Lecture Global marketing management (7th edition): Chapter 12 - Masaaki Kotabe, Kristiaan Helsen

Chapter global pricing. After studying this chapter you will be able to understand: The dynamic growth in the region, the importance and slow growth of Japan, the importance of the Bottom-of-the-Pyramid Markets, the diversity across the region, the interrelationships among countries in the region, the diversity within China.

Chapter Overview

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

• 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

• Main drivers affecting global pricing:

Exhibit 12-1:

Retail Price Comparison across Cities

1 Drivers of Foreign Market Pricing

– Variations in Trade Margins and Length of Margins

– Issues of Everyday Low Prices (EDLP)

– Parallel Imports (Gray Market)

• Government Policies

Exhibit 12-3: Price Promotions in Chinese

Cultures with End-8 Prices

Exhibit 12-4: Average Quarterly Sales and Factory Selling Prices of Antidepressants

Ex-(1988, Q1−1999, Q1)

2 Managing Price Escalation

• 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

• 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

• 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

Exhibit 12-5: Retail Price Harley-Davidson Ultra Electric Glide (In US$ Equivalent)

4 Global Pricing and Currency Fluctuations

• Currency Gain/Loss Pass Through (See Exhibits 12-5 and 12-6.)

– Pass-through issue

– Pricing-to-market (PTM)

– Local-currency price stability (LCPs)

• Currency Quotation

Exhibit 12-6: Exporter Strategies Under

Varying Currency Conditions

Exhibit 12-7: A Numerical Illustration of Pass Through and Local Currency Stability

Exhibit 12-8: Pan-European Price

Coordination

5 Transfer Pricing

• 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

– Joint venture partner

– Morale of local country managers

5 Transfer Pricing

• 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

– 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 market pricing procedures

non-• Minimizing the Risk of Transfer Pricing Tax

Audits:

– Basic Arm’s Length Standard (BALS)

6 Global Pricing and Antidumping

Regulation

• Dumping occurs when imports are sold at an

“unfair” price.

• 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

• The following considerations will be necessary

when developing a global pricing strategy:

7 Price Coordination

• 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

• 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

(See Exhibit 12-8.)

Exhibit 12-9: Pan-European Price

Coordination

7 Price Coordination

• Implementing Price Coordination: Global

marketers can choose from four alternatives to

promote price coordination within their