GLOBAL PRICING

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GLOBAL PRICING
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• I - Introduction

• Global pricing is one of the most critical and
  complex issues that a global firms face.
• Price is the only marketing mix instrument that
  creates revenues
• A firms pricing policy is inherently a highly
  cross-functional process based on inputs from the
  firms finance, accounting, manufacturing, tax
  and legal divisions.
• Multinationals also face the challenge of how to
  coordinate their pricing policy across different
  countries.
• A lack of coordination will create gray market
  situations

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• II - Drivers of Foreign Market Pricing

The 4 Cs (drivers) of price variations
A Company Goals

• When developing a pricing strategy the firm needs
  to decide what it wants to accomplish with its
  strategy.
• These goals might include
• - Maximizing Current Profits, or
• - Projecting a Premium image
• Company objectives will vary form market to
  market, especially in MNCs with a large degree of
  autonomy
• Ex Levis 501, Europe and the U.S.

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B Company Costs

• Company costs consist of two parts
• a) Variable Costs (which change with sales
  volume)
• b)Fixed costs (e.g., overhead which do not
  vary)
• Export Pricing policies
• a) Cost-Plus Pricing adds international costs
  and a mark-up to the domestic manufacturing cost.
• b) Dynamic Incremental Pricing only variable
  costs and a portion of the overhead load
  (incremental costs) should be recuperated.
  Exporting-related incremental costs
  (manufacturing costs, shipping expenses,
  insurance, and overseas promotional costs).

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C Customer Demand
Consumer demand is a function of buying power,
tastes, habits and substitutes Buying power is
a key consideration in pricing decisions A
market consists of a quality-sensitive and a
price-sensitive market segment Companies should
exploit differences in price sensitivity by price
discrimination One useful summary measure for
price sensitivity is price elasticity.
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Typically, the nature of demand will change over
time. In countries that were entered recently,
the firm may need to stimulate trial via
discounting or a penetration pricing
strategy. Brand loyalty price will play less
of a role as a purchase criterion.
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D Competition

• Competition is another key factor in global
  pricing
• The competitive situation may vary for a number
  of reasons
• a) Number of Competitors
• b) Nature of Competition (Ex Global versus Local
  players)
• c) Compete with knock-off versions
• d) Legitimate distribution competes with
  smugglers
• e) Strenght of Private Labels
• A companys competitive position typically varies
  across countries. Companies will be price leaders
  in some countries and price takers in other
  countries.
• Nonprice competition (advertising, channel
  coverage)

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E Distribution Channels
The balance of power between manufacturers and
their distributors Large retailers order in
bulk Parallel Imports (gray markets)
F Government Policies

• Direct Impact tax rates, tariffs, and price
  controls
• Indirect government deficits (interest rates),
  currency volatility, and inflation.

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III - Managing Price Escalation

• Exporting involves more steps and substantially
  higher risks than domestic marketing.
• To cover the incremental costs (shipping,
  insurance, tariffs, etc), the final foreign
  retail price will often be much higher than the
  domestic retail price.
• Price escalation raises two pressing issues
• a) Sticker shock
• b) Competitiveness

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Two major approaches to deal with price
escalation
A Find ways to cut the export price

• Rearrange the distribution channel length of the
  channel, or number of layers between manufacturer
  and end-user.
• Ex U.S. firms in Japan
• Eliminate costly features (or make them optional)
  
• Downsize the product
• Assemble or manufacture the product in foreign
  markets
• Adapt the product to escape tariffs or tax
  levies
• Ex Land Rover

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IV - Pricing in Inflationary Environments
There are several alternative ways to safeguard
against inflation - Modify components,
ingredients, parts and/or - ackaging materials -
Source materials form low-cost suppliers -
Shorten credit terms - Include escalator clauses
in long-term contracts - Quote Prices in a stable
currency - Pursue rapid inventory turnovers -
Draw lessons from other countries
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V - Global Pricing and Currency Movements

• Given the sometimes dramatic exchange rate
  movements, setting prices in a floating exchange
  rate world poses a tremendous challenge.
• Two major managerial pricing issues result from
  currency movements
• How much of an exchange rate gain (loss) should
  be passed through our customers?
• Ex Customers price sensitivity, the amount of
  competition in the export market
• In what currency should we quote our prices?
• Depends on the balance of power between the
  supplier and the customer
• Some companies adopt a single currency

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VI - Transfer Pricing
MNCs should consider the following criteria when
making transfer pricing decisions a) Tax
regimes b) Local Market conditions c) Market
Imperfections d) Joint-venture partner e) Morale
of local country managers Key drivers behind
transfer pricing a) Market conditions in the
foreign country b) Competition in the foreign
country c) Reasonable profit for foreign
affiliate d) U.S. federal income taxes
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• e) Economic conditions in the foreign country
• f) Import Restrictions
• g) Customs Duties
• h) Price Controls
• i) Taxation in the foreign country
• j) Exchange Controls
• Setting Transfer Prices
• a) Arms length prices use of market mechanism
  as a cue for setting transfer prices.
• b) Cost-based pricing (adds a mark-up)

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VII - Global Pricing and Antidumping Regulation

• Dumping imports are being sold at an
  unfairprice
• Protectionism
• - To minimize risk exposure to antidumping
  actions, exporters might pursue any of these
  strategies
• - Trading-up (move away from low-value to
  high-value products)
• - Service Enhancement differentiate your product
  by adding support services to the core product
• - Distribution and Communication strategic
  alliances

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VIII - Price Coordination

• When developing a global pricing strategy, one of
  the thorniest issues is how much coordination
  should exist between prices charged in different
  countries
• In deciding how much coordination, several
  considerations matter
• a) Nature of customers
• b) Nature of channels
• c) Nature of competition
• d) Market integration
• e) Internal organization
• f) Government regulation

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IX - Countertrade
Countertrade is an umbrella term used to describe
unconventional trade-financing transactions that
involve some form of noncash compensation.
A Forms of Countertrade Barter Buy
Back Offset

• B 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

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• C 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