WILEY IM CHAP 14

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  • Refer to header: Drivers of foreign market pricing Wide cross border price differences are common even within geographic areas. A KPMG Consultancy survey of retail prices across countries that use the euro as their currency found that, 33 directly comparable products (such as salt, eggs, toothpaste and jeans), 29 showed price differentials of more than 50 per cent between the highest- and lowest-priced countries. Almost half had differences of 100 per cent ore more. The biggest price difference was recorded for household salt (1200 per cent). Prices are affected by the four Cs: company, customers, competition and channels. Government policies (local taxes, import duties) also have an impact.
  • Refer to header: Drivers of foreign market pricing The organisation needs to decide what it want to accomplish through its international pricing strategy. Its goals might include maximising current profits, penetrating the market or projecting a premium image. Organisation costs figure prominently in the pricing decision. Costs set the floor: the organisations want sot set at least a price that will cover all costs needed to make and sell its products. Cost differentials between countries can lead to wide difference in price. It is important management considers all relevant costs of manufacturing, marketing and distributing the product.
  • Refer to header: Drivers of foreign market pricing Whereas costs set the base for price calculations, the consumer’s willingness to pay for a product sets a ceiling for the price. Consumer demand is a function of buying power, tastes, habits, cultural norms and substitutes. These demand conditions will vary from country to country.
  • Refer to header: Drivers of foreign market pricing Competition is another key factor in international pricing. Difference in the competitive situation across countries usually lead to cross boarder price differentials. The competitive situation may vary for several reasons. The number of competitors The nature of the competition The competitive position
  • Refer to header: Drivers of foreign market pricing The distribution channel is another driver of international pricing, particularly relevant for Australian and New Zealand organisations because of the distance to markets and the smaller size of organisations. These factors both make direct representation in the market extremely costly. The pressure exercised by channels can take many forms. Variations in trade margins and the length of the channels will influence the ex-factor price charged by the organisation.
  • Refer to header: Drivers of foreign market pricing Even after he launch of the euro, car prices in the EU can still vary by up to 50 per cent. Once of the main reasons for these car price disparities is the sales tax rate for new cars. These vary from as low as 15 per cent in Luxembourg to 213 per cent in Denmark. This taxation gap also affect pre-tax car prices. Most car makers in Europe subsidies the pre-tax prices in high –tax countries by charging more in low-tax countries. BMW is the first car manufacturer in Europe to advertise one price across all countries in one Euro value. This offers transparency, absent in the retail price of cars in Europe.
  • Refer to header: Managing price escalation Exporting involves more steps and substantially higher risks than domestic marketing. The process of covering incremental costs (e.g. shipping, insurance, tariffs, margins of various intermediaries) makes the final foreign retail price higher than the domestic retail price There two broad approaches to dealing with price escalation: find ways to cut the export price or position the price as a premium brand. Several options exist to lower the export price: Rearrange the distribution channel Eliminate costly features (or make them optional)
  • Refer to header: Managing price escalation Strategies for lowering export price (continued): - Downsize the product - Assemble or manufacture the product in foreign markets - Adapt the product to escape tariffs or tax levies
  • Refer to header: Pricing in inflationary environments Rampant inflation is a major obstacle to doing business in many countries. Moreover, high inflation rates are usually coupled with highly volatile exchange rate movements. In such markets, organisations’ financial divisions are often far more important than other departments. There are several alternative ways to safeguard against inflation: Modify components, ingredients, parts or packaging materials Source materials from low-cost suppliers Shorten credit terms Include escalator clauses in long-term contracts Quote prices in a stable currency Pursue rapid inventory turnovers
  • Refer to header: Pricing in inflationary environments Ways to safeguard against inflation (cont’d): Include escalator clauses in long-term contracts Quote prices in a stable currency Pursue rapid inventory turnovers Draw lessons from other countries (JIT) – Just in time
  • Refer to header: Pricing in inflationary environments Organisations faced with price controls can consider several courses of action: Adapt the product line, to reduce exposure to a government imposed price freeze Shift target segments or markets. A more drastic move is to shift the organisations target segment. Launch new products or variants of existing products. If price controls are selective, an organisation can navigate around them by systematically launching new products or modifying existing ones. negotiate with the government. In some cases, organisations are able to negotiate for permission to adjust their prices. Lobbying can be done individually, but it is more likely to be successful if done industry wide. Predict price controls. Some countries have a history of price-freeze programs. Given historical information on the occurrence of price controls and other economic variables, econometric models can be constructed to forecast the likelihood of price controls.
