11. Global Pricing

Chapter Overview 1. Drivers of Foreign Market Pricing 2. Managing Price Escalation 3. Pricing in Inflationary Environments 4. Global Pricing and Currency Fluctuations 5. Transfer Pricing 6. Global Pricing and Antidumping Regulation 7. 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. 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 11-1: 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 11-2: Price Promotions in Chinese Cultures with End-8 Prices 7

Exhibit 11-3: 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 11-4: Retail Price Harley-Davidson Ultra Electric Glide (In US $ Equivalent) 12

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 13

Exhibit 11-5: Exporter Strategies Under Varying Currencies 14

Exhibit 11-6: Numerical Illustration of Pass Through and Local Currency Stability 15

Exhibit 11-7: Retail Price Changes During Dollar Appreciations 16

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 17

5. Transfer Pricing Criteria for making transfer pricing decisions: – Tax regimes – Local market conditions – Market imperfections – Joint venture partner – Morale of local country managers 18

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. 19

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) 20

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? 21

Exhibit 11-8: Decision-Making Model for Assessing Risk of TP Strategy 22

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 23

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 24

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. 25

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 11-8.) 26

Exhibit 11-9: Pan-European Price Coordination 27

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 28