Global Marketing and R_amp;D Chapter 17 by yurtgc548



    Week 9
                Pricing Strategy

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.
            Pricing Strategies
 Pricing, a Controllable Variable
  To obtain the maximum benefits from
   pricing, management must regard it in the
   same manner as it does other controllable
     • That is, pricing is one of the marketing mix
       elements that can be varied to achieve the
       marketing objectives of the firm
    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
More Drivers of Foreign Market Pricing
Customer Demand
 Cross-Border Price Differentials
 Nonprice Competition
Distribution Channels
 Variations in Trade Margins and Length of
 Issues of Everyday Low Prices (EDLP)
 Parallel Imports (Gray Market)
Government Policies
Determinants of Demand Elasticity

Income level and competitive conditions
 determine elasticity.
  Elasticity tends to be be greater in countries
           1) with low income levels.
           2) where there are many competitors.

Standard worldwide pricing.
Dual pricing.
Transfer pricing.
Market differentiated pricing.
   Market Differentiated Pricing
Two conditions must be met if a firm is to
 successfully practice market pricing:
   The firm must face different demand and/or cost
    conditions in the countries in which it sells its products.
   The firm must be able to prevent arbitrage. The firm’s
    market pricing policy will unravel if customers are able
    to buy the firm’s products in a low-price country and
    resell them profitably in a high-price country.
              Transfer Pricing
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
          Transfer Pricing (contd.)

Criteria for making transfer pricing decisions:
 Tax regimes
 Local market conditions
 Market imperfections
 Joint venture partner
 Morale of local country managers
          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.
        5. Transfer Pricing (contd.)
 Government-imposed market constraints (e.g.,
   import restrictions, price controls, exchange
   controls) favor nonmarket-based transfer
 Most firms use a mixture of market-based and
   non-market pricing procedures.
Minimizing the Risk of Transfer Pricing Tax
 Basic Arm’s Length Standard (BALS)
          Transfer Pricing (contd.)
To minimize the risk of tax audits, decisions
 should center around the following five questions:
   1. Do comparable/uncontrollable transactions
   2. Where is the most value added? Parent?
   3. Are combined profits of parent and
      subsidiary shared in proportion to
   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?
          Gray Market

A gray market is a market that results
when products are imported into a
country legally but outside the normal
channels of distribution authorized by
the manufacturer. (This phenomenon is
also know as parallel importing.)
             Strategic Pricing
Predatory pricing:
  Using price as a competitive weapon.
Price discrimination:
  Must keep national markets separate.
  Different price elasticities
Experience curve pricing:
  Firms price low worldwide to build market share.
   Incurred losses are made up as company moves
   down experience curve.
         Managing Price Escalation

Several options exist to lower the export price:
   1. Rearrange the distribution channel
   2. Eliminate costly features (or make them
   3. Downsize the product
   4. Assemble or manufacture the product in
      foreign markets
   5. Adapt the product to escape tariffs or tax
  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
    5. Quote prices in a stable currency.
    6. Pursue rapid inventory turnovers.
    7. Draw lessons from other countries.
Pricing in Inflationary Environments
  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
  4. Negotiate with the government.
  5. Predict incidence of price controls.
Regulatory Influences on Prices
 Antidumping regulations:
   Selling a product for a price that is less than
    the cost of producing it.
   Antidumping rules place a floor under export
    prices and limit a firm’s ability to pursue
    strategic pricing.
Interaction between Marketing
  and Other Functional Areas
The finance people want prices that are both
 profitable and conducive to a steady cash flow.
Production supervisors want prices that create large
 sales volumes, which permit long production runs.
The legal department worries about possible
 antitrust violations when different prices are set
 according to type of customer.
The tax people are concerned with the effects of
 prices on tax loads.
The domestic sales manager wants export prices to
 be high enough to avoid having to deal with parallel
       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
2. Transfer Pricing
  Prices within the European Union countries
    will become more transparent.
Publication of International Chamber of
Contains concise and widely understood
 abbreviations for being clear in pricing
 quotations including:
    - place where title passes
    - place where buyer takes possession
    - who is responsible for freight, loading,
    offloading, insurance, damage, duties,
    loss, etc.

Barter - direct exchange of goods of
approximately the same value.
Product for product.

Countertrade - characterized by linkage of
exports and imports in addition to money.
Product + money for product.
Economic circumstances.
Less strain on hard currency reserves.
Allows buyer from country with soft
 currency access to countries with hard
Seller gains access to huge market.
Competitive advantage over other firms.
Generate long-term customer goodwill
   Countertrade: Pros and Cons
  Provides business a way to finance an export deal when
   other means are not available.
  Business may receive unusable or poor quality goods
   that can’t be disposed of profitably.
  May replace multilateral, free-market situations with
   bilateral, non-competitive situations, thus creating
   economic inefficiencies.
  No “in-house” use for goods offered by customers
  Timely and costly negotiations
Counterpurchase (or parallel barter)
    - used to unlink timing of contract
    performance where one transaction
    takes longer than the other.
    EG: Seeds for crops.
Buy-back (or compensation arrangement)
    - one party agrees to supply technology or
    equipment which allows the other party to
    produce goods which are used to repay
    1st party.
    EG: Levi to Hungarian firm.
 Offset - normally used in defense contracts or
 contracts for huge amounts like aircraft.
 Designed to offset the negative impact on the
 current account.

    EG: Foreign country purchase planes
    from Canada but produce and
    assemble locally.

Switch trading: uses third-party trading house.

Debt Swap - used particularly in LDC’s with
huge private and public debt. Debt exchanged for
natural resources, equity...
Countertrade as a Share of World Trade
 % 50
        1975   1985   1990   1992   2000 Est
            Countertrade Practice
Percent of
companies    80
engaged in                  73
each         60
            40                                                                                           Offset
                                                         19           22                                 Switch Trading
            20                                                                                           Barter
                                           3                                                             Buyback
             0    O ffs t
                            S w itc h T ra d in g

                                                    B a rte r

                                                                Bu y a c k

                                                                             C o u n te rp u rc h a se

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