  • Refer to header: International pricing and currency movements Exchange rates reflect how much one currency is worth in terms of another currency. Exchange rates continuously float upward or downward for various economic or political reasons. Even membership in a monetary union does not guarantee exchange rate stability.
  • Refer to header: International pricing and currency movements
  • Refer to header: International pricing and currency movements Two major managerial pricing issues result from currency movements. How much of an exchange rate gain (loss) should be passed through to the customers? In what currency should prices be quoted? 1 st – the Pass-through issue. How much currency movements are reflected in changes to the price customers pay.
  • Refer to header: International pricing and currency movements 2 nd – the Pricing-to-market (PTM). Destination-specific adjustments of mark ups in response to exchange rate movements.
  • Refer to header: International pricing and currency movements Another pricing concern rising from floating exchange centres on the currency unit to be used in international business transactions. Sellers and buyers usually prefer a quote in their domestic currency. That way, the other party will have to bear currency risks. The decision largely depend son the balance of power between the supplier and the customer. Whoever yields will need to cover currency exposure risk through hedging transaction on the forward exchange market.
  • Refer to header: International pricing and currency movements Most large organisations have a network of subsidiaries spread across the globe. Sales transactions among related entities of the same organisations can be quite substantial involving trade of raw materials, components, finished goods or services. Transfer prices are prices charged for such transactions. Generally speaking, organisation should consider the following criteria when making transfer pricing decisions: Tax regimes Local market conditions Market imperfections Joint venture partner Morale of local country managers
  • Refer to header: International pricing and antidumping regulation Dumping is the introduction of a product to the market of another country at less than the product’s normal value in the home market. The antidumping laws most government use to counter dumping practices are a potential minefield for global pricing policies. As discussed, to protect local producers against the encroachment of low-priced imports, government may levy countervailing duties or fines. Therefore, it is important for exporters to realise that pricing policies, such as penetration pricing, may trigger antidumping actions.
  • Refer to header: Price coordination Huge price differentials between countries will encourage grey markets where goods are shipped from low-price to high-price countries by unauthorised distributors so some coordination will usually be necessary, with its degree depending on: Nature of customers Amount of product differentiation Nature of channels Nature of competition Market integration Internal organisation Governmental regulation
  • Refer to header: Price coordination (Continued from previous slide) Huge price differentials between countries will encourage grey markets where goods are shipped from low-price to high-price countries by unauthorised distributors so some coordination will usually be necessary, with its degree depending on: Nature of competition Market integration Internal organisation Governmental regulation
  • Refer to header: Price coordination Increasingly, purchasers demand global-pricing contracts (GPCs) from their suppliers. Before engaging in a GPC with a purchaser, it is important for companies to do their homework. Select customer who want more than just the lowest price Align the supplier’s organisation with the customer’s Hire global account manger who can handle diversity. Reward those global-account managers and local sales representatives who make the relationship work Allow for some pricing flexibility Building information systems to monitor the key variables (e.g. cost variations, competitive situation)
  • Refer to header: Price coordination Guidelines to achieve successful GPC implementation are:
  • Refer to header: Price coordination Given the pressure toward increased globalisation, some degree of price coordination become absolutely necessary. In some cases, organisations set a uniform pricing formula that is applied by all affiliates. Elsewhere, coordination is limited to general rules that indicate only the desired pricing positioning.
  • Refer to header: Pricing policies and the euro The arrival of the euro meant less risk associated with foreign exchange movement for businesses. However, new challenges have arisen that manager who do business in the euro zone need to tackle. The major consequence of the euro is that prices have become more transparent for distributors and consumers alike. Increased price transparency does not mandate price consistency, but it definitely makes strategic pricing decisions within Europe more complicated. Cross border price differences can no longer hide behind exchange rate fluctuations.
  • Refer to header: Countertrade Countertrade is an umbrella term used to describe unconventional trade-financing transactions that involve some from of non-cash compensation. During the past three decades, organisations have increasingly been forced to rely on countertrade. The number of countries mandating countertrade jumped from about 15 in 1975 to more than 100 in 1991. Estimates on the overall magnitude of countertrade vary. One estimate is that it covers 10 to 15 per cent of world trade, whereas some researchers believe that I might actually account for up to 30 per cent of world trade.
