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GLOBAL PRICINGGLOBAL PRICING
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II-- IntroductionIntroduction GlobalGlobal pricingpricing isis oneone ofof thethe mostmost criticalcritical andand
complexcomplex issuesissues thatthat aa globalglobal firmsfirms faceface..
PricePrice isis thethe onlyonly marketingmarketing mixmix instrumentinstrument thatthatcreatescreates revenuesrevenues
AA firmsfirms pricingpricing policypolicy isis inherentlyinherently aa highlyhighlycrosscross--functionalfunctional processprocess basedbased onon inputsinputs fromfromthethe firmsfirms finance,finance, accounting,accounting, manufacturing,manufacturing,taxtax andandlegallegal divisionsdivisions..
MultinationalsMultinationals alsoalso faceface thethe challengechallenge ofof howhow totocoordinatecoordinate theirtheir pricingpricing policypolicy acrossacross differentdifferentcountriescountries..
AA lacklack ofof coordinationcoordination willwill createcreate graygray marketmarketsituationssituations
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BB CompanyCostsCompanyCosts
CompanyCompany costscostsconsistconsist ofoftwotwo partsparts::
a)a) VariableVariable CostsCosts (which(which changechange withwith salessalesvolume)volume)
bb))FixedFixed costscosts (e(e..gg..,, overheadoverhead whichwhich dodo notnotvary)vary)
ExportExport PricingPricing policiespolicies::
a)a) CostCost--PlusPlusPricingPricing:: addsaddsinternationalinternational costscosts andandaa markmark--upup toto thethe domesticdomesticmanufacturingmanufacturing costcost..
b)b) DynamicDynamic IncrementalIncremental PricingPricing:: onlyonly variablevariablecostscosts andand aa portionportion ofof thethe overheadoverhead loadload(incremental(incremental costs)costs) shouldshould bebe rec uperatedrecuperated..ExportingExporting--relatedrelated incrementalincremental costscosts(manufacturing(manufacturing costs,costs, shippingshipping expenses,expenses,
insurance,insurance, andand overseasoverseaspromotionalpromotional costs)costs)..
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CC CustomerDemandCustomerDemand
ConsumerConsumer demanddemand isis aa functionfunction ofof buyingbuying power,power, tastes,tastes,
habitshabits andandsubstitutessubstitutes
BuyingBuying powerpowerisis aa keykey considerationconsideration ininpricingpricing decisionsdecisions
AA marketmarket consistsconsists ofof aa qualityquality--sensitivesensitive andand aa priceprice--sensitivesensitive marketmarketsegmentsegment
CompaniesCompanies shouldshould exploitexploit differencesdifferences ininpriceprice sensitivitysensitivitybyby priceprice discriminationdiscrimination
OneOne usefuluseful summarysummary measuremeasure forfor priceprice sensitivitysensitivity isispriceprice elasticityelasticity..
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Typically,Typically, thethe naturenature ofof demanddemand willwill changechange overover timetime..
InIn countriescountries thatthat werewere enteredentered recently,recently, thethe firmfirm maymayneedneed toto stimulatestimulate trialtrial viavia discountingdiscounting oror aa penetrationpenetrationpricingpricing strategystrategy..
BrandBrand loyaltyloyalty:: priceprice willwill playplay lessless ofof aa rolerole asas aa purchasepurchasecriterioncriterion..
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DD CompetitionCompetition
CompetitionCompetition isis anotheranother keykey factorfactor inin globalglobal pricingpricing
TheThe competitivecompetitive situationsituation maymay varyvary forfor aa numbernumber ofofreasonsreasons::
a)a) NumberNumber ofof CompetitorsCompetitors
b)b) NatureNature ofof CompetitionCompetition (Ex(Ex:: GlobalGlobal versusversus LocalLocal
players)players)c)c) CompeteCompete withwith knockknock--offoff versionsversions
d)d) LegitimateLegitimate distributiondistributioncompetescompetes withwith smugglerssmugglers
e)e) StrenghtStrenght ofof PrivatePrivate LabelsLabels
AA companyscompanys competitivecompetitive positionposition typicallytypically variesvaries acrossacrosscountriescountries.. CompaniesCompanies willwill bebe priceprice leadersleaders inin somesomecountriescountries andand priceprice takerstakers inin otherother countriescountries..
