global princing

8/8/2019 Global Princing

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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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