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Global Pricing


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Global Pricing

  1. 1. Global Pricing Challenges in Global Pricing
  2. 2. Introduction <ul><li>Global Pricing is lot more complex than domestic pricing due to: </li></ul><ul><ul><li>International Currency Fluctuations </li></ul></ul><ul><ul><li>Price Escalations due to Tariffs </li></ul></ul><ul><ul><li>Difficulties to access credit risks </li></ul></ul><ul><ul><li>Price controls, Anti-dumping laws </li></ul></ul><ul><ul><li>Regulation on transfer pricing </li></ul></ul><ul><ul><li>Methods of payment </li></ul></ul>
  3. 3. Limits of Microeconomic Theory <ul><li>Microeconomic theory of pricing has its limits because: </li></ul><ul><ul><li>Demand & Cost curves are not easy to estimate & are not stable over time </li></ul></ul><ul><ul><li>Competitors influence the demand function unpredictably </li></ul></ul><ul><ul><li>When a Firm produces for more than one market, the prices cant be changed instantaneously due to organizational constrains </li></ul></ul>
  4. 4. Pricing Basics <ul><li>Basic Principle of pricing considers: </li></ul><ul><ul><li>Costs or Cost-Plus formula </li></ul></ul><ul><ul><li>Experience Curve Pricing I.e costs go down as more units are produced </li></ul></ul><ul><ul><li>Competition Pricing: Discount or premium pricing w.r.t competition </li></ul></ul><ul><ul><li>Demand factored pricing </li></ul></ul><ul><li>For Global Pricing, there are several other factors to be considered in addition to the basics </li></ul>
  5. 5. Export Pricing Considerations <ul><li>In addition to pricing basics such as costs, demand, competition etc Export pricing has to consider other factors </li></ul><ul><li>Factors affecting export pricing are: </li></ul><ul><ul><li>Currency Risk & Credit Risk </li></ul></ul><ul><ul><li>Tariffs & Price escalation </li></ul></ul><ul><ul><li>Dumping or </li></ul></ul><ul><ul><li>Skimming Vs Penetration Pricing </li></ul></ul><ul><li>Final price depends on product positioning in foreign markets </li></ul>
  6. 6. Multinational Pricing Factors <ul><li>MNC’s have different pricing considerations apart from the pricing basics </li></ul><ul><ul><li>Currency to price, Exchange Rates, Hedging risks </li></ul></ul><ul><ul><li>Transfer Pricing for profit repatriation </li></ul></ul><ul><ul><li>Counter trade/systems pricing </li></ul></ul><ul><ul><li>Price coordination to prevent gray trade </li></ul></ul><ul><ul><li>Polycentric/Geocentric/Ethnocentric pricing </li></ul></ul>
  7. 7. Currency Factors <ul><li>Global companies have to sell in local currency. </li></ul><ul><li>This exposes company to exchange risks </li></ul><ul><li>To minimize risks, firms use hedging, swaps or other financial instruments </li></ul><ul><li>There may be additional constrains such as inability to freely convert local currency to other currencies, limitations on foreign exchange transfers etc </li></ul>
  8. 8. Currency Fluctuations <ul><li>Exchange Rates are never constant, appreciating or depreciating currency affects profitability. </li></ul><ul><li>Exchange rates affects exporters ability to competitively price their products in the long run </li></ul><ul><li>If exchange rates remain unfavorable for a long time, Firm may: </li></ul><ul><ul><li>Chose to manufacture locally instead of exporting </li></ul></ul><ul><ul><li>Or chose to supply from a different country </li></ul></ul><ul><ul><li>Or withdraw from that market </li></ul></ul><ul><ul><li>Or increase price if possible </li></ul></ul>
  9. 9. Transfer Pricing <ul><li>MNC’s have to determine transfer prices, I.e. the prices charged on subsidiaries for products, components and supplies. </li></ul><ul><li>Transfer pricing must be: </li></ul><ul><ul><li>Fair for local subsidiary’s performance measurement </li></ul></ul><ul><ul><li>Help repatriate profits </li></ul></ul><ul><ul><li>Satisfy local tax laws governing transfer pricing </li></ul></ul><ul><li>Global firms are setting up market related transfer prices to satisfy local laws </li></ul>
  10. 10. How to Transfer Income? <ul><li>Transfer pricing has come under strict government rules & regulations, so here are some guidelines from Accounting firms: </li></ul><ul><ul><li>Before beginning the annual business cycle, meet with outside advisors and agree on a game plan </li></ul></ul><ul><ul><li>Compare third party transactions (arms-length pricing) and Adjust prices accordingly </li></ul></ul><ul><ul><li>Prepare a financial model to test the method agreed on </li></ul></ul><ul><ul><li>Ensure everyone involved understands transfer pricing issues </li></ul></ul>
  11. 11. Guidelines Cont’d <ul><ul><li>Prepare Internal & External documentation </li></ul></ul><ul><ul><li>Simulate pricing audit by outside advisors </li></ul></ul><ul><ul><li>Spot check the process within the company </li></ul></ul><ul><ul><li>Evaluate year-end tax position against goals </li></ul></ul><ul><ul><li>Prepare tax returns </li></ul></ul><ul><li>Source: Davis 1994 </li></ul>
  12. 12. Price Coordination <ul><li>MNC’s have to coordinate prices in different geographic market such that: </li></ul><ul><ul><li>Eliminate gray trade & other distribution channel conflicts </li></ul></ul><ul><ul><li>It does not limit local subsidiaries performance or abilities </li></ul></ul><ul><ul><li>Remain competitive in local markets </li></ul></ul><ul><ul><li>Pricing strategy is a part for global marketing strategy </li></ul></ul>
