Global Marketing Management A European Perspective

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Global MarketingManagementA European Perspective
Global Pricing

• Warren J. Keegan
• Bodo B. Schlegelmilch

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Overview

• Environmental Influences on Pricing Decisions
• Different Approaches to International Price
  Setting
• Standardisation vs. Differentiation
• Dumping
• Grey Markets and Parallel Imports
• Transfer Pricing
• Summary

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Learning Objectives

• Know about the complexity of international price
  setting
• Appreciate which external and internal factors
  influence international pricing
• Learn about different approaches to setting
  prices
• Be aware of factors promoting or inhibiting
  international price standardisation
• Know how to react to dumping by competitors
• Learn which key issues are involved in transfer
  pricing

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Global Pricing Important Concepts

• Rigid Cost-Plus Pricing and Flexible Cost-Plus
  Pricing
• Dynamic Incremental Pricing
• Price Corridor
• Dumping
• Parallel Imports and Grey Markets
• Transfer Pricing
• Principle of Arms Length

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Environmental Influences on Pricing Decisions (1)

• Currency Fluctuations
• Two positions
• Fix prices in country target markets
• Fix prices in home-country currency
• Pricing should be consistent with the companys
  marketing strategy
• Inflation
• Inflation is a persistent upward change in price
  levels
• Inflation requires periodic price adjustments

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Environmental Influences on Pricing Decisions (2)

• Government Controls and Subsidies
• In countries, which are undergoing severe
  financial difficulties, governments may restrict
  price increases or prescribe fixed prices
• Competitive Behaviour and Market Demand
• Pricing decisions are also dependent on the
  nature of demand and competitive action

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Rigid Cost-Plus Pricing

• Adding up all the costs required to get the
  product to where it is sold
• All costs incurred in getting a product to an
  international market are taken into account
• Cost-Plus Pricing sometimes ignores competitive
  conditions
• Rigid cost-plus pricing is mostly used by
  companies new to foreign business

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Flexible Cost-Plus Pricing

• Flexible cost-plus pricing is based on the same
  principle as rigid-cost plus pricing
• However Prices may vary, if the market situation
  requires (e.g. the nature of the customer, the
  size of the order or the intensity of local
  competition)

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Dynamic Incremental Pricing

• Price setting practice which is based on the idea
  that fixed costs occur regardless of whether the
  company is successful or not
• The goal is to regain at least variable costs and
  international marketing and promotion costs in
  export ventures
• This strategy is also known as penetration
  pricing
• Penetration pricing means that the product may be
  sold at a loss for a certain time to gain market
  share

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Standardisation vs. Differentiation in
International Pricing

• It is an important question whether prices should
  be standardised across markets or differentiated
  between international markets
• Companies do not act consistently
• Cross-subsidisation a company uses financial
  resources from one area to compete in another
  area

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Influences on Prices Standardisation vs.
Differentiation
Factors Driving
Factors Driving
Price Differentiation
Price Standardisation
Reduction

of

Trade
Customer

Preferences
Barriers
Related Drivers
Drivers

Competitive
Decreasing
Situation
Transportation

Costs
-
External
Market
Optimal
Prices
!
Active

Retailers
/
Grey

Cost
Situation
Markets
/Global
Sourcing
Price

Nivellation
?
Future
Developments
Improved

Communication

Inflation/Exchange Rates
Drivers
and
Information
Flow

Related
Increasing
Brand
External
Regulations
/
-
Drivers
Globalisation
/
Tariffs

and

Duties
Standardisation
Company
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An International Price Corridor
13
Decision Making Framework for International
Pricing
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Dumping

• A company exports a product at a price lower than
  the price it normally charges in its own home
  market
• Dumping is an important global pricing issue,
  because it is sometimes regarded as unfair
  competition
• Organisations like the WTO or OECD have issued
  guidelines how to treat these problematic
  situations

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Grey Markets and Parallel Imports

• Distribution of trademarked products in a country
  through channels unauthorised by the trademark
  owner
• Grey marketers take advantage of price
  differences between markets by re-importing
  branded merchandise from low-price to high-price
  markets
• Parallel Imports reduce or cannibalise sales by
  authorised channel members in high-price countries

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Transfer Pricing

• Pricing transactions between buyers and sellers
  that belong to the same corporation
• The approach used will vary with the nature of
  the firm
• Cost-Based Transfer Pricing
• Market-Based Transfer Pricing
• Negotiated Transfer Pricing

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Tax Regulations and Transfer Prices

• Companies sometimes use transfer prices to shift
  profits from high-tax to low-tax countries
• The principle of arms length is a way of
  establishing a transfer price between company
  units. The price shall amount to what two
  independent, unrelated entities would negotiate

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Summary

• There are three different approaches to price
  setting
• Rigid-cost pricing
• Flexible-cost pricing
• Dynamic incremental pricing
• Dumping refers to selling products in
  international markets at prices below those in
  the home country
• Grey Markets
• Transfer Pricing