Global Pricing 1470
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Transcript of Global Pricing 1470
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Global Pricing
Challenges in Global Pricing
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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 onemarket, the prices cant be changed
instantaneously due to organizational
constrains
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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 pricingFor Global Pricing, there are several
other factors to be considered in addition
to the basics
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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
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Multinational Pricing Factors
MNCs have different pricing
considerations apart from the pricing
basics
Currency to price, Exchange Rates, Hedgingrisks
Transfer Pricing for profit repatriation
Counter trade/systems pricingPrice coordination to prevent gray trade
Polycentric/Geocentric/Ethnocentric pricing
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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
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Currency Fluctuations
Exchange Rates are never constant,appreciating or depreciating currency affectsprofitability.
Exchange rates affects exporters ability tocompetitively price their products in the longrun
If exchange rates remain unfavorable for a longtime, 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
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Transfer Pricing
MNCs have to determine transfer prices,I.e. the prices charged on subsidiaries forproducts, components and supplies.
Transfer pricing must be:Fair for local subsidiarys performance
measurement
Help repatriate profits
Satisfy local tax laws governing transferpricing
Global firms are setting up market related
transfer prices to satisfy local laws
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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, meetwith 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 agreedon
Ensure everyone involved understands transfer
pricing issues
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Guidelines Contd
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
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Price Coordination
MNCs 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 marketsPricing strategy is a part for global marketing
strategy
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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 thatmay be separately priced or priced as a
bundle
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Issues with Counter Trade
Counter Trade arises when a country does not havesufficient foreign exchange or its currency is not freelyconvertible
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 purchaseagreements to buy back a part of local production forthe 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 barteredgoods
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Evaluation of Counter Trade
Counter Trade is done if its 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 tovaluate
Counter Trade is a reality in Global
markets
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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 thelocal currency?
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Turnkey Pricing
Turnkey Projects are usually of 2 types:Bundled Pricing : Entire project is priced as
one bundle
Unbundled Pricing: Components of theproject is priced individually
Profit Sharing or Penalties fornonperformance is usually used in pricing
strategyComponent prices are based on
competitive positions, market entry
decisions and FSA factors
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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 theofficial price from the Japanese subsidiary
Gray markets leads to channel conflicts
and loss of goodwillGray markets also results in after sales
service problems
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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 localmarkets
Coordinating pricing decisions between
regional markets to reduce arbitrage
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Coordinated Pricing Strategies
Economic Controls
FormalizationCentralization
Informal
Coordination
Level of Marketing Standardization
High Low
Low
High
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Global Pricing Policies
Polycentric PricingMulti-Domestic firms give wide leverage for
subsidiaries on pricing resulting in different prices indifferent countriesResults in gray markets
Geocentric PricingUse 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 marketsPricing an entire product line is a problem. Markup
on one product in one country may not be inlinewith other products
Ideal for FTA zones
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Pricing Policies Contd
Geocentric Pricing
E.g: HP uses a global standard price in USD
plus regional markup. This avoids gray trade
but loses competitive position whencompetitors 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
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Pricing Policies Contd
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
marketsNot suitable when there is competition from
local manufacturers