Pricing for International and Global Markets

1. 12 Pricing for International and Global Markets

2. Learning Objectives • Differentiate between full-cost pricing and marginal-cost pricing and explain the implications of both to global marketers. • Note how international transportation costs, tariffs, taxes, local production, and channel costs all affect pricing decisions. • