Chapter 17 Global Pricing Principles of International Marketing 9th Edition Chapter 17 Global Pricing

Transfer Pricing Transfer pricing, or intracorporate pricing, is the pricing of sales to members of the extended corporate family. Transfer prices can be based on costs or on market prices. International transfer pricing objectives may lead to conflicting objectives, especially if the influencing factors vary dramatically from one market to another.

Transfer Pricing Transfer pricing is established to achieve the following objectives: Competitiveness in the international marketplace Reduction of taxes and tariffs Management of cash flows Minimization of foreign exchange risks Avoidance of conflicts with home and host governments

Transfer Pricing Use of transfer prices to achieve corporate objectives The three philosophies of transfer pricing are cost-based, market-based, and arm’s-length price. The rationale for transferring at cost is to increase the profits of affiliates. Deriving transfer prices from the market is the most marketing-oriented method because it takes local conditions into account. Arm’s-length pricing is favored by many constituents, such as governments, to ensure proper intracompany pricing.

Transfer Pricing Use of transfer prices to achieve corporate objectives The effect of environmental influences in overseas markets can be alleviated by manipulating transfer prices in principle. Transfer prices may be adjusted to balance the effects of fluctuating currencies when one partner is operating in a low-inflation environment and the other in one of rampant inflation.

Transfer Pricing Transfer pricing challenges - Performance measurement Transfer pricing challenges - Performance measurement If the firm operates on a profit center basis, consideration must be given to the effect of transfer pricing on the subsidiary’s apparent profit performance and its actual performance. Cultural differences may be further complicate the issue if the need to subsidize less-efficient members of the corporate family is not made clear. An adjustment in the control mechanism is used to give appropriate credit to divisions for their actual contributions.

Transfer Pricing Transfer pricing challenges – Taxation Transfer pricing challenges – Taxation Transfer prices will involve the tax and regulatory jurisdictions of the countries in which the company does business. Since 1962, the U.S. government has affirmed the arm’s-length standard as the principal basis for transfer pricing. Because it involves profits

Pricing Within Individual Markets Pricing within the individual markets in which the company operates is determined by: Corporate objectives Costs Customer behavior and market conditions Market structure Environmental constraints

Pricing Within Individual Markets Corporate objectives Global marketers must set and adjust their financial and marketing-related objectives based on the prevailing conditions in each of their markets. Price changes may be frequent if the company’s objective is to undersell a major competitor.10%-20% lower With longer-term unfavorable currency changes, marketers have to improve their efficiency and/or shift production bases.

Pricing Within Individual Markets Costs Frequently used as a basis for price determination largely because they are easily measured and provide a base under which prices cannot go in the long term. Varying inflation rates will have a major impact on the administration of prices.

Pricing Within Individual Markets Costs Prices cannot be increased due to economic conditions. Strategies for thriving in disinflationary times may include target pricing, introducing innovative products at a modest premium, and getting close to customers by using new technologies.

Pricing Within Individual Markets Demand and market factors Price elasticity of consumer demand must be understood to determine appropriate price levels, especially if cost structures change. Pricing decisions is closely tied to customer perceptions of the product offering and the marketing communication tied to it. The success of a particular pricing strategy will depend on the willingness of both the manufacturer and the intermediary to cooperate.

Pricing Within Individual Markets Market structure and competition Competition helps set the price within the parameters of cost and demand. Depending on the marketer’s objectives and competitive position, it may choose to compete directly on price or elect for nonprice measures. Some marketers can fend off price competition by emphasizing other elements of the marketing mix.

Pricing Within Individual Markets Environmental constraints Multinational corporations must work with governments in the developing countries to establish an economic policy centered on a relatively free market without price controls.

Countertrade Countertrade is a sale that encompasses more than an exchange of goods, services, or ideas for money. Conditions that support countertrade are lack of money, lack of value of money, lack of acceptability of money as an exchange medium, or greater ease of transaction by using goods.

Countertrade as a Pricing Tool Why purchasers impose countertrade: To preserve hard currency To improve balance of trade To gain access to new markets To upgrade manufacturing capabilities To maintain prices of export goods

Countertrade as a Pricing Tool (continued) Types of countertrade Barter - Direct exchange of goods of approximately equal value. Not used very often because difficult to find goods of equal value. Assessing value and disposing of goods is also a problem. Counterpurchase or offset trade - Seller gets paid but agrees to purchase goods worth the same amount from the buyer. More flexibility in selecting goods and in assessing value. Compensation deals - Part payment in goods and part in cash. Some cash involved, flexibility in assessing value of goods involved. Product buyback agreement - Seller agrees to accept as payment a portion of the output or buy it back. Technology transfer, quality assurance, and assured payment. Usually developing or newly-industrialized nations.

Countertrade Merits of countertrade Merits of countertrade Permits the covert reduction of prices and therefore allows firms and governments to circumvent price and exchange controls. An excellent mechanism to gain entry into new markets. Provides stability for long-term sales. Can ensure the quality of an international transaction.