Chapter 13Copyright (c) 2007 John Wiley & Sons, Inc.1 Global Marketing Management, 4e Chapter 13...

Chapter 13Chapter 13 Copyright (c) 2007 John Wiley & Sons, Inc.Copyright (c) 2007 John Wiley & Sons, Inc. 11

Global Marketing Management, 4eGlobal Marketing Management, 4e

Chapter 13

Global PricingGlobal Pricing


Chapter OverviewChapter Overview

1. Drivers of Foreign Market Pricing1. Drivers of Foreign Market Pricing

2. Managing Price Escalation2. Managing Price Escalation

3. Pricing in Inflationary Environments3. Pricing in Inflationary Environments

4. Global Pricing and Currency Movements4. Global Pricing and Currency Movements

5. Transfer Pricing5. Transfer Pricing

6. Global Pricing and Antidumping 6. Global Pricing and Antidumping

RegulationRegulation

7. Price Coordination 7. Price Coordination

8. Countertrade8. Countertrade


IntroductionIntroduction

Global pricing is one of the most critical and Global pricing is one of the most critical and complex issues in international marketing.complex issues in international marketing.

Price is the only marketing mix instrument that Price is the only marketing mix instrument that creates revenues. All other elements entail costs.creates revenues. All other elements entail costs.

A company’s global pricing policy may make or A company’s global pricing policy may make or break its overseas expansion efforts.break its overseas expansion efforts.

Multinationals also face the challenges of how to Multinationals also face the challenges of how to coordinate their pricing across different countries.coordinate their pricing across different countries.



Main drivers affecting global pricingMain drivers affecting global pricing::– Company GoalsCompany Goals

Satisfactory ROISatisfactory ROI Market ShareMarket Share Specified Product GoalSpecified Product Goal

– Company CostsCompany Costs Cost-Plus PricingCost-Plus Pricing Dynamic Incremental PricingDynamic Incremental Pricing Incremental CostsIncremental Costs



Customer DemandCustomer Demand CompetitionCompetition

– Cross-Border Price DifferentialsCross-Border Price Differentials– Nonprice CompetitionNonprice Competition

Distribution ChannelsDistribution Channels– Variations in Trade Margins and Length of Variations in Trade Margins and Length of

MarginsMargins– Issues of Everyday Low Prices (EDLP)Issues of Everyday Low Prices (EDLP)– Parallel Imports (Gray Market)Parallel Imports (Gray Market)

Government PoliciesGovernment Policies


1. Drivers of 1. Drivers of Foreign Market Foreign Market

PricingPricing




2. Managing Price Escalation2. Managing Price Escalation

Several options exist to lower the export priceSeveral options exist to lower the export price::

1. Rearrange the distribution channel1. Rearrange the distribution channel

2. Eliminate costly features (or make them 2. Eliminate costly features (or make them optional) optional)

3. Downsize the product3. Downsize the product

4. Assemble or manufacture the product in 4. Assemble or manufacture the product in foreign markets foreign markets

5. Adapt the product to escape tariffs or tax 5. Adapt the product to escape tariffs or tax levies levies



Alternative ways to safeguard against inflation Alternative ways to safeguard against inflation may includemay include::

1. Modify components, ingredients, parts and/or 1. Modify components, ingredients, parts and/or packaging materials.packaging materials.

2. Source materials from low-cost suppliers.2. Source materials from low-cost suppliers.

3. Shorten credit terms.3. Shorten credit terms.

4. Include escalator clauses in long-term contracts.4. Include escalator clauses in long-term contracts.

5. Quote prices in a stable currency.5. Quote prices in a stable currency.

6. Pursue rapid inventory turnovers.6. Pursue rapid inventory turnovers.

7. Draw lessons from other countries.7. Draw lessons from other countries.



Companies faced with price controls can consider Companies faced with price controls can consider several alternativesseveral alternatives::