  • Refer to header: Summary
  • Refer to header: Summary
  • WILEY IM CHAP 14

    1. 1. Chapter 14 INTERNATIONAL PRICING Prepared by Robin Roberts Griffith University
    2. 2. Learning objectives <ul><li>After studying this chapter you should be able to: </li></ul><ul><li>Discuss the drivers of foreign market pricing </li></ul><ul><li>Explain the management of price escalation </li></ul><ul><li>Explain the management of pricing in inflationary environments </li></ul><ul><li>Discuss strategies for managing the effects of currency fluctuations </li></ul>
    3. 3. Learning objectives <ul><li>Describe the use of transfer pricing </li></ul><ul><li>Explain the implications of antidumping regulations </li></ul><ul><li>Understand how to implement pricing coordination </li></ul><ul><li>Describe countertrade </li></ul>
    4. 4. Drivers of foreign market pricing <ul><li>International prices are affected by the 4 Cs: </li></ul><ul><ul><li>company (costs and goals) </li></ul></ul><ul><ul><li>customers (price sensitivity and segments) </li></ul></ul><ul><ul><li>competition (nature and intensity) </li></ul></ul><ul><ul><li>channels (distribution) </li></ul></ul><ul><ul><li>Government policies are also a major factor </li></ul></ul>
    5. 5. Drivers of foreign market pricing <ul><li>Organisation goals </li></ul><ul><li>Cost-plus </li></ul><ul><ul><li>adding international costs and a markup to the domestic manufacturing cost </li></ul></ul><ul><li>Dynamic incremental pricing </li></ul><ul><ul><li>costs based on international costs and ignores fixed costs </li></ul></ul><ul><ul><ul><li>assumes fixed costs would be borne anyway </li></ul></ul></ul><ul><ul><ul><li>must be careful not to be seen to be dumping </li></ul></ul></ul>
    6. 6. Drivers of foreign market pricing <ul><li>Customer demand </li></ul><ul><li>Demand from the customer sets the price </li></ul><ul><ul><li>Proctor and Gamble selling small sachets of shampoo in developing markets due to buying power in those countries </li></ul></ul><ul><ul><li>Louis Vuitton targets more broadly in developed countries like Japan than it does in developing countries like Thailand </li></ul></ul>
    7. 7. Drivers of foreign market pricing <ul><li>Competition </li></ul><ul><li>Number of competitors varies from country to country </li></ul><ul><ul><li>differing degrees of intensity </li></ul></ul><ul><li>Nature of competition </li></ul><ul><ul><li>global versus local </li></ul></ul><ul><ul><li>presence of counterfeit products </li></ul></ul><ul><ul><li>strength of private labels </li></ul></ul><ul><li>Competitive position </li></ul><ul><ul><li>market leader at home/market follower abroad </li></ul></ul>
    8. 8. Drivers of foreign market pricing <ul><li>Distribution channels </li></ul><ul><li>Direct </li></ul><ul><ul><li>not possible in all countries due to size of market and/or geographic distances required </li></ul></ul><ul><ul><ul><li>makes direct representation extremely costly </li></ul></ul></ul><ul><li>Indirect </li></ul><ul><ul><li>length of channel can affect end price of product/service </li></ul></ul>
    9. 9. Drivers of foreign market pricing <ul><li>Government policies </li></ul><ul><li>Taxation regulation </li></ul><ul><ul><li>sales tax on cars in the EU </li></ul></ul><ul><ul><ul><li>15% - Luxembourg </li></ul></ul></ul><ul><ul><ul><li>213% - Denmark </li></ul></ul></ul><ul><li>Tariffs </li></ul><ul><ul><li>recent reduction on tax on imported wines in Hong Kong allows for a reduction in end selling price </li></ul></ul>
    10. 10. Managing price escalation <ul><li>Strategies for lowering export price: </li></ul><ul><ul><li>rearrange the distribution channel </li></ul></ul><ul><ul><ul><li>shortening the channel in Japan by going directly to the end retailer </li></ul></ul></ul><ul><ul><li>rearrange costly features (or make them optional) </li></ul></ul><ul><ul><ul><li>offer the ‘no-frills’ version of a Sony Vaio in Cambodia </li></ul></ul></ul><ul><ul><ul><li>give the customer the option to upgrade </li></ul></ul></ul>