NonpriceNonprice competitioncompetition(advertising,(advertising, channelchannel coverage)coverage)
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EE DistributionChannelsDistributionChannels
TheThe balancebalance ofof powerpower betweenbetween manufacturersmanufacturers andand theirtheir
distributorsdistributors
LargeLarge retailersretailersorderorder inin bulkbulk
ParallelParallelImportsImports (gray(gray markets)markets)
FF GovernmentPoliciesGovernmentPolicies
DirectImpactDirectImpact:taxrates,tariffs, and price controls:taxrates,tariffs, and price controls
IndirectIndirect:governmentdeficits (interestrates), currency:governmentdeficits (interestrates), currencyvolatility, and inflation.volatility, and inflation.
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IIIIII-- Managing Price EscalationManaging Price Escalation
Exporting involvesmore steps and substantially higherExporting involvesmore steps and substantially higher
risksthandomesticmarketing.risksthandomesticmarketing.
Tocovertheincrementalcosts (shipping,insurance,Tocovertheincrementalcosts (shipping,insurance,tariffs,etc),thefinalforeignretailpricewilloftenbetariffs,etc),thefinalforeignretailpricewilloftenbemuchhigherthanthe domesticretailprice.muchhigherthanthe domesticretailprice.
Priceescalationraisestwo pressing issuesPriceescalationraisestwo pressing issues::
a)a) StickershockStickershock
b)b) CompetitivenessCompetitiveness
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Two majorapproachestodealwithpriceescalation:Two majorapproachestodealwithpriceescalation:
AA FindwaystocuttheexportpriceFindwaystocuttheexportprice
RearrangeRearrange thethe distributiondistribution channelchannel:: lengthlength ofof thethechannel,channel, oror numbernumber ofof layerslayersbetweenbetweenmanufacturermanufacturerandandendend--useruser..
ExEx:: UU..SS.. firmsfirmsinin JapanJapan
EliminateEliminate costlycostly featuresfeatures (or(ormakemake themthem optional)optional)
DownsizeDownsize thethe productproduct
AssembleAssemble or or manufacturemanufacture thethe productproduct inin foreignforeignmarketsmarkets
AdaptAdapt thethe productproduct toto escapeescape tariffstariffsoror taxtax levieslevies
ExEx:: LandLandRoverRover
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IVIV-- Pricing inInflationaryPricing inInflationaryEnvironmentsEnvironments
There are severalalternativewaysto safeguard againstThere are severalalternativewaysto safeguard againstinflationinflation
-- Modifycomponents,ingredients, parts and/orModifycomponents,ingredients, parts and/or--ackaging materialsackaging materials
-- Source materials form lowSource materials form low--costsupplierscostsuppliers
-- ShortencredittermsShortencreditterms
-- IncludeescalatorclausesinlongIncludeescalatorclausesinlong--term contractsterm contracts
-- QuotePricesina stablecurrencyQuotePricesina stablecurrency
-- Pursuerapid inventoryturnoversPursuerapid inventoryturnovers-- Drawlessons from othercountriesDrawlessons from othercountries
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VV-- GlobalPricing andCurrencyGlobalPricing andCurrencyMovementsMovements
GivenGiven thethe sometimessometimesdramaticdramatic exchangeexchange raterate movements,movements,settingsetting pricesprices inin aa floatingfloating exchangeexchange raterate worldworld posesposes aa
tremendoustremendouschallengechallenge..
TwoTwo majormajor managerialmanagerial pricingpricing issuesissues resultresult fromfrom currencycurrencymovementsmovements
HowHow muchmuch ofof anan exchangeexchange raterate gaingain (loss)(loss) shouldshouldbebe passedpassed throughthrough ourour customers?customers?
ExEx:: CustomersCustomers priceprice sensitivity,sensitivity, thethe amountamount ofofcompetitioncompetition inin thethe exportexportmarketmarket
InIn whatwhat currencycurrencyshouldshould wewe quotequote ourourprices?prices?
