GLOBAL PRICING CHAPTER OVERVIEW Drivers of Foreign Market Pricing Managing Price Escalation Pricing in Inflationary Environments Global Pricing and Currency Movements Transfer Pricing Global Pricing and Antidumping Regulation Price Coordination Countertrade

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.

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

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

1. Drivers of Foreign Market Pricing

1. Drivers of Foreign Market Pricing

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

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. 7. Draw lessons from other countries.

3. Pricing in Inflationary Environments 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.

4. Global Pricing and Currency Movements Currency Gain/Loss Pass Through (see Exhibit 13-4) Pass-through issue Pricing-to-market (PTM) Local-currency price stability (LCPs) Currency Quotation

4. Global Pricing and Currency Movements

4. Global Pricing and Currency Movements

4. Global Pricing and Currency Movements

Copyright (c) 2007 John Wiley & Sons, Inc. 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 Chapter 13 Copyright (c) 2007 John Wiley & Sons, Inc.

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

5. Transfer Pricing 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.

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)

5. Transfer Pricing 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? 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?

5. Transfer Pricing

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

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

7. Price Coordination 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.

7. Price Coordination

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.

7. Price Coordination Implementing Price Coordination: Global marketers can choose from four alternatives to promote price coordination within their organizations: Economic measures Centralization Formalization Informal coordination

7. Price Coordination

8. Countertrade Forms of Countertrade: Simple barter Clearing agreement Switch trading Buyback (compensation) Counterpurchase Offset

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

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

8. Countertrade

8. Countertrade 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. 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.