    11. 11. Managing price escalation <ul><li>Strategies for lowering export price (cont’d): </li></ul><ul><ul><li>downsize the product </li></ul></ul><ul><ul><ul><li>make a smaller version of the product </li></ul></ul></ul><ul><ul><li>assemble or manufacture in foreign markets </li></ul></ul><ul><ul><ul><li>BMW assemble cars in South Africa </li></ul></ul></ul><ul><ul><li>adapt the product to escape tariffs or tax levies </li></ul></ul><ul><ul><ul><li>Land Rover is heavier in the US so as to be classified as a truck rather than car </li></ul></ul></ul>
    12. 12. Pricing in inflationary environments <ul><li>Ways to safeguard against inflation </li></ul><ul><ul><li>modify components/ingredients </li></ul></ul><ul><ul><ul><li>not all components maybe subject to the same level of inflation </li></ul></ul></ul><ul><ul><li>source material from low cost suppliers </li></ul></ul><ul><ul><ul><li>import from low inflation countries </li></ul></ul></ul><ul><ul><li>shorten credit terms </li></ul></ul><ul><ul><ul><li>juggle terms of payment </li></ul></ul></ul>
    13. 13. Pricing in inflationary environments <ul><li>Ways to safeguard against inflation </li></ul><ul><ul><li>include escalator clauses in long-term contracts </li></ul></ul><ul><ul><ul><li>to provide necessary protection </li></ul></ul></ul><ul><ul><li>quote prices in a stable currency </li></ul></ul><ul><ul><ul><li>Dollar or Euro </li></ul></ul></ul><ul><ul><li>pursue rapid inventory turnovers </li></ul></ul><ul><ul><ul><li>use of IT and JIT delivery to yield competitive advantage </li></ul></ul></ul><ul><ul><li>draw lessons from other countries </li></ul></ul>
    14. 14. Pricing in inflationary environments <ul><li>Courses of action to deal with price controls: </li></ul><ul><ul><li>adapt the product line </li></ul></ul><ul><ul><li>shift target segments or markets </li></ul></ul><ul><ul><li>launch new products or variants of existing products </li></ul></ul><ul><ul><li>negotiate with the government </li></ul></ul><ul><ul><li>predict price controls </li></ul></ul>
    15. 15. International pricing and currency movements <ul><li>Exporters and importers are subject to the whims of currency movements </li></ul><ul><ul><li>as currencies strengthen and weaken this has implications for pricing and margins </li></ul></ul><ul><ul><li>a strategic view of the problem should be undertaken </li></ul></ul>
    16. 16. International pricing and currency movements Figure 14.1 Exporter strategies under varying currency conditions
    17. 17. Currency gain/loss pass through <ul><li>Should exporters pass through gains they make from currency movements to their customers? </li></ul><ul><ul><li>help steal business from domestic competitors </li></ul></ul><ul><ul><li>are they more market share (pass it on) or short-term profit oriented (keep it)? </li></ul></ul><ul><li>Should they pass through price rises to customers if they suffer currency losses? </li></ul>
    18. 18. Currency gain/loss pass through <ul><li>Pricing-to-market </li></ul><ul><ul><li>occurs where companies are more responsive to specific market trends </li></ul></ul><ul><ul><ul><li>make destination specific adjustments of markups in response to exchange rate movements </li></ul></ul></ul><ul><ul><ul><li>German auto makers like BMW more likely to take this approach than their short-term profit driven rivals at Toyota </li></ul></ul></ul>
    19. 19. Currency quotation <ul><li>Which currency should be used in international business transactions? </li></ul><ul><ul><li>which party should bear the risk? </li></ul></ul><ul><li>Quoting a common currency could be a way of sharing the risk </li></ul><ul><ul><li>US dollar across countries with their own currency </li></ul></ul><ul><ul><ul><li>trading between Australia and New Zealand </li></ul></ul></ul>
    20. 20. <ul><li>Prices charged for sales transactions among related entities of the same organisation in different countries </li></ul><ul><ul><li>organisations consider the following criteria when making transfer pricing decisions </li></ul></ul><ul><ul><ul><li>tax regimes </li></ul></ul></ul><ul><ul><ul><li>local market conditions </li></ul></ul></ul><ul><ul><ul><li>market imperfections </li></ul></ul></ul><ul><ul><ul><li>joint venture partner </li></ul></ul></ul><ul><ul><ul><li>morale of local country managers </li></ul></ul></ul>Transfer pricing
