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 firm’s pricing policy is inherently a highly cross-functional process based on inputs from the firm’s 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
II – Drivers of Foreign Market Pricing
The 4 C’s (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: Levi’s 501, Europe and the U.S.
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).
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.
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.
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 company’s 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)
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.
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
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
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
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: Customer’s 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
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
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) Arm’s length prices: use of market mechanism as a cue for setting transfer prices.
b) Cost-based pricing (adds a mark-up)
VII – Global Pricing and Anti-dumping Regulation
Dumping: imports are being sold at an “unfair”price
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
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
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
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