1. Adapt the product line1. Adapt the product line

2. Shift target segments or markets.2. Shift target segments or markets.

3. Launch new products or variants of 3. Launch new products or variants of existing existing products. products.

4. Negotiate with the government.4. Negotiate with the government.

5. Predict incidence of price controls.5. Predict incidence of price controls.


4. Global Pricing and Currency 4. Global Pricing and Currency MovementsMovements

Currency Gain/Loss Pass Through (see Exhibit Currency Gain/Loss Pass Through (see Exhibit

13-4)13-4)– Pass-through issuePass-through issue– Pricing-to-market (PTM)Pricing-to-market (PTM)– Local-currency price stability (LCPs)Local-currency price stability (LCPs)

Currency QuotationCurrency Quotation








5. Transfer Pricing5. Transfer Pricing Sales transactions between related entities of the same Sales transactions between related entities of the same

companies are called transfer prices.companies are called transfer prices. Determinants of Transfer PricesDeterminants of Transfer Prices::

1. Market conditions in the foreign country1. Market conditions in the foreign country

2. Competition in the foreign country2. Competition in the foreign country

3. Reasonable profit for foreign affiliate3. Reasonable profit for foreign affiliate

4. U.S. federal income taxes4. U.S. federal income taxes

5. Economic conditions in the foreign country5. Economic conditions in the foreign country

6. Import restrictions6. Import restrictions

7. Customs duties7. Customs duties

8. Price controls8. Price controls

9. Taxation in the foreign country9. Taxation in the foreign country

10. Exchange controls10. Exchange controls



Criteria for making transfer pricing decisionsCriteria for making transfer pricing decisions::– Tax regimesTax regimes– Local market conditionsLocal market conditions– Market imperfectionsMarket imperfections– Joint venture partnerJoint venture partner– Morale of local country managersMorale of local country managers



Setting Transfer PricesSetting Transfer Prices::– Market-based transfer pricing:Market-based transfer pricing:

Arm’s length pricesArm’s length prices– Nonmarket-based pricing:Nonmarket-based pricing:

Cost-based pricingCost-based pricing Negotiated pricingNegotiated pricing

– A recent study shows that compliance with A recent study shows that compliance with financial reporting norms, fiscal and custom financial reporting norms, fiscal and custom rules, and anti-dumping regulations prompt rules, and anti-dumping regulations prompt companies to use market-based transfer pricing.companies to use market-based transfer pricing.



– Government-imposed market constraints Government-imposed market constraints (e.g., import restrictions, price controls, (e.g., import restrictions, price controls, exchange controls) favor nonmarket-based exchange controls) favor nonmarket-based transfer pricing.transfer pricing.

– Most firms use a mixture of market-based Most firms use a mixture of market-based and non-market pricing procedures.and non-market pricing procedures.

Minimizing the Risk of Transfer Pricing Tax Minimizing the Risk of Transfer Pricing Tax Audits:Audits:– Basic Arm’s Length Standard (BALS)Basic Arm’s Length Standard (BALS)


5. Transfer Pricing5. Transfer Pricing To minimize the risk of tax audits, decisions should To minimize the risk of tax audits, decisions should

center around the following five questions (see center around the following five questions (see Exhibit 13-6):Exhibit 13-6):

1. Do comparable/uncontrollable transactions 1. Do comparable/uncontrollable transactions exist?exist?2. Where is the most value added? Parent? 2. Where is the most value added? Parent? Subsidiary?Subsidiary?3. Are combined profits of parent and subsidiary 3. Are combined profits of parent and subsidiary shared in proportion to contributions?shared in proportion to contributions?4. Does the transfer price meet the benchmark set 4. Does the transfer price meet the benchmark set by the tax authorities?by the tax authorities?5. Does the tax MNC have the information to 5. Does the tax MNC have the information to justify the transfer prices used?justify the transfer prices used?




6. Global Pricing and Antidumping 6. Global Pricing and Antidumping RegulationRegulation

Dumping occurs when imports are sold at an Dumping occurs when imports are sold at an “unfair” price.“unfair” price.

