GM S-9 Pricing_SG

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LB5301 Global Marketing: Global Pricing 1

2

Global Pricing

LB5301 Global Marketing: Global Pricing


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LB5301 Global Marketing: Global Pricing 3/26

Learning Outcomes

After completing this session, you should beable to: Explain the effect of the following influences on pricing:

Consumer demand and purchasing power

Cost/Market pricing

Competitive forces and government policies

Price escalation

Pricing under currency fluctuations

Countertrade

transfer pricing

price coordination with these influences

Price of Selected Goods


0 50 100 150 200 250

NY

HK

Seoul

Tokyo

Paris

London

Shanghai

Sydney

Indexed Price (relative to 100)

City

Indexed Price of Selected Goods

Prada Handbag Listerine Mouthwash Nikon D800 SLR Camera

Range

ListerineMouth wash: 100-215 = 115

Nikon SLR: 100 - 167 = 67

Prada Handbag: 100 - 116 = 16

Adapted from Kotabe and Helsen (2010) (Exhibit 12-1)

Why is there

such a large

variation with

cheaper goodscompared with

the more

expensive

items?


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Price of Oil April 2010


Oslo, Norway $6.

82

London, UK $5.

96

Sao Paulo

, Brazil $4.42

Sidney, Australi

a $3.42

Riyadh, Saudi Arabia $0.09

Anonymous

18-6

Drivers of Foreign Market Pricing

Company goals: ROI? Market shares? Specificproduct goal?

Skimming pricing Used by a company when the objective is to reach a

segment of the market that is relatively price insensitive

Market is willing to pay a premium price for the valuereceived

Penetration pricing policy Used to stimulate market and sales growth by

deliberately offering products at low prices


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Drivers of Foreign Market Pricing

Cost Based

Rigid Cost-Plus

Add all costs accrued to international market and gross margin

Flexible cost-Plus

Adjusts to host market conditions (eg. Competition)

Dynamic incremental

Removes domestic costs (sunk costs), includes variable costs and

part of overhead



Cost Plus Pricing

Rigid Cost-Plus Add all costs accrued to international market and gross margin

Where

Product is leading edge technology

No competition in overseas market

Requires no market research Appropriate for setting the minimum price

Ignores

Purchasing power

Economic factors

8


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Cost Plus Pricing (Fletcher & Brown 1999)

Cost item $ AusCost of production in Australia (full or marginal

cost)

100.00

Cost of transport (Freight A$10, insurance A$5,

delivery to wharf $2; Agent $15; Marketing costs

os $5

37.00

- Less export incentives and subsidies (Export

Market Development Grant Scheme)

-10.00

Minimum Acceptable profit 13.00

Total 140.00

9

Dynamic

incremental


Customer Demand

Low purchasing power in developing marketsPrice

sensitive

Labour time taken to purchase product

Navali village, India: daily earnings US $2.80 ($A 5.20)

2/3 of global population make < $1,500 pa

Unilever:

developing nations account for global sales by 2010compared to 1/3 around five years ago

Sunsilk shampoo in India

100ml (Rs 55= $A 1.27), 200ml (Rs 105=

$2.44), Sachets (3Rs = $0.06)

10


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Market Pricing Targeted

Standard price but target premium segment

Income

High

Med

Low Domestic Country A Country B

Quality sensitive segment

Price-sensitive segment

Versus

Which is

dominant?

11

Drivers of foreign market pricing

Distribution channels

Indirect

Variations in trade margins

length of channel

Bargaining power

can affect end price of product/service


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Market Forces

Competition number of competitors

national/international, black market and counterfeit

government supported

intense competition = less freedom to set price Hyundai < US $25,000 vs Toyota $26,625

Where new entrant gains monopoly greater freedom to set prices

first mover advantage

New entrant seen as threat Set Lower price

Requires market research

15


Government Policies

Taxes sales tax on cars in the EU

15% - Luxembourg 213% - Denmark

Tariffs recent reduction on tax on imported wines in

Hong Kong allows for a reduction in endselling price

Price control Medicine price; minimum wage

16


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Price escalation

To cover the incremental costs involved in international

marketing, the final foreign retail price will often be much

higher than the domestic retail price.

