1. Global Marketing Management, 5e Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 1 Chapter 12 Global Pricing

2. 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 8. Countertrade Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 2

3. 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. Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 3

4. 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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 4

5. Exhibit 12-1: Retail Price Comparison across Cities Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 5

6. 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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 6

7. Chapter 13Copyright (c) 2007 John Wiley & Sons, Inc. 7 Exhibit 12-2: Price Promotions in Chinese Cultures with End-8 Prices

8. Chapter 13Copyright (c) 2007 John Wiley & Sons, Inc. 8 Exhibit 12-3: Average Quarterly Sales & Ex- Factory Selling Prices of Antidepressants

9. 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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 9

10. 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. Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 10

11. 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. Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 11

12. Exhibit 12-4: Exporter Strategies under Varying Currency Conditions Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 12

13. 4. Global Pricing and Currency Fluctuations  Currency Gain/Loss Pass Through (See Exhibits 12- 5 and 12-6.)  Pass-through issue  Pricing-to-market (PTM)  Local-currency price stability (LCPs)  Currency Quotation Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 13

14. Exhibit 12-5: Numerical Illustration of Pass- Through and Local Currency Stability Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 14

15. Exhibit 12-6: Retail Price Changes during Dollar Appreciation: Japanese and German Exports to the U.S. Market Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 15

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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 16

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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 17

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. Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 18

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) Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 19

20. 5. Transfer Pricing  To minimize the risk of tax audits, consider these five questions (Exhibit 12-7): 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? Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 20

21. Exhibit 12-7: Decision-Making Model for Assessing Risk of TP Strategy Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 21

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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 22

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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 23

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. Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 24

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 12-8.) Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 25

26. Exhibit 12-8: Pan-European Price Coordination Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 26

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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 27

28. 8. Countertrade  Forms of Countertrade (See Exhibit 12-9.)  Simple barter  Clearing agreement  Switch trading  Buyback (compensation)  Counterpurchase  Offset Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 28

29. Exhibit 12-9: Classification of Forms of Countertrade Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 29

30. 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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 30

31. 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 Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 31

32. 8. Countertrade  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. Chapter 12Copyright (c) 2009 John Wiley & Sons, Inc. 32