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Chapter 12
Global Pricing
Chapter Overview
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1. Drivers of Foreign Market Pricing
2. Managing Price Escalation
3. Pricing in Inflationary Environments
4. Global Pricing and Currency Fluctuations
5. Transfer Pricing
6. Global Pricing and Antidumping
Regulation
7. Price Coordination
8. Countertrade
Introduction
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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.
1. Drivers of Foreign Market
Pricing
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Main drivers affecting global pricing:
Company Goals
Satisfactory ROI
Market Share
Specified Product Goal
Company Costs
Cost-PlusPricing
Dynamic Incremental Pricing
Incremental Costs
Retail Price Comparison across
5 Cities
1. Drivers of Foreign Market
Pricing
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Customer Demand
Competition
Cross-Border Price Differentials
Nonprice Competition
Distribution Channels
Variations in Trade Margins and Length
of Margins
Issues of Everyday Low Prices (EDLP)
Parallel Imports (Gray Market)
Government Policies
Price Promotions in Chinese
Cultures with End-8 Prices
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Average Quarterly Sales & Ex-Factory
Selling Prices of Antidepressants
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2. Managing Price Escalation
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Options to lower the export price:
1. Rearrange the distribution channel
2. Eliminate costly features (or make them
optional)
3. Downsize the product
4. Assemble or manufacture the product in
foreign markets
5. Adapt the product to escape tariffs or tax
levies
3. Pricing in Inflationary
Environments
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Ways to safeguard against inflation:
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
contracts.
5. Quote prices in a stable currency.
6. Pursue rapid inventory turnovers.
7. Draw lessons from other countries.
3. Pricing in Inflationary
Environments
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Alternatives to price controls:
1. Adapt the product line
2. Shift target segments or markets.
3. Launch new products or variants of
existing products.
4. Negotiate with the government.
5. Predict incidence of price controls.
Exporter Strategies under Varying
Currency Conditions
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4. Global Pricing and Currency
Fluctuations
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Currency Gain/Loss Pass Through
Pass-through issue
Pricing-to-market (PTM)
Local-currency price stability (LCPs)
Currency Quotation
Numerical Illustration of Pass-Through
and Local Currency Stability
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Retail Price Changes during Dollar Appreciation:
Japanese and German Exports to the U.S. Market
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5. Transfer Pricing
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Sales transactions between related entities of the
same companies are called transfer prices.
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
5. Transfer Pricing
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Criteria for making transfer pricing
decisions:
Tax regimes
Local market conditions
Market imperfections
Joint venture partner
Morale of local country managers
5. Transfer Pricing
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Setting Transfer Prices:
Market-based transfer pricing:
Arm’s length prices
Nonmarket-based pricing:
Cost-based pricing
Negotiated pricing
Compliance with financial reporting norms,
fiscal and custom rules, and anti-dumping
regulations prompts use of market-based
transfer pricing.
5. Transfer Pricing
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Government-imposed market constraints
(e.g., import restrictions, price controls,
exchange controls) favor nonmarket-
based transfer pricing.
Most firms use a mixture of market-based
and non-market pricing procedures.
Minimizing the Risk of Transfer
Pricing Tax Audits:
Basic Arm’s Length Standard (BALS)
5. Transfer Pricing
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To minimize the risk of tax audits, consider
these five questions :
1. Do comparable/uncontrollable transactions
exist?
2. Where is the most value added? Parent?
Subsidiary?
3. Are combined profits of parent and subsidiary
shared in proportion to contributions?
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?
Decision-Making Model for
Assessing Risk of TP Strategy
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6. Global Pricing and Antidumping
Regulation
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Dumping occurs when imports are sold
at an “unfair” price.
Voluntary Export Restraint (VER)
To minimize risk exposure to
antidumping actions, exporters might
pursue any of the following marketing
strategies:
Trading up
Service enhancement
Distribution and communication
7. Price Coordination
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The following considerations will be
necessary when developing a global
pricing strategy:
1. Nature of customers
2. Amount of product differentiation
3. Nature of channels
4. Nature of competition
5. Market integration
6. Internal organization
7. Government regulation
7. Price Coordination
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Global-Pricing Contracts –GPCs
Purchasers often demand GPCs from their
suppliers.
GPCs can also benefit suppliers.
A GPC can offer the opening toward
nurturing a lasting customer relationship.
Small suppliers can use GPCs as a
differentiation tool to get access to new
accounts.
7. Price Coordination
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Aligning Pan-Regional Prices
A Pricing Corridor (to find the middle ground
by upping prices in low-price countries and
cutting them in high-price countries) works as
follows:
Step 1. Determine optimal price for each country.
Step 2. Find out whether parallel imports (“gray
markets”) are likely to occur at these prices.
Step 3. Set a pricing corridor.
Pan-European Price Coordination
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7. Price Coordination
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Implementing Price Coordination:
Global marketers can choose from four
alternatives to promote price
coordination within their organizations:
1. Economic measures
2. Centralization
3. Formalization
4. Informal coordination
8. Countertrade
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Forms of Countertrade
Simple barter
Clearing agreement
Switch trading
Buyback (compensation)
Counterpurchase
Offset
Classification of Forms of
Countertrade
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8. Countertrade
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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
8. Countertrade
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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
8. Countertrade
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Advice regarding countertrade:
1. Always evaluate the pros and cons of
countertrade against other options.
2. Minimize the ratio of compensation goods to
cash.
3. Strive for goods that can be used in-house.
4. Assess the relative merits of relying on
middlemen versus an in-house staff.
5. Check whether the goods are subject to any
restrictions.
6. Assess the quality of goods.
