Global Pricing

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Global Pricing
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Basic Factors in Pricing
Costs Experience Curve Competition Demand
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Pricing Basics

• The Role of Costs
• The standard pricing procedure for exporting
  consists of
• A cost-plus formula
• Price escalation The added costs in exporting
  mean that export prices tend to escalate over the
  domestic prices.
• Experience Curve Pricing
• Use of cost-based pricing has increased due to
  the experience curve effect
• The experience curve shows how unit costs go down
  as successively more units of a product are
  produced
• Experience curve pricing has been adopted
  primarily by companies entering an existing
  market in the maturity stage, because of the need
  to be competitive.

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The Experience Curve Effect
UNIT COST
PROFIT MARGIN lt 0
P
PROFIT MARGIN gt 0
BREAKEVEN TIME
ACCUMULATED PRODUCTION q
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Pricing Basics

• Competition
• The premium price differential refers to the
  degree to which the firm might be granted a
  higher price by the market because of the
  particular strengths of its product.
• Because of competition, prices in foreign market
  are sometimes lower than at home, contrary to the
  price escalation effect.
• Demand
• The strength of demand tends to vary with the PLC
  stage, the growth stage typically showing
  strongest demand.
• Demand and supply Whether or not price can be
  high in a strong demand market, is also
  determined by the supply from competitors.

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Competitive Value Pricing
SETTING A PRICE PREMIUM ON THE BASIS OF DIRECT
COMPARISONS WITH COMPETITION (Caterpillar
example) 20,000 IS THE COMPETITORS PRICE
3,000 IS THE PREMIUM FOR SUPERIOR
DURABILITY 2,000 IS THE PREMIUM FOR SUPERIOR
RELIABILITY 2,000 IS THE PREMIUM FOR SUPERIOR
SERVICE 1,000 IS THE PREMIUM FOR LONGER
WARRANTY 28,000 IS THE TOTAL VALUE 4,000
DISCOUNT 24,000 FINAL PRICE
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Global Pricing Added to the Pricing Basics
EXPORT PRICING
MULTINATIONAL PRICING
EXCHANGE RATES, HEDGING
CURRENCY RISK, CREDIT RISK
TRANSFER PRICE
TARIFFS, PRICE ESCALATION
COUNTERTRADE, SYSTEMS PRICING
DUMPING
PRICE COORDINATION, GRAY TRADE
SKIMMING VS. PENETRATION PRICING
POLYCENTRIC PRICING, GEOCENTRIC PRICING,
ETHNOCENTRIC PRICING
POSITIONING PRICE, PRICE/QUALITY
FINAL PRICE
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Skimming vs Penetration Pricing
Unit sales
Profitability
Penetration price
Penetration price
Skimming price
Skimming price
Time in local market
Time in local market
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Re-positioning via a Price Reduction
Before Re-positioning
After Re-positioning
Economy
Economy
Brand C
Brand C
Brand A (low price)
Performance
Performance
Brand A (high price)
Brand B
Brand B
This is the PREFERENCE VECTOR. This shows that
the market wants high performance AND high
economy (strong quality/price ratio)
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Financial Issues
EXCHANGE RATES firms must be wary of
devaluations exchange rate fluctuations affect
the performance of local subsidiaries HEDGING
purchasing insurance against losses because of
currency fluctuations, firms make use of forward
contracts or swaps GOVERNMENT INTERVENTION
various nations introduce stabilizing measures
into financial systems via selective price
controls and price discrimination laws
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Transfer Pricing
TRANSFER PRICE the price paid for products
shipped between units of the same organization
when the shipment crosses national borders so
that the correct duties related fees can be paid
Transfer prices should reflect the prices the
subsidiary might encounter in the open market,
also known as arms length prices
Transfer prices are also used to shift resources
within a firm to offset inflation in country
subsidiaries, to support a subsidiarys local
competitive position, and in other cases for
profit repatriation. This has resulted in
accounting firms developing strict guideline for
the transfer pricing process.
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Countertrade
COUNTERTRADE transactions in which all or part
of the payment is made in kind rather than cash.
Examples are as follows
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Evaluating a Countertrade Offer
For the seller evaluating a countertrade
proposal, the following points must be considered

• Is this the only way the order can be secured?
• Can the received goods be sold?
• How can we maximize the cash portion?
• Does the invoiced price incorporate extra
  transaction costs?
• Are there import barriers to the received goods?
• Could there be currency exchange problems if we
  repatriate the earnings from sales in a third
  country?

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Systems Pricing in Turnkey Sales
Pricing of turnkey package
Bundled?
Unbundled
Get supplier discounts?
No firm-specific advantages
Components where firm has FSA's
System discounts?
Price taker
Price maker
Competitors stand-alone profit centers?
Competitive entry? Make or buy?
Package Price
Profit sharing or penalty for nonperformance
Component prices?
No profit sharing or penalty for nonperformance
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Gray Trade

• Gray trade is the sales of genuine branded goods
  through unauthorized channels.
• Gray trade involves shipments from overseas
  plants that enter a market via entry points not
  easily controlled. Examples include shipments
  from the Asian manufacturers who produce for
  Western companies and whose products can be
  diverted to ports in one country before entering
  the market country.
• Gray trade is acute in trade areas where barriers
  have been recently dismantled exchange rates
  fluctuate, creating big arbitrage opportunities
  and consumer tourism.

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Gray trade and global pricing.

• Coordinating prices across the globe is necessary
  because
• Communication is global
• Products and brands are standardized
• Distribution is global and efficient
• Trade barriers are low
• Customers can buy anywhere they want

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Coordinating global pricing (contd)

• Coordinating prices across the globe is difficult
  because
• Currency exchange rates fluctuate
• Local retail prices can only be recommended
• Local distributors are independent
• Import prices to subsidiaries have to consider
  tariffs, taxes.
• Local competition varies across countries.
• One global price is unrealistic (although perhaps
  not for aircraft).

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Pricing Actions against Gray Trade

• ECONOMIC CONTROLS influencing price setting in
  local markets via changing shipping prices or by
  rationing the product
• CENTRALIZATION forming price-corridors, setting
  limits for local prices
• FORMALIZATION standardizing the process of
  planning and implementing pricing decisions
• INFORMAL COORDINATION via articulation of
  corporate values culture, human resource
  exchanges

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Price corridors
PRICE CORRIDORS the limits of prices between
which the local price may vary without
interference from headquarters
The price corridors should reflect demand and
competitive pressure in the local market but also
the differences in exchange rates and likelihood
of gray distribution a very difficult balancing
act.
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Controlling Gray Trade Coordinating Pricing
Strategies
Level of Marketing Standardization
High
Low
Economic controls
Informal coordination
High
Strength of Local Resources
Low
Formalization
Centralization
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Ethnocentric Pricing
ETHNOCENTRIC PRICING One global price, in one
currency PROS no gray trade CONS no local
adaptation

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Geocentric Pricing
GEOCENTRIC PRICING One price in each region,
common regional currency PROS some coordination,
little gray trade, some adaptation CONS not
locally adapted
Y

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Polycentric Pricing
POLYCENTRIC PRICING Local prices, in local
currency PROS locally adapted CONS not
coordinated, more gray trade
Y

P
P
k
k

Y
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