1. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
Chapter 13
Global Pricing
Chapter 13
Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

2. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
Chapter Overview
1. Drivers of Foreign Market Pricing
2. Managing Price Escalation
3. Pricing in Inflationary Environments
4. Global Pricing and Currency Movements
5. Transfer Pricing
6. Global Pricing and Antidumping
Regulation
7. Price Coordination
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

3. Chapter Overview (contd.)
8. Pricing Policies and the Euro
9. Countertrade
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

4. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
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.
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

5. 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
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

6. 1. Drivers of Foreign Market Pricing (contd.)
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
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

7. 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
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

8. 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.
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

9. 3. Pricing in Inflationary Environments (contd.)
7. Draw lessons from other countries.
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.
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

10. 4. Global Pricing and Currency Movements
Currency Gain/Loss Pass Through (see Exhibit
13-3)
Pass-through issue
Pricing-to-market (PTM)
Local-currency price stability (LCPs)
Currency Quotation
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11. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
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
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

12. 5. Transfer Pricing (contd.)
8. Price controls
9. Taxation in the foreign country
10. Exchange controls
Criteria for making transfer pricing decisions:
Tax regimes
Local market conditions
Market imperfections
Joint venture partner
Morale of local country managers
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

13. 5. Transfer Pricing (contd.)
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.
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

14. 5. Transfer Pricing (contd.)
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)
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

15. 5. Transfer Pricing (contd.)
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?
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

16. 5. Transfer Pricing (contd.)
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?
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

17. 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
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18. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
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
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

19. 7. Price Coordination (contd.)
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.
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

20. 7. Price Coordination (contd.)
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.
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

21. 7. Price Coordination (contd.)
Implementing Price Coordination: Global marketers can choose from four alternatives to promote price coordination within their organizations:
Economic measures
Centralization
Formalization
Informal coordination
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

22. 8. Pricing Policies and the Euro
As of January 1, 2002, the euro is the common currency within the 12 EU member states.
Companies operating in the euro-zone will need to make strategic decisions in two areas:
1. Harmonization of Prices
The biggest impact is likely to be price harmonization.
2. Transfer Pricing
Prices within the European Union countries will become more transparent.
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

23. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
9. Countertrade
Forms of Countertrade:
Simple barter
Clearing agreement
Switch trading
Buyback (compensation)
Counterpurchase
Offset
Motives behind Countertrade:
Gain access to new or difficult markets
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24. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
9. Countertrade (contd.)
Overcome exchange rate controls or lack of hard currency
Overcome low country credit worthiness
Increase sales volume
Generate long-term customer goodwill
Shortcomings of Countertrade:
No “in-house” use for goods offered by customers
Timely and costly negotiations
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

26. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
9. Countertrade (contd.)
Uncertainty and lack of information on future prices
Transaction costs
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.
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004

27. Kotabe & Helsen's Global Marketing Management, Third Edition, 2004
9. Countertrade (contd.)
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.
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Kotabe & Helsen's Global Marketing Management, Third Edition, 2004