Transcript GLOBAL POLICY AND PRICING DECISIONS II: MARKETING

Global Marketing Management
Masaaki Kotabe & Kristiaan Helsen
Third Edition
John Wiley & Sons, Inc., 2004
Chapter 13
Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
1
Chapter 13
Global Pricing
Chapter 13
Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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Chapter Overview
1.
2.
3.
4.
5.
6.
Drivers of Foreign Market Pricing
Managing Price Escalation
Pricing in Inflationary Environments
Global Pricing and Currency Movements
Transfer Pricing
Global Pricing and Antidumping
Regulation
7. Price Coordination
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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Chapter Overview (contd.)
8. Pricing Policies and the Euro
9. Countertrade
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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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.
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Management, Third Edition, 2004
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1. Drivers of Foreign Market Pricing

Main drivers affecting global pricing:
– Company Goals
» Satisfactory ROI
» Market Share
» Specified Product Goal
– Company Costs
» Cost-Plus Pricing
» Dynamic Incremental Pricing
» Incremental Costs
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Management, Third Edition, 2004
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1. Drivers of Foreign Market Pricing
(contd.)
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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
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Management, Third Edition, 2004
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2. Managing Price Escalation

Several options exist 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
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Management, Third Edition, 2004
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3. Pricing in Inflationary Environments

Alternative ways to safeguard against inflation
may include:
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.
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Management, Third Edition, 2004
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3. Pricing in Inflationary Environments
(contd.)

7. Draw lessons from other countries.
Companies faced with price controls can consider
several alternatives:
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.
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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4. Global Pricing and Currency
Movements
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Currency Gain/Loss Pass Through (see Exhibit
13-3)
– Pass-through issue
– Pricing-to-market (PTM)
– Local-currency price stability (LCPs)
Currency Quotation
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Management, Third Edition, 2004
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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
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Management, Third Edition, 2004
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5. Transfer Pricing (contd.)

8. Price controls
9. Taxation in the foreign country
10. Exchange controls
Criteria for making transfer pricing decisions:
– Tax regimes
– Local market conditions
– Market imperfections
– Joint venture partner
– Morale of local country managers
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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5. Transfer Pricing (contd.)

Setting Transfer Prices:
– Market-based transfer pricing:
» Arm’s length prices
– Nonmarket-based pricing:
» Cost-based pricing
» Negotiated pricing
– A recent study shows that compliance with
financial reporting norms, fiscal and custom
rules, and anti-dumping regulations prompt
companies to use market-based transfer pricing.
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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5. Transfer Pricing (contd.)

– 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)
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Management, Third Edition, 2004
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5. Transfer Pricing (contd.)

To minimize the risk of tax audits, decisions
should center around the following five questions
(see Exhibit 13-6):
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?
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Management, Third Edition, 2004
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5. Transfer Pricing (contd.)
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?
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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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
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Management, Third Edition, 2004
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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
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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7. Price Coordination (contd.)

Global-Pricing Contracts –GPCs (see Exhibit 137):
– 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.
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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7. Price Coordination (contd.)
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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.
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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7. Price Coordination (contd.)

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
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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8. Pricing Policies and the Euro
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As of January 1, 2002, the euro is the common
currency within the 12 EU member states.
Companies operating in the euro-zone will need to
make strategic decisions in two areas:
1. Harmonization of Prices
– The biggest impact is likely to be price
harmonization.
2. Transfer Pricing
– Prices within the European Union countries
will become more transparent.
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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9. Countertrade
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Forms of Countertrade:
– Simple barter
– Clearing agreement
– Switch trading
– Buyback (compensation)
– Counterpurchase
– Offset
Motives behind Countertrade:
– Gain access to new or difficult markets
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Management, Third Edition, 2004
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9. Countertrade (contd.)
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– Overcome exchange rate controls or lack of
hard currency
– Overcome low country credit worthiness
– Increase sales volume
– Generate long-term customer goodwill
Shortcomings of Countertrade:
– No “in-house” use for goods offered by
customers
– Timely and costly negotiations
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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9. Countertrade (contd.)

– Uncertainty and lack of information on future
prices
– Transaction costs
Words of 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.
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Management, Third Edition, 2004
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9. Countertrade (contd.)
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.
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Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
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Copyright © John Wiley & Sons, Inc., 2004
Chapter 13
Kotabe & Helsen's Global Marketing
Management, Third Edition, 2004
31