DependsDependsonon thethe balancebalance ofof powerpower betweenbetween thethe suppliersupplierandandthethe customercustomer
SomeSome companiescompanies adoptadoptaa singlesingle currencycurrency
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VIVI-- TransferPricingTransferPricing
MNCsMNCs s houldshould considerconsider thethe followingfollowing criteriacriteria whenwhen
makingmaking transfertransferpricingpricing decisionsdecisions::
a)a) TaxTax regimesregimes
b)b) LocalLocal MarketMarket conditionsconditions
c)c) MarketMarket ImperfectionsImperfections
d)d) JointJoint--ventureventure partnerpartner
e)e) MoraleMorale ofof locallocal countrycountry managersmanagers
KeyKey driversdriversbehindbehind transfertransferpricingpricing::
a)a) MarketMarket conditionsconditionsininthethe foreignforeign countrycountry
b)b) CompetitionCompetition ininthethe foreignforeign countrycountry
c)c) ReasonableReasonable profitprofit forforforeignforeignaffiliateaffiliate
d)d) UU..SS.. federalfederal incomeincome taxestaxes
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ee)) EconomicEconomic conditionsconditions inin thethe foreignforeign countrycountry
ff)) ImportImport RestrictionsRestrictions
gg)) CustomsCustoms DutiesDuties
hh)) PricePrice ControlsControls
ii)) TaxationTaxation inin thethe foreignforeign countrycountry
jj)) ExchangeExchange ControlsControls
SettingTransfer PricesSettingTransfer Prices
a)a) Arms length prices: use ofmarketArms length prices: use ofmarketmechanismasa cuefor setting transfer prices.mechanismasa cuefor setting transfer prices.
b)b) CostCost--based pricing (addsamarkbased pricing (addsamark--up)up)
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VIIVII-- GlobalPricing andGlobalPricing andAntidumping RegulationAntidumping Regulation
DumpingDumping:: importsimports areare beingbeing soldsoldatatanan unfairpriceunfairprice
ProtectionismProtectionism
-- ToTo minimizeminimize riskrisk exposureexposure toto antidumpingantidumping actions,actions,
exportersexporters mightmight pursuepursue anyany ofof thesethese strategiesstrategies::
-- TradingTrading--upup (move(move awayaway fromfrom lowlow--valuevalue toto highhigh--valuevalue products)products)
-- SServiceervice EnhancementEnhancement:: differentiatedifferentiate youryour productproductbyby addingadding supportsupport servicesservices toto thethe corecore productproduct
-- DistributionDistribution andand CommunicationCommunication:: str ategicstrategicalliancesalliances
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VIIIVIII-- PriceCoordinationPriceCoordination
WhenWhen developingdeveloping aa globalglobal pricingpricing strategy,strategy, oneone ofof thethethorniestthorniest issuesissues isis howhow muchmuch coordinationcoordination shouldshould existexistbetweenbetweenpricesprices chargedcharged inin differentdifferent countriescountries
InIn decidingdeciding howhow muchmuch coordination,coordination, severalseveralconsiderationsconsiderations mattermatter::
a)a) NNatureature ofof customerscustomers
b)b) NatureNature ofof channelschannels
c)c) NatureNature ofof competitioncompetition
d)d) MarketMarket integrationintegration
e)e) InternalInternal organizationorganization
f)f) GovernmentGovernment regulationregulation
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IXIX-- CountertradeCountertrade
CountertradeCountertrade isis anan umbrellaumbrella termterm usedused toto describedescribe
unconventionalunconventional tradetrade--financingfinancing tr ansactionstransactions thatthatinvolveinvolve somesome formform ofof noncashnoncash compensationcompensation..
AA FormsofCountertradeFormsofCountertrade
BarterBarter
Buy BackBuy Back
OffsetOffset
BB Motives BehindCountertradeMotives BehindCountertrade
-- GainaccesstonewordifficultmarketsGainaccesstonewordifficultmarkets-- Overcomeexchangerate controlsor lackofhardOvercomeexchangerate controlsor lackofhard
currencycurrency
-- Overcome low country creditworthinessOvercome low country creditworthiness
-- IncreasesalesvolumeIncreasesalesvolume
-- Generate longGenerate long--term customergoodwillterm customergoodwill
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CC ShortcomingsofShortcomingsof CountertradeCountertrade
-- NoinNoin--houseuse forgoodsofferedby customershouseuse forgoodsofferedby customers-- Timely andcostly negotiationsTimely andcostly negotiations
-- Uncertainty and lackofinformationonfutureUncertainty and lackofinformationonfuturepricesprices
-- TransactioncostsTransactioncosts
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