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Transcript of Global Pricing Chapter 14 © 2006 The McGraw-Hill Companies, Inc. All rights...
Global Pricing
Chap
ter
14
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Outline
Pricing BasicsGlobal Pricing IssuesCountertradePricing Strategies to Control Gray TradeGlobal Pricing StrategiesTakeaways.
Basic Factors in Pricing
Costs
Experience Curve
Competition
Demand
Pricing Basics
The Role of CostsThe standard pricing procedure for exporting consists of
A cost-plus formulaPrice 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” effectThe experience curve shows how unit costs go down as
successively more units of a product are producedExperience curve pricing has been adopted primarily by
companies entering an existing market in the maturity stage, because of the need to be competitive.
UNIT COST
P**
BREAKEVEN TIME
PROFIT MARGIN < 0
PROFIT MARGIN > 0
ACCUMULATED PRODUCTION = q
The Experience Curve Effect
Pricing Basics
CompetitionThe 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.
DemandThe 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.
SETTING A PRICE PREMIUM ON THE BASIS OF DIRECT COMPARISONS WITH COMPETITION (Caterpillar example)
$ 20,000 IS THE COMPETITOR’S 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$24,000 FINAL PRICE
Competitive Value Pricing
EXPORT PRICING MULTINATIONAL PRICING
CURRENCY RISK, CREDIT RISK EXCHANGE RATES, HEDGING
TARIFFS, PRICE ESCALATIONTRANSFER PRICE
DUMPINGCOUNTERTRADE, SYSTEMS PRICING
SKIMMING VS. PENETRATION PRICING
PRICE COORDINATION, GRAY TRADE
POLYCENTRIC PRICING, GEOCENTRIC PRICING, ETHNOCENTRIC PRICING
POSITIONING PRICE, PRICE/QUALITY
FINAL PRICE
Global Pricing: Added to the Pricing Basics…
Unit sales
Time in local market
Profitability
Time in local market
Penetration price
Penetration price
Skimming price
Skimming price
Skimming vs Penetration Pricing
Economy
Performance
Brand C
Brand B
Brand A (high price)
Economy
Performance
Brand C
Brand B
Brand A (low price)
Before Re-positioning After Re-positioning
This is the PREFERENCE VECTOR. This shows that the market wants high performance AND high economy (strong quality/price ratio)
Re-positioning via a Price Reduction
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
Financial Issues
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 “arm’s length prices”
Transfer prices are also used to shift resources within a firm to offset inflation in country subsidiaries, to support a subsidiary’s local
competitive position, and in other cases for profit repatriation. This has resulted in accounting firms developing strict guideline for the transfer
pricing process.
Transfer Pricing
COUNTERTRADE – transactions in which all or part of the payment is made in kind rather than cash. Examples are as follows:
Barter The direct exchange of goods/services between trading partners
Compensation Deals Involve payment both in goods and in cash; the inclusion of some amount of cash makes the deal more attractive to the seller.
Counterpurchases
The most typical version of countertrade; two contracts are negotiated, one to sell the product (which constitutes the initial agreement) at an agreed cash price, and one to buy goods from the purchaser at an amount equal to the amount in the initial transaction.
Product Buy-backs May take two forms; 1) seller agrees to accept some amount of output as full or partial payment, 2) seller agrees to buy back some output at a later date.
Offset Deals The seller contracts to invest in local production or procurement to partially offset the sale price.
Countertrade
For the seller evaluating a countertrade proposal, the following points must be considered:
1. Is this the only way the order can be secured?
2. Can the received goods be sold?
3. How can we maximize the cash portion?
4. Does the invoiced price incorporate extra transaction costs?
5. Are there import barriers to the received goods?
6. Could there be currency exchange problems if we repatriate the earnings from sales in a third country?
Evaluating a Countertrade Offer
Profit sharing or penalty for nonperformance
Package Price
System discounts?
Get supplier discounts?
Bundled?
Pricing of turnkey package
Unbundled
No firm-specific advantages
Components where firm has FSA's
Price taker Price maker
Competitors: stand-alone profit centers?
Competitive entry? Make or buy?
Component prices?
No profit sharing or penalty for nonperformance
Systems Pricing in Turnkey Sales
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”.
• 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
Pricing Actions against Gray Trade
Economic controls Informal coordination
FormalizationCentralization
High
High
Low
Low
Level of Marketing Standardization
Strength of Local
Resources
Controlling Gray Trade:Coordinating Pricing Strategies
ETHNOCENTRIC PRICING
One global price, in one currency
PROS: no gray trade
CONS: no local adaptation
$
Ethnocentric Pricing
GEOCENTRIC PRICING
One price in each region, common regional currency
PROS: some coordination, little gray trade, some adaptation
CONS: not locally adapted
$
YDM
Geocentric Pricing
POLYCENTRIC PRICING
Local prices, in local currency
PROS: locally adapted
CONS: not coordinated, more gray trade
DM
$
Y
Y
$DM
kk
PP
Polycentric Pricing
Although centrally coordinated prices interfere with the local subsidiary’s ability to target its market, it is necessary and possible to coordinate pricing at least by regions or trading
areas.
Takeaways
To discourage gray trade, which attempts to take advantage of currency exchange shifts & local price differentials,
companies try to keep prices in different countries within a narrow band or “corridor”.
Takeaways
Transfer prices between a global firm’s plants in different countries can seldom be used to shift profits but should be
used to motivate subsidiaries & measure performance, while remaining supportable to local tax authorities.
Takeaways
Countertrade, including barter, is a frequent pricing option in countries with a lack of hard currency, especially when
global financial turmoil puts domestic currencies under pressure.
Takeaways
Global pricing still has to pay attention to basic issues such as competition, price-quality relationships, & stage of the
product life cycle.
Takeaways