Download Global Pricing

Pricing in International Markets
Vijay Madanu – 17
Ankur Rathi – 37
Vishal Roge – 38
Sachin Shah – 42
Deepak Singh – 47
Nikhil Thadani -52
Price …
Price is the amount of money charged for
a product or service, or the sum of the
values consumers exchange for the
benefits of having or using the product or
service.
Pricing strategies usually change as the
product passes through its life cycle,
because there are constrains on the
company’s freedom to price a product at
different stage.
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
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
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
Price Corridor
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 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,
• 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, Defense Equipments, etc.
Homogeneity of prices eliminated gray
markets
Not suitable when there is competition from
local manufacturers
Pricing Strategy
Transfer pricing.
Cost Plus.
Parity.
Second Market.
Low price supplier.
Complementary product.
Price Co-ordination.
Counter Trade and System Pricing.
Pricing Strategy
Transfer pricing strategy
 Transfer pricing is a strategy used when MNCs sell
products to their divisions in other countries.
 Transfer prices between divisions will vary depending
on variables such as the taxation rates (i.e., higher
income tax rates in the parent’s home country will lead
to lower transfer prices emanating from the home
country to foreign divisions) and
 The desire to minimize profitability of subsidiaries as a
barrier to entry.
Pricing Strategy
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 send back profits
Satisfy local tax laws governing transfer
pricing
Global firms are setting up market related
transfer prices to satisfy local laws
Pricing Strategy
Cost-plus pricing strategy
 This is the most widely used pricing
strategy. Cost-plus pricing plays an
important role in export pricing of industrial
products, especially when firms begin to
export to guard against market related
uncertainty.
Thus, when entering countries for the first
time, it is easiest to develop a price based on
the most accurate available information,
internal cost figures.
Pricing Strategy
Parity pricing strategy
 A firm adopts this strategy when it sets its prices in
a range where most buyers would find the prices
acceptable and appropriate.
 Parity pricing is used by firms with lower industry
control and market share.
 Firms adopting this strategy do so in lieu of
charging a higher price for fear that competition
could gain a significant advantage due to volume
sales and experience cost savings.
Pricing Strategy
Second market pricing strategy
 Second market pricing is a strategy where different
prices are charged based on distinct international
markets.
 This strategy is viable when the price differential
between markets does not exceed the transaction costs
associated with arbitraging a product from one market
to the next.
 If price differences between markets are too great,
parallel markets may develop, thus reducing overall
profitability.
 Complaints can be filed against organizations of
“Dumping”
Pricing Strategy
Low price supplier strategy
Low cost suppliers need to be in a market in
which their price changes are not easily
detected by competitors.
The ability of a competitor not to retaliate
would be limited if it is already producing at
full capacity.
 If larger competitors were to retaliate, it will
result in a price war. The price reduction might
undermine overall sales and profits in the larger
related markets.
Pricing Strategy
Complementary product pricing
This pricing strategy is usually more appropriate with
products with high switching costs. The motivation of
firms to use this strategy is to enhance customers’
involvement with the original product to the degree that
they are likely to purchase increased amounts of
ancillary products or supplies.
 The advantage-accorded firms using complementary
products is that by charging a lower price for the
primary product, they realize the benefits of higher
profits through the sale of the complementary products
or supplies.
 Eg: Printer cartridge (HP)
Price Strategy
Price Co-ordination.
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
Price 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
Price Strategy
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
 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
Price Strategy
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
Factors that need special attention
Factors that need special attention
National Market Size
One of the main factors to determine an
international pricing strategy is the size of the
national market.
 A company will often attempt to use the
potential volume of sales to estimate the price at
which they will need to market their product to
break even.
Eg; Nokia (Base Models)
Factors that need special attention
Exchange Rate
 Exchange rates also play a significant role in
setting prices.
 Due to differences in the value of different
currency, similar products in different countries
may be priced differently.
 This has to do not just with demand for that
particular product, but with macroeconomic
demand for national currencies, which affects
inflation and, by extension, pricing. Companies
often have to adjust prices due to fluctuations in
exchange rates.
Factors that need special attention
Cultural Differences
One of the more complicated factors in
international pricing is cultural differences.
How members of certain cultures perceive the
value of certain products, which in turn affects
how much they are willing to pay for them.
 For example, in the United States women's
handbags often are seen as a status symbol.
Female consumers, therefore, often are willing
to pay high prices. In other cultures, handbags
are considered more functional.
Factors that need special attention
Regulations
 When setting prices in other countries, companies
must research all national regulations relevant to
their product.
 Many countries set price ceilings as well as price
floors on certain products. For example, in Nigeria
(a large oil producer) the price of gasoline and
other petroleum derivatives is capped. Even if the
product a company is selling does not have price
restrictions, regulations placed on the prices of
similar products may affect potential demand and
thus price.
Factors that need special attention
Distribution
 Before setting a price, companies also must
consider the distribution network by which they
are selling their products overseas.
 For example, if a company is selling a product
through franchise licenses, they are likely to price
their products differently than if they were selling
them wholesale to local distributors
Pricing – MC Donald's
As the value of currencies varies worldwide,
McDonald’s is often forced to change its
pricing strategy in accordance to its target
market.
In Switzerland, the Big Mac is valued $ 4.93.
In the china, the Big Mac is price at $ 1.3 .
-60%
Switzerland
Denmark
Sweden
Euro Area
Britain
United States
New Zealand
Turkey
Canada
Chile
Brazil
Hungary
Mexico
Czech Republic
South Korea
Australia
Taiwan
South Africa
Singapore
Japan
Poland
Egypt
Russia
Philippines
Argentina
Hong kong
Indonesia
Thailand
Malaysia
China
-40%
-20%
0%
20%
40%
Comparison of
BIG MAC prices
internationally
60%
$4.93
$4.49
$4.28
$3.51
$3.32
$3.15
$3.08
$3.07
$3.01
$2.98
$2.74
$2.71
$2.66
$2.60
$2.56
$2.44
$2.35
$2.29
$2.20
$2.19
$2.09
$1.61
$1.60
$1.56
$1.55
$1.55
$1.54
$1.51
$1.47
$1.30
Pricing – MC Donald's
The company tries to maintain a price range on
all its products based on the location, income
 Its primary goal is to initially attract middle
and upper class citizens, as they can afford
McDonald’s prices.
In the United States, for example, the restaurant
chain has appealed equally well to all classes
ranging from the poor to the upper class;
however, its popularity continues to be among
the lower, middle and upper middle class.
Pricing Strategies – MC Donald
Product Line Pricing: (Combo meals)
Promotional Pricing: (Happy Hours)
Penetration Pricing:(Coffee offered free)
Value Pricing: (Dollar Menu)
Aap ke zamane me, bap ke zamane ke daam.
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
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