    21. 21. International pricing and antidumping regulation <ul><li>Dumping </li></ul><ul><ul><li>introducing a product to the market of another country at much less than the product’s normal value in the home market </li></ul></ul><ul><ul><li>WTO help regulate some of this behaviour </li></ul></ul><ul><ul><ul><li>Governments of countries can seek redress with WTO if they feel another country has dumped product in their market </li></ul></ul></ul><ul><ul><ul><li>‘ member’ countries must comply with WTO rulings </li></ul></ul></ul>
    22. 22. Price coordination <ul><li>How similar should prices be across markets depends on: </li></ul><ul><ul><li>nature of customers </li></ul></ul><ul><ul><ul><li>Apple prices globally to cater for a global segment and avoid parallel imports </li></ul></ul></ul><ul><ul><li>amount of product differentiation </li></ul></ul><ul><ul><ul><li>identical products probably need to be priced identically </li></ul></ul></ul><ul><ul><li>nature of channels </li></ul></ul><ul><ul><ul><li>how much control over international distributors? </li></ul></ul></ul>
    23. 23. Price coordination <ul><li>How similar should prices be across markets depends on (cont’d): </li></ul><ul><ul><li>nature of competition </li></ul></ul><ul><ul><ul><li>competing with the same rival in a given region </li></ul></ul></ul><ul><ul><li>market integration </li></ul></ul><ul><ul><ul><li>when markets integrate barriers to cross border movement of goods come down </li></ul></ul></ul><ul><ul><li>internal organisation </li></ul></ul><ul><ul><li>government regulation </li></ul></ul>
    24. 24. Global-pricing contracts <ul><li>Supporting reasons for GPCs: </li></ul><ul><ul><li>select customers who want more than just the lowest price </li></ul></ul><ul><ul><li>align the suppliers organisation with the customers </li></ul></ul><ul><ul><li>hire global account managers </li></ul></ul><ul><ul><li>reward those global-account managers who make the relationship work </li></ul></ul><ul><ul><li>allow for some price flexibility </li></ul></ul><ul><ul><li>build information systems to monitor key variables </li></ul></ul>
    25. 25. Global-pricing contracts Figure 14.3 Checklist before signing a GPC
    26. 26. Aligning panregional prices <ul><li>Pricing corridor </li></ul><ul><ul><li>the price range in markets across a region, ideally set to balance profits and minimise parallel importing </li></ul></ul><ul><li>Simon & Kucher 3-step procedure </li></ul><ul><ul><li>Determine the optimal price for each country </li></ul></ul><ul><ul><li>Find out whether parallel imports are likely to occur at these prices </li></ul></ul><ul><ul><li>Set a pricing corridor </li></ul></ul>
    27. 27. Pricing policies and the euro <ul><li>Initially saw a spike in some prices in the EU </li></ul><ul><ul><li>also witnessed some reductions </li></ul></ul><ul><ul><ul><li>cars in Italy and Spain </li></ul></ul></ul><ul><li>More transparency </li></ul><ul><ul><li>some organisations being caught out </li></ul></ul><ul><ul><ul><li>Apple iTunes faces antitrust charged with unfair pricing tactics </li></ul></ul></ul>
    28. 28. Countertrade <ul><li>Motives </li></ul><ul><ul><li>gain access to new or difficult markets </li></ul></ul><ul><ul><li>overcome lack of hard currency </li></ul></ul><ul><ul><li>overcome low country creditworthiness </li></ul></ul><ul><li>Shortcomings </li></ul><ul><ul><li>timely and costly negotiations </li></ul></ul><ul><ul><li>uncertainty and lack of information on future prices </li></ul></ul>
    29. 29. Summary <ul><li>You should now have an understanding of: </li></ul><ul><li>The drivers of foreign market pricing </li></ul><ul><li>The management of price escalation </li></ul><ul><li>The management of pricing in inflationary environments </li></ul><ul><li>Strategies for managing the effects of currency fluctuations </li></ul>
    30. 30. Summary <ul><li>The use of transfer pricing </li></ul><ul><li>The implications of antidumping regulations </li></ul><ul><li>How to implement pricing coordination </li></ul><ul><li>Countertrade </li></ul>

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