Taxes, tariffs, and administrative costs

E.g., export and import licenses, other

documents, shipping, insurance, tariffs, margins of

various intermediaries

This higher price phenomenon is calledprice escalation

Position product as a (super) premium brand

Cut the export price


Approaches to Lessening Price Escalation

Lowering cost of goods

Assembling or Manufacturing in a third country

Eliminating costly functional features (or make them

optional)

Lowering overall product quality

Downsize the product

Lowering tariffs

Reclassifying products into a different, and lower customs

classification

Modify product to qualify for a lower tariff rate within

classification

Requiring assembly or further processing

Repackaging LB5301 Global Marketing: Global Pricing 18


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Approaches to Lessening Price Escalation

Lowering distribution costs Shorter channels Reducing or eliminating middlemen

Using foreign trade zones to lessen price

escalation Establish free trade zones (FTZs) or free ports

Tax-free enclave not considered part of country Postpones payment of duties and tariffs


18-20

How Are Foreign Trade Zones Used?

Exhibit 18.3


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Currency Fluctuations

Pass Through100% Pass Through

Case - 1

Currency

Conditions: $1 US =

100 Yen

130 Yen (USD appreciates)

70 Yen (USD depreciates)

Unit price from

factory

$ US

$30,000

Constant

Unit Price in

Yen

3.0m

3.9m

2.1m

Units sold

1,850

1,805

1,895

US$

Revenue

$55.5m

$54.15m

$56.85

Currency change

Passed on

Demand

Change

Revenue

change

Trade-off short term profits for long term market

share

Price adjustment based on price sensitivity to

product in market based on rate movements

21


Currency Fluctuations-Price to Market

Pass Through

Local Currency Price Stability

Case - 2

Currency

Conditions: $1 US =

100 Yen

130 Yen(USD appreciates)

70 Yen (USD depreciates)

Ex Factory unit Price

$US

$30,000

$23,000

$42,857

Unit Price in

Yen

3.0m

Constant

Units sold

$55.5m

$42.69m

$79.26m

Currency change

absorbed by

adjustment of margins

Avoids consequences of frequent changes to prices in

response to currency changes where distributors and

customers may switch brands/suppliers

Demand

Constant

Revenue

Gain/loss

$0($11.45)

$22.45

22

US$ Revenue

1,850


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Exchange rate fluctuations and Pass-through

Exchange rate fluctuations No one is quite sure of the future value of currency

Currency of nation A depreciates relative to the tradingpartner nation B exported products from A will becheaper for consumers in B. if selling at the same ex-factory price, loss of consumers; if selling at the same localprice, gains in revenue

Currency of nation A appreciates relative to the tradingpartner nation B exported products from A will be moreexpensive for consumers in B. if selling at the same ex-factory price, gain of consumers; if selling at the same localprice, loss in revenue

How much loss / gains should be passed toconsumers? LB5301 Global Marketing: Global Pricing 23


Currency Fluctuations

Responses depend on: Size of the export market

Large markets absorb prices

Impact of the dollar appreciation on firms cost structure

Declines in costs through currency appreciation greater latitudefor pricing

Amount of competition in the export market Strong competition cut prices

The firms strategic orientation

Market share or short-term profit orientation?

Price sensitivity of customer

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If the MNC decides to adopt the Price to Market

a U.S. tool manufacturer quote an order for a prospective buyer

in Germany in Euro at an anticipated forward rate at 0.7722

USD/Euro 3 months in the future

Until the bid is accepted, the U.S. companys price translated to

dollars is subject to exchange risk.

Projecting the forward currency rate for the date that you

anticipate the transaction to be consummated and, depending

upon the sensitivity of your pricing, incorporating the cost

into your bid.

Structuring an agreement that allows for price adjustmentswith percentage movements that might occur in the exchange

rate between the time the quote is made and the transaction is

consummated.

