Global Pricing

Global Pricing Challenges in Global Pricing

Introduction
Global Pricing is lot more complex than domestic pricing due to:
International Currency Fluctuations
Price Escalations due to Tariffs
Difficulties to access credit risks
Price controls, Anti-dumping laws
Regulation on transfer pricing
Methods of payment

Limits of Microeconomic Theory
Microeconomic theory of pricing has its limits because:
Demand & Cost curves are not easy to estimate & are not stable over time
Competitors influence the demand function unpredictably
When a Firm produces for more than one market, the prices cant be changed instantaneously due to organizational constrains

Pricing Basics
Basic Principle of pricing considers:
Costs or Cost-Plus formula
Experience Curve Pricing I.e costs go down as more units are produced
Competition Pricing: Discount or premium pricing w.r.t competition
Demand factored pricing
For Global Pricing, there are several other factors to be considered in addition to the basics

Export Pricing Considerations
In addition to pricing basics such as costs, demand, competition etc Export pricing has to consider other factors
Factors affecting export pricing are:
Currency Risk & Credit Risk
Tariffs & Price escalation
Dumping or
Skimming Vs Penetration Pricing
Final price depends on product positioning in foreign markets

Multinational Pricing Factors
MNC’s have different pricing considerations apart from the pricing basics
Currency to price, Exchange Rates, Hedging risks
Transfer Pricing for profit repatriation
Counter trade/systems pricing
Price coordination to prevent gray trade
Polycentric/Geocentric/Ethnocentric pricing

Currency Factors
Global companies have to sell in local currency.
This exposes company to exchange risks
To minimize risks, firms use hedging, swaps or other financial instruments
There may be additional constrains such as inability to freely convert local currency to other currencies, limitations on foreign exchange transfers etc

Currency Fluctuations
Exchange Rates are never constant, appreciating or depreciating currency affects profitability.
Exchange rates affects exporters ability to competitively price their products in the long run
If exchange rates remain unfavorable for a long time, Firm may:
Chose to manufacture locally instead of exporting
Or chose to supply from a different country
Or withdraw from that market
Or increase price if possible

Transfer Pricing
MNC’s have to determine transfer prices, I.e. the prices charged on subsidiaries for products, components and supplies.
Transfer pricing must be:
Fair for local subsidiary’s performance measurement
Help repatriate profits
Satisfy local tax laws governing transfer pricing
Global firms are setting up market related transfer prices to satisfy local laws

How to Transfer Income?
Transfer pricing has come under strict government rules & regulations, so here are some guidelines from Accounting firms:
Before beginning the annual business cycle, meet with outside advisors and agree on a game plan
Compare third party transactions (arms-length pricing) and Adjust prices accordingly
Prepare a financial model to test the method agreed on
Ensure everyone involved understands transfer pricing issues

Guidelines Cont’d
Prepare Internal & External documentation
Simulate pricing audit by outside advisors
Spot check the process within the company
Evaluate year-end tax position against goals
Prepare tax returns
Source: Davis 1994

Price Coordination
MNC’s have to coordinate prices in different geographic market such that:
Eliminate gray trade & other distribution channel conflicts
It does not limit local subsidiaries performance or abilities
Remain competitive in local markets
Pricing strategy is a part for global marketing strategy

Counter trade & Systems Pricing
When local currency is not freely convertible, firms resort to counter trade.
Exchange local currency for some other goods that is then sold for US$ or other currency
Systems pricing or Pricing for turnkey projects have several subcomponents that may be separately priced or priced as a bundle

Issues with Counter Trade
Counter Trade arises when a country does not have sufficient foreign exchange or its currency is not freely convertible
Counter Trade is like a Barter, and the exchanged goods then has to be sold to realize any profits
E.g: Pepsi for Stolichnaya Vodka in USSR
Counter trade can arise from counter purchase agreements to buy back a part of local production for the right to export into that country
Product Buyback e.g : Hundai exporting cars from India
Third goods buy back e.g: Pepsi exporting potato chips from India
Major Problem is accessing the value of the bartered goods

Evaluation of Counter Trade
Counter Trade is done if it’s the only option for trade
Firms use trading houses to dispose of the goods received in trade
Firms need to be extra cautious in fixing the barter exchange rates as international value of certain goods is difficult to valuate
Counter Trade is a reality in Global markets

Points to Consider in Counter Trade
Is this the only way to make a deal?
Can the received goods be sold?
How to maximize cash returns?
Are there any import restrictions in getting the goods back?
Are there other ways of converting the local currency?

Turnkey Pricing
Turnkey Projects are usually of 2 types:
Bundled Pricing : Entire project is priced as one bundle
Unbundled Pricing: Components of the project is priced individually
Profit Sharing or Penalties for nonperformance is usually used in pricing strategy
Component prices are based on competitive positions, market entry decisions and FSA factors

Price and Positioning
Final selling price depends on Positioning
Price-Quality Relationships (high price = High Quality)
Competitive Positioning : Premium or discount w.r.t competitors
Purchasing power : How much customers are able to pay?
Product Life Cycle & Price Skimming : High price during introduction & falling prices later on
Penetration Pricing : Discount to gain market share

Global Coordination
Pricing disparities between regions leads to “Gray Market” or parallel Imports
E.g: Cameras imported to US from Singapore or Japan is cheaper than the official price from the Japanese subsidiary
Gray markets leads to channel conflicts and loss of goodwill
Gray markets also results in after sales service problems

Eliminate gray trade
Firms can eliminate gray trade by Minimizing arbitrage between regions via:
Tough economic control over importers
Centralizing price range within a narrow bandwidth
Formalizing the pricing decisions in all local markets
Coordinating pricing decisions between regional markets to reduce arbitrage

Coordinated Pricing Strategies Economic Controls Formalization Centralization Informal Coordination Level of Marketing Standardization High Low Low High Strength of Local Resources

Global Pricing Policies
Polycentric Pricing
Multi-Domestic firms give wide leverage for subsidiaries on pricing resulting in different prices in different countries – Results in gray markets
Geocentric Pricing
Use a regional (global) standard pricing Plus a local markup.
Base price is derived from cost plus formula
Affected by local tax laws leading to gray markets
Pricing an entire product line is a problem. Markup on one product in one country may not be inline with other products
Ideal for FTA zones

Pricing Policies Cont’d
Geocentric Pricing
E.g: HP uses a global standard price in USD plus regional markup. This avoids gray trade but loses competitive position when competitors discount their products
IBM discounts products where they have competition, but to prevent gray market, IBM sells services at a higher price for gray goods

Pricing Policies Cont’d
Ethnocentric Pricing
Have a common price all over the world
A global standard price
Ideal for big-ticket industrial items such as Aircrafts, computers etc.
Homogeneity of prices eliminated gray markets
Not suitable when there is competition from local manufacturers

Global Pricing

by Arun Kottolli on Sep 10, 2007

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