Global Pricing

  • 41,058 views
Uploaded on

 

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
  • It's very interesting knowledge I need. I'm studying international business
    Are you sure you want to
    Your message goes here
No Downloads

Views

Total Views
41,058
On Slideshare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
1,252
Comments
1
Likes
8

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Global Pricing Challenges in Global Pricing
  • 2. 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
  • 3. 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
  • 4. 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
  • 5. 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
  • 6. 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
  • 7. 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
  • 8. 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
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. 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?
  • 17. 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
  • 18. 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
  • 19. 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
  • 20. 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
  • 21. Coordinated Pricing Strategies Economic Controls Formalization Centralization Informal Coordination Level of Marketing Standardization High Low Low High Strength of Local Resources
  • 22. 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
  • 23. 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
  • 24. 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