Global Pricing 1470

8/2/2019 Global Pricing 1470

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Global Pricing

Challenges in Global Pricing


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Limits of Microeconomic Theory

Microeconomic theory of pricing has its

limits because:

Demand & Cost curves are not easy to

estimate & are not stable over time

Competitors influence the demand function

unpredictably

When a Firm produces for more than onemarket, the prices cant be changed

instantaneously due to organizational

constrains


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Pricing Basics

Basic Principle of pricing considers:

Costs or Cost-Plus formula

Experience Curve Pricing I.e costs go down

as more units are produced

Competition Pricing: Discount or premium

pricing w.r.t competition

Demand factored pricingFor Global Pricing, there are several

other factors to be considered in addition

to the basics


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Export Pricing Considerations

In addition to pricing basics such as costs,

demand, competition etc Export pricing

has to consider other factors

Factors affecting export pricing are:

Currency Risk & Credit Risk

Tariffs & Price escalation

Dumping or

Skimming Vs Penetration Pricing

Final price depends on product

positioning in foreign markets


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Multinational Pricing Factors

MNCs have different pricing

considerations apart from the pricing

basics

Currency to price, Exchange Rates, Hedgingrisks

Transfer Pricing for profit repatriation

Counter trade/systems pricingPrice coordination to prevent gray trade

Polycentric/Geocentric/Ethnocentric pricing


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Currency Factors

Global companies have to sell in local

currency.

This exposes company to exchange risks

To minimize risks, firms use hedging,

swaps or other financial instruments

There may be additional constrains such

as inability to freely convert local

currency to other currencies, limitations

on foreign exchange transfers etc


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Currency Fluctuations

Exchange Rates are never constant,appreciating or depreciating currency affectsprofitability.

Exchange rates affects exporters ability tocompetitively price their products in the longrun

If exchange rates remain unfavorable for a longtime, Firm may: Chose to manufacture locally instead of exporting

Or chose to supply from a different country

Or withdraw from that market

Or increase price if possible


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Transfer Pricing

MNCs have to determine transfer prices,I.e. the prices charged on subsidiaries forproducts, components and supplies.

Transfer pricing must be:Fair for local subsidiarys performance

measurement

Help repatriate profits

Satisfy local tax laws governing transferpricing

Global firms are setting up market related

transfer prices to satisfy local laws


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How to Transfer Income?

Transfer pricing has come under strict

government rules & regulations, so here are

some guidelines from Accounting firms:

Before beginning the annual business cycle, meetwith outside advisors and agree on a game plan

Compare third party transactions (arms-length

pricing) and Adjust prices accordingly

Prepare a financial model to test the method agreedon

Ensure everyone involved understands transfer

pricing issues


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Guidelines Contd

Prepare Internal & External documentation

Simulate pricing audit by outside advisors

Spot check the process within the company

Evaluate year-end tax position against goals

Prepare tax returns

Source: Davis 1994


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Price Coordination

MNCs have to coordinate prices in

different geographic market such that:

Eliminate gray trade & other distribution

channel conflicts

It does not limit local subsidiaries

performance or abilities

Remain competitive in local marketsPricing strategy is a part for global marketing

strategy


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Counter trade & Systems Pricing

When local currency is not freely

convertible, firms resort to counter trade.

Exchange local currency for some other

goods that is then sold for US$ or other

currency

Systems pricing or Pricing for turnkey

projects have several subcomponents thatmay be separately priced or priced as a

bundle


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Issues with Counter Trade

Counter Trade arises when a country does not havesufficient foreign exchange or its currency is not freelyconvertible

Counter Trade is like a Barter, and the exchanged goods

then has to be sold to realize any profits E.g: Pepsi for Stolichnaya Vodka in USSR

Counter trade can arise from counter purchaseagreements to buy back a part of local production forthe right to export into that country

Product Buyback e.g : Hundai exporting cars from India Third goods buy back e.g: Pepsi exporting potato chips from

India

Major Problem is accessing the value of the barteredgoods


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Evaluation of Counter Trade

Counter Trade is done if its the only

option for trade

Firms use trading houses to dispose of the

goods received in trade

Firms need to be extra cautious in fixing

the barter exchange rates as international

value of certain goods is difficult tovaluate

Counter Trade is a reality in Global

markets


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Points to Consider in

Counter Trade

Is this the only way to make a deal?

Can the received goods be sold?

How to maximize cash returns?

Are there any import restrictions in

getting the goods back?

Are there other ways of converting thelocal currency?


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Turnkey Pricing

Turnkey Projects are usually of 2 types:Bundled Pricing : Entire project is priced as

one bundle

Unbundled Pricing: Components of theproject is priced individually

Profit Sharing or Penalties fornonperformance is usually used in pricing

strategyComponent prices are based on

competitive positions, market entry

decisions and FSA factors


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Global Coordination

Pricing disparities between regions leads

to Gray Market or parallel Imports

E.g: Cameras imported to US from

Singapore or Japan is cheaper than theofficial price from the Japanese subsidiary

Gray markets leads to channel conflicts

and loss of goodwillGray markets also results in after sales

service problems


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Eliminate gray trade

Firms can eliminate gray trade by

Minimizing arbitrage between regions

via:

Tough economic control over importers

Centralizing price range within a narrow

bandwidth

Formalizing the pricing decisions in all localmarkets

Coordinating pricing decisions between

regional markets to reduce arbitrage


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Coordinated Pricing Strategies

Economic Controls

FormalizationCentralization

Informal

Coordination

Level of Marketing Standardization

High Low

Low

High


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Global Pricing Policies

Polycentric PricingMulti-Domestic firms give wide leverage for

subsidiaries on pricing resulting in different prices indifferent countriesResults in gray markets

Geocentric PricingUse a regional (global) standard pricing Plus a local

markup.

Base price is derived from cost plus formula

Affected by local tax laws leading to gray marketsPricing an entire product line is a problem. Markup

on one product in one country may not be inlinewith other products

Ideal for FTA zones


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Pricing Policies Contd

Geocentric Pricing

E.g: HP uses a global standard price in USD

plus regional markup. This avoids gray trade

but loses competitive position whencompetitors discount their products

IBM discounts products where they have

competition, but to prevent gray market,

IBM sells services at a higher price for gray

goods


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Pricing Policies Contd

Ethnocentric Pricing

Have a common price all over the world

A global standard price

Ideal for big-ticket industrial items such as

Aircrafts, computers etc.

Homogeneity of prices eliminated gray

marketsNot suitable when there is competition from

local manufacturers

Global Pricing 1470

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