION, GRAY TRADE POLYCENTRIC PRICING, GEOCENTRIC PRICING, ETHNOCENTRIC PRICING POSITIONING PRICE, PRICE/QUALITY FINAL PRICE Global Pricing: Added to the Pricing Basics…

ETHNOCENTRIC PRICING One global price, in one currency PROS: no gray trade CONS: no local adaptation $ Ethnocentric Pricing

GEOCENTRIC PRICING One price in each region, common regional currency PROS: some coordination, little gray trade, some adaptation CONS: not locally adapted $ Y DM Geocentric Pricing

POLYCENTRIC PRICING Local prices, in local currency PROS: locally adapted CONS: not coordinated, more gray trade DM $ Y Y $ DM k k P P Polycentric Pricing

Setting of Prices: Kodak Example Manufacturer’s Transfer Price * Discount Factor Factory Billing Price + Distributor Gross Margin + Local Costs * Exchange Rate Adjustment Distributor’s Exit Price (List Price) + Retailer’s Mark-up + Value Added Tax Retail Price

Price Escalation: An American-Built Jeep Cherokee Makes the Trip to Japan

Retail Price Comparison across Cities

Price Promotions in Chinese Cultures with End-8 Prices

Average Quarterly Sales & Ex-Factory Selling Prices of Antidepressants

EXCHANGE RATES – firms must be wary of devaluations; exchange rate fluctuations affect the performance of local subsidiaries EXCHANGE RATES – firms must be wary of devaluations; exchange rate fluctuations affect the performance of local subsidiaries HEDGING – purchasing insurance against losses because of currency fluctuations, firms make use of “forward contracts” or “swaps” GOVERNMENT INTERVENTION – various nations introduce stabilizing measures into financial systems via selective price controls and price discrimination laws Financial Issues

Managing Price Escalation u 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

Pricing in Inflationary Environments I u 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.

Pricing in Inflationary Environments II u 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.

Exporter Strategies under Varying Currency Conditions

Global Pricing and Currency Fluctuations u Currency Gain/Loss Pass Through –Pass-through issue –Pricing-to-market (PTM) –Local-currency price stability (LCPs) u Currency Quotation

Numerical Illustration of Pass-Through and Local Currency Stability

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

TRANSFER PRICE – the price paid for products shipped between units of the same organization when the shipment crosses national borders so that the correct duties & related fees can be paid Transfer prices should reflect the prices the subsidiary might encounter in the open market, also known as “arm’s length prices” Transfer prices are also used to shift resources within a firm to offset inflation in country subsidiaries, to support a subsidiary’s local competitive position, and in other cases for profit repatriation. This has resulted in accounting firms developing strict guideline for the transfer pricing process. Transfer Pricing

u Setting Transfer Prices: –Market-based transfer pricing: F Arm’s length prices –Nonmarket-based pricing: F Cost-based pricing F Negotiated pricing –Compliance with financial reporting norms, fiscal and custom rules, and anti-dumping regulations prompts use of market-based transfer pricing.

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. u Minimizing the Risk of Transfer Pricing Tax Audits: –Basic Arm’s Length Standard (BALS)

Transfer Pricing u To minimize the risk of tax audits, consider these five questions: 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?

Global Pricing and Antidumping Regulation u Dumping occurs when imports are sold at an “unfair” price. u Voluntary Export Restraint (VER) u To minimize risk exposure to antidumping actions, exporters might pursue any of the following marketing strategies: –Trading up –Service enhancement –Distribution and communication

Gray Trade u u Gray trade is the sales of genuine branded goods through unauthorized channels. u u Parallel importation: the activity of gray marketers parallels authorized distributors u u Gray trade involves shipments from overseas plants that enter a market via entry points not easily controlled. Examples include shipments from the Asian manufacturers who produce for Western companies and whose products can be diverted to ports in one country before entering the market country. u u Gray trade is acute in trade areas where barriers have been recently dismantled & exchange rates fluctuate, creating big arbitrage opportunities and “consumer tourism”.

Factors Facilitating Gray Trade u Substantial price differences between national markets u The opportunities to offset supply shortages in the importing country at below-market prices u Competitive pricing strategies u Substantial fluctuation in exchange rates u Inability to synchronize demand and supply in various national markets u Unavailability in a market of foreign-made products with desired exclusives u Relative ease with which products can be moved across countries and adapted for local use

Gray Trade Designer Fragrances

ECONOMIC CONTROLS – influencing price setting in local markets via changing shipping prices or by rationing the productECONOMIC CONTROLS – influencing price setting in local markets via changing shipping prices or by rationing the product CENTRALIZATION – forming price-corridors, setting limits for local pricesCENTRALIZATION – forming price-corridors, setting limits for local prices FORMALIZATION – standardizing the process of planning and implementing pricing decisionsFORMALIZATION – standardizing the process of planning and implementing pricing decisions INFORMAL COORDINATION – via articulation of corporate values & culture, human resource exchangesINFORMAL COORDINATION – via articulation of corporate values & culture, human resource exchanges Pricing Actions against Gray Trade

Economic controls Informal coordination FormalizationCentralization High High Low Low Level of Marketing Standardization Strength of Local Resources Controlling Gray Trade: Coordinating Pricing Strategies

Pan-European Price Coordination

Managerial Perspective of Gray Trade u Erosion of Trademark Image u Strained Manufacturer-Dealer-Customer Relations u Legal Liabilities u Disruption of Marketing Strategy and Profits

Reactive Strategies to Combat Gray Trade u Strategic Confrontation –Dealer education; Analysis of strengths and weaknesses; Promotion of dealer strengths and competitive weaknesses; Creative merchandising u Participation u Aggressive Confrontation –Price Cutting –Supply Interference –Promotional Bursts u Collaboration u Acquisition

Proactive Strategies to Prevent Gray Trade u Product/Service Differentiation and Availability u Strategic Pricing u Dealer Development u Marketing Information Systems u Long-Term Image Reinforcement u Establishing Legal Precedence u Lobbying