Voluntary Export Restraint (VER)Voluntary Export Restraint (VER) To minimize risk exposure to antidumping actions, To minimize risk exposure to antidumping actions,

exporters might pursue any of the following exporters might pursue any of the following marketing strategiesmarketing strategies::– Trading upTrading up– Service enhancementService enhancement– Distribution and communicationDistribution and communication


7. Price Coordination7. Price Coordination

The following considerations will be necessary The following considerations will be necessary when developing a global pricing strategywhen developing a global pricing strategy::

1. Nature of customers1. Nature of customers2. Amount of product differentiation2. Amount of product differentiation3. Nature of channels3. Nature of channels4. Nature of competition4. Nature of competition5. Market integration5. Market integration6. Internal organization6. Internal organization7. Government regulation7. Government regulation



Global-Pricing Contracts –GPCsGlobal-Pricing Contracts –GPCs (see Exhibit 13- (see Exhibit 13-7):7):– Purchasers often demand GPCs from their Purchasers often demand GPCs from their

suppliers.suppliers.– GPCs can also benefit suppliers.GPCs can also benefit suppliers. – A GPC can offer the opening toward nurturing a A GPC can offer the opening toward nurturing a

lasting customer relationship.lasting customer relationship.– Small suppliers can use GPCs as a Small suppliers can use GPCs as a

differentiation tool to get access to new differentiation tool to get access to new accounts.accounts.





Aligning Pan-Regional PricesAligning Pan-Regional Prices A Pricing Corridor (to find the middle ground by A Pricing Corridor (to find the middle ground by

upping prices in low-price countries and cutting upping prices in low-price countries and cutting them in high-price countries) works as follows:them in high-price countries) works as follows:

Step 1. Determine optimal price for each Step 1. Determine optimal price for each country.country.

Step 2. Find out whether parallel imports (“gray Step 2. Find out whether parallel imports (“gray markets”) are likely to occur at these prices.markets”) are likely to occur at these prices.

Step 3. Set a pricing corridor.Step 3. Set a pricing corridor.



Implementing Price CoordinationImplementing Price Coordination: Global : Global marketers can choose from four alternatives to marketers can choose from four alternatives to promote price coordination within their promote price coordination within their organizations:organizations:

1.1. Economic measuresEconomic measures

2.2. CentralizationCentralization

3.3. FormalizationFormalization

4.4. Informal coordinationInformal coordination





Forms of CountertradeForms of Countertrade::– Simple barterSimple barter– Clearing agreementClearing agreement– Switch tradingSwitch trading– Buyback (compensation)Buyback (compensation)– CounterpurchaseCounterpurchase– OffsetOffset



Motives behind CountertradeMotives behind Countertrade::– Gain access to new or difficult marketsGain access to new or difficult markets– Overcome exchange rate controls or lack of Overcome exchange rate controls or lack of

hard currencyhard currency– Overcome low country credit worthinessOvercome low country credit worthiness– Increase sales volumeIncrease sales volume– Generate long-term customer goodwillGenerate long-term customer goodwill


8. Countertrade8. Countertrade Shortcomings of Countertrade:Shortcomings of Countertrade:

– No “in-house” use for goods offered by No “in-house” use for goods offered by customerscustomers

– Timely and costly negotiationsTimely and costly negotiations– Uncertainty and lack of information on future Uncertainty and lack of information on future

pricesprices– Transaction costsTransaction costs





Words of advice regarding countertradeWords of advice regarding countertrade::

1. Always evaluate the pros and cons of countertrade 1. Always evaluate the pros and cons of countertrade against other options.against other options.

2. Minimize the ratio of compensation goods to cash.2. Minimize the ratio of compensation goods to cash.

3. Strive for goods that can be used in-house.3. Strive for goods that can be used in-house.

4. Assess the relative merits of relying on middlemen 4. Assess the relative merits of relying on middlemen versus an in-house staff.versus an in-house staff.

5. Check whether the goods are subject to any 5. Check whether the goods are subject to any restrictions.restrictions.

6. Assess the quality of goods.6. Assess the quality of goods.

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Chapter 13Copyright (c) 2007 John Wiley & Sons, Inc.1 Global Marketing Management, 4e Chapter 13...

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