Purchasing an option to hedge against the currency risk.LB5301 Global Marketing: Global Pricing 25

Foreign currency option

A foreign currency option is a contract giving

the option purchaser (the buyer) the right, but

not the obligation, to buy or sell a fixed

amount of foreign exchange at a fixed price

per unit for a specified time period.



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Option to hedge against the currency risk

a U.S. tool manufacturer quote an order for a prospective buyer in

Germany in Euro at an anticipated forward rate at 0.7722

USD/Euro 3 months in the future

To control the risk, the company would purchase a foreign-

exchange currency option to coincide with the bid acceptance

period and exchange rate.

At the end of 3 months, exchange rate increases to 0.7455, US

company will exercise the option, thus obtaining the conversion

rate of 0.7722 USD/Euro.

If the dollar fell beyond the option price, the company would

allow the option to expire unused. Euro proceeds from the orderwill be sold in cash.


18-28

Pricing Policy Parallel Imports

Parallel imports Parallel trade occurs when a good protected by a

patent, copyright, or trademark, having been legallypurchased in one country, is exported to another without theauthorization of the local owner of the intellectual propertyrights in the importing market

Occur whenever price differences are greaterthan cost of transportation between two markets retailer price discrimination, vertical pricing restraints, or

national differences in government price controls.

pharmaceutical companies

Exclusive distribution (Perfume & designerbrands, Gucci, Cartier, Nike)

.


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18-29

How Gray-Market Goods End Up in U.S. Stores

Exhibit 18.1

Nikes Air Max Metallic

trainers, which are priced

at 120 ($196) in sports

shops, could be

purchased at Tesco for

50 ($80).

Price Coordination

Global Pricing Contracts Build customer loyalty

Price flexibility

Information systems

Pan regional Pricing1. Determine optimal price

for each country2. Find out if grey markets

are likely to occur at theseprices.

3. Set a pricing corridor


Kotabe and Helsen (2010)


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18-32

Countertrade as a Pricing Tool

Countertrade

Exchanging goods or services which are paid for, in

whole or part, with other goods or services, rather than

with money.

A tool every international marketer must be ready to

employ

Often gives company a competitive advantage

Russia and PepsiCo

Trading vodka and wine for soft drinks

18-33


Types of countertrade

Barter: direct exchange of goods between two parties in a

transaction

Compensation deals: involve payment in goods and in cash

Counterpurchase or offset trade: two contracts are negotiated.

1, the seller agrees to sell a product at a set price to a buyer

and receives payment in cash. 2, original seller must buygoods from the buyer for the total monetary amount involved

in the first contract or for a set percentage of that amount.

There is 6 to 12 months or longerfor completion of the

second contract.


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Product buyback agreement: the agreement is made when the

sale involves goods or services that produce other goods and

services, that is, production plant, production equipment, or

technology. The seller agrees to accept as partial payment a

certain portion of the output, or the seller receives full price

initially but agrees to buy back a certain portion of the output.


18-35


Problems of countertrading

Determining the value of and potential demand for the

goods offered

Barter houses

The Internet and countertrading

Proactive countertrade strategy

Included as part of an overall market strategy

Effective for exchange-poor countries


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Transfer Pricing

Sales transactions between related entities of

the same companies are called transfer prices.

Determinants of Transfer Prices (order of

importance)

local market conditions

market imperfections

joint venture partner interests

morale of local country managers tax regimes



Transfer Pricing Transfer pricing

Minimise tax

Australia Hong Kong

High tax

low profit

Sells at low price

Low tax

High profit

Below fair market

value

UK

Sells at

High

price

37

Manufacturer

(parent)Subsidiary Customer


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Transfer Pricing

Setting Transfer Prices: Market-based transfer pricing:

Arms length prices

Nonmarket-based pricing:

Cost-based pricing

Negotiated pricing

Compliance with financial reporting norms, fiscal andcustom rules, and anti-dumping regulations prompts useof market-based transfer pricing.

Most firms use a mixture of market and non-Market based pricing



Conclusions

Complexity of controllable and environmental

influences

Controllable influences and decisions

Cost/Market pricing

Price escalation

Pass-through

Price coordination

transfer pricing

Countertrade

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