  13. 13. Counter trade & Systems Pricing <ul><li>When local currency is not freely convertible, firms resort to counter trade. </li></ul><ul><li>Exchange local currency for some other goods that is then sold for US$ or other currency </li></ul><ul><li>Systems pricing or Pricing for turnkey projects have several subcomponents that may be separately priced or priced as a bundle </li></ul>
  14. 14. Issues with Counter Trade <ul><li>Counter Trade arises when a country does not have sufficient foreign exchange or its currency is not freely convertible </li></ul><ul><li>Counter Trade is like a Barter, and the exchanged goods then has to be sold to realize any profits </li></ul><ul><ul><li>E.g: Pepsi for Stolichnaya Vodka in USSR </li></ul></ul><ul><li>Counter trade can arise from counter purchase agreements to buy back a part of local production for the right to export into that country </li></ul><ul><ul><li>Product Buyback e.g : Hundai exporting cars from India </li></ul></ul><ul><ul><li>Third goods buy back e.g: Pepsi exporting potato chips from India </li></ul></ul><ul><li>Major Problem is accessing the value of the bartered goods </li></ul>
  15. 15. Evaluation of Counter Trade <ul><li>Counter Trade is done if it’s the only option for trade </li></ul><ul><li>Firms use trading houses to dispose of the goods received in trade </li></ul><ul><li>Firms need to be extra cautious in fixing the barter exchange rates as international value of certain goods is difficult to valuate </li></ul><ul><li>Counter Trade is a reality in Global markets </li></ul>
  16. 16. Points to Consider in Counter Trade <ul><li>Is this the only way to make a deal? </li></ul><ul><li>Can the received goods be sold? </li></ul><ul><li>How to maximize cash returns? </li></ul><ul><li>Are there any import restrictions in getting the goods back? </li></ul><ul><li>Are there other ways of converting the local currency? </li></ul>
  17. 17. Turnkey Pricing <ul><li>Turnkey Projects are usually of 2 types: </li></ul><ul><ul><li>Bundled Pricing : Entire project is priced as one bundle </li></ul></ul><ul><ul><li>Unbundled Pricing: Components of the project is priced individually </li></ul></ul><ul><li>Profit Sharing or Penalties for nonperformance is usually used in pricing strategy </li></ul><ul><li>Component prices are based on competitive positions, market entry decisions and FSA factors </li></ul>
  18. 18. Price and Positioning <ul><li>Final selling price depends on Positioning </li></ul><ul><ul><li>Price-Quality Relationships (high price = High Quality) </li></ul></ul><ul><ul><li>Competitive Positioning : Premium or discount w.r.t competitors </li></ul></ul><ul><ul><li>Purchasing power : How much customers are able to pay? </li></ul></ul><ul><ul><li>Product Life Cycle & Price Skimming : High price during introduction & falling prices later on </li></ul></ul><ul><ul><li>Penetration Pricing : Discount to gain market share </li></ul></ul>
  19. 19. Global Coordination <ul><li>Pricing disparities between regions leads to “Gray Market” or parallel Imports </li></ul><ul><ul><li>E.g: Cameras imported to US from Singapore or Japan is cheaper than the official price from the Japanese subsidiary </li></ul></ul><ul><li>Gray markets leads to channel conflicts and loss of goodwill </li></ul><ul><li>Gray markets also results in after sales service problems </li></ul>
  20. 20. Eliminate gray trade <ul><li>Firms can eliminate gray trade by Minimizing arbitrage between regions via: </li></ul><ul><ul><li>Tough economic control over importers </li></ul></ul><ul><ul><li>Centralizing price range within a narrow bandwidth </li></ul></ul><ul><ul><li>Formalizing the pricing decisions in all local markets </li></ul></ul><ul><ul><li>Coordinating pricing decisions between regional markets to reduce arbitrage </li></ul></ul>
  21. 21. Coordinated Pricing Strategies Economic Controls Formalization Centralization Informal Coordination Level of Marketing Standardization High Low Low High Strength of Local Resources
  22. 22. Global Pricing Policies <ul><li>Polycentric Pricing </li></ul><ul><ul><li>Multi-Domestic firms give wide leverage for subsidiaries on pricing resulting in different prices in different countries – Results in gray markets </li></ul></ul><ul><li>Geocentric Pricing </li></ul><ul><ul><li>Use a regional (global) standard pricing Plus a local markup. </li></ul></ul><ul><ul><li>Base price is derived from cost plus formula </li></ul></ul><ul><ul><li>Affected by local tax laws leading to gray markets </li></ul></ul><ul><ul><li>Pricing an entire product line is a problem. Markup on one product in one country may not be inline with other products </li></ul></ul><ul><ul><li>Ideal for FTA zones </li></ul></ul>
  23. 23. Pricing Policies Cont’d <ul><li>Geocentric Pricing </li></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>IBM discounts products where they have competition, but to prevent gray market, IBM sells services at a higher price for gray goods </li></ul></ul>
  24. 24. Pricing Policies Cont’d <ul><li>Ethnocentric Pricing </li></ul><ul><ul><li>Have a common price all over the world </li></ul></ul><ul><ul><li>A global standard price </li></ul></ul><ul><ul><li>Ideal for big-ticket industrial items such as Aircrafts, computers etc. </li></ul></ul><ul><ul><li>Homogeneity of prices eliminated gray markets </li></ul></ul><ul><ul><li>Not suitable when there is competition from local manufacturers </li></ul></ul>