Global Pricing

Basic Factors in Pricing Costs Experience Curve Competition Demand

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

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

Pricing Basics 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. 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.

Basic Pricing Concepts The Global Manager must develop systems and policies that address Price Floors Price Ceilings Optimum Prices Must be consistent with global opportunities and constraints

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

EXPORT PRICINGMULTINATIONAL 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…

Global Pricing Objectives and Strategies Managers must determine the objectives for the pricing objectives Unit Sales Market Share Return on investment They must then develop strategies to achieve those objectives Penetration Pricing Market Skimming

Market Skimming and Financial Objectives Market Skimming Charging a premium price May occur at the introduction stage of product life cycle Sony Ad. for camcorders

Penetration Pricing and Non- Financial Objectives Penetration Pricing Charging a low price in order to penetrate market quickly Appropriate to saturate market prior to imitation by competitors 1979 Sony Walkman

Unit sales Time in local market Profitability Time in local market Penetration price Skimming price Skimming vs Penetration Pricing

Target Costing 1. Does the price reflect the product’s quality? 2. Is the price competitive given local market conditions? 3. Should the firm pursue market penetration, market skimming, or some other pricing objective? 4. What type of discount (trade, cash, quantity) and allowance (advertising, trade-off) should the firm offer its international customers? 5. Should prices differ with market segment? 6. What pricing options are available if the firm’s costs increase or decrease? Is demand in the international market elastic or inelastic? 7. Are the firm’s prices likely to be viewed by the host-country government as reasonable or exploitative? 8. Do the foreign country’s dumping laws pose a problem?

Dumping In international trade, this occurs when one country exports a significant amount of goods to another country at prices much lower than in the domestic market

Target Costing Cost-Based Pricing is based on an analysis of internal and external cost Firms using western cost accounting principles use the Full absorption cost method Per-unit product costs are the sum of all past or current direct and indirect manufacturing and overhead costs

Target Costing Rigid cost-plus pricing means that companies set prices without regard to the eight foundational pricing considerations Flexible cost-plus pricing ensures that prices are competitive in the contest of the particular market environment

Economy Performance Brand C Brand B Brand A (high price) Economy Performance Brand C Brand B Brand A (low price) Before Re-positioningAfter Re-positioning This is the PREFERENCE VECTOR. This shows that the market wants high performance AND high economy (strong quality/price ratio) Re-positioning via a Price Reduction

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

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

COUNTERTRADE – transactions in which all or part of the payment is made in kind rather than cash. Examples are as follows: Countertrade

For the seller evaluating a countertrade proposal, the following points must be considered: 1.Is this the only way the order can be secured? 2.Can the received goods be sold? 3.How can we maximize the cash portion? 4.Does the invoiced price incorporate extra transaction costs? 5.Are there import barriers to the received goods? 6.Could there be currency exchange problems if we repatriate the earnings from sales in a third country? Evaluating a Countertrade Offer

Profit sharing or penalty for nonperformance Package Price System discounts? Get supplier discounts? Bundled? Pricing of turnkey package Unbundled No firm-specific advantages Components where firm has FSA's Price taker Price maker Competitors: stand- alone profit centers? Competitive entry? Make or buy? Component prices? No profit sharing or penalty for nonperformance Systems Pricing in Turnkey Sales

Gray Trade Gray trade is the sales of genuine branded goods through unauthorized channels. 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. Gray trade is acute in trade areas where barriers have been recently dismantled & exchange rates fluctuate, creating big arbitrage opportunities and “consumer tourism”.

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

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

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 $ k k P P Polycentric Pricing

Although centrally coordinated prices interfere with the local subsidiary’s ability to target its market, it is necessary and possible to coordinate pricing at least by regions or trading areas. Takeaways

To discourage gray trade, which attempts to take advantage of currency exchange shifts & local price differentials, companies try to keep prices in different countries within a narrow band or “corridor”. Takeaways

Transfer prices between a global firm’s plants in different countries can seldom be used to shift profits but should be used to motivate subsidiaries & measure performance, while remaining supportable to local tax authorities. Takeaways

Countertrade, including barter, is a frequent pricing option in countries with a lack of hard currency, especially when global financial turmoil puts domestic currencies under pressure. Takeaways

Global pricing still has to pay attention to basic issues such as competition, price-quality relationships, & stage of the product life cycle. Takeaways