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Global Pricing
Challenges in Global Pricing
Introduction
Global Pricing is lot more complex than
domestic pricing due to:
International Currency Fluctuations
Price Escalations due to Tariffs
Difficulties to access credit risks
Price controls, Anti-dumping laws
Regulation on transfer pricing
Methods of payment
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 one
market, the prices cant be changed
instantaneously due to organizational
constrains
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 pricing
For Global Pricing, there are several
other factors to be considered in addition
to the basics
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
Multinational Pricing Factors
MNC’s have different pricing
considerations apart from the pricing
basics
Currency to price, Exchange Rates, Hedging
risks
Transfer Pricing for profit repatriation
Counter trade/systems pricing
Price coordination to prevent gray trade
Polycentric/Geocentric/Ethnocentric pricing
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
Currency Fluctuations
Exchange Rates are never constant,
appreciating or depreciating currency affects
profitability.
Exchange rates affects exporters ability to
competitively price their products in the long
run
If exchange rates remain unfavorable for a long
time, 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
Transfer Pricing
MNC’s have to determine transfer prices,
I.e. the prices charged on subsidiaries for
products, components and supplies.
Transfer pricing must be:
Fair for local subsidiary’s performance
measurement
Help repatriate profits
Satisfy local tax laws governing transfer
pricing
Global firms are setting up market related
transfer prices to satisfy local laws
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, meet
with 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 agreed
on
 Ensure everyone involved understands transfer
pricing issues
Guidelines Cont’d
 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
Price Coordination
MNC’s 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 markets
Pricing strategy is a part for global marketing
strategy
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 that
may be separately priced or priced as a
bundle
Issues with Counter Trade
 Counter Trade arises when a country does not have
sufficient foreign exchange or its currency is not freely
convertible
 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 purchase
agreements to buy back a part of local production for
the 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 bartered
goods
Evaluation of Counter Trade
Counter Trade is done if it’s 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 to
valuate
Counter Trade is a reality in Global
markets
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 the
local currency?
Turnkey Pricing
Turnkey Projects are usually of 2 types:
Bundled Pricing : Entire project is priced as
one bundle
Unbundled Pricing: Components of the
project is priced individually
Profit Sharing or Penalties for
nonperformance is usually used in pricing
strategy
Component prices are based on
competitive positions, market entry
decisions and FSA factors
Price and Positioning
Final selling price depends on Positioning
Price-Quality Relationships (high price =
High Quality)
Competitive Positioning : Premium or
discount w.r.t competitors
Purchasing power : How much customers are
able to pay?
Product Life Cycle & Price Skimming : High
price during introduction & falling prices
later on
Penetration Pricing : Discount to gain market
share
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 the
official price from the Japanese subsidiary
Gray markets leads to channel conflicts
and loss of goodwill
Gray markets also results in after sales
service problems
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 local
markets
Coordinating pricing decisions between
regional markets to reduce arbitrage
Coordinated Pricing Strategies
Level of Marketing Standardization
High
Low
High
Economic Controls
Informal
Coordination
Low
Centralization
Formalization
Global Pricing Policies
Polycentric Pricing
 Multi-Domestic firms give wide leverage for
subsidiaries on pricing resulting in different prices in
different countries – Results in gray markets
Geocentric Pricing
 Use 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 markets
 Pricing an entire product line is a problem. Markup
on one product in one country may not be inline
with other products
 Ideal for FTA zones
Pricing Policies Cont’d
Geocentric Pricing
E.g: HP uses a global standard price in USD
plus regional markup. This avoids gray trade
but loses competitive position when
competitors 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
Pricing Policies Cont’d
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
markets
Not suitable when there is competition from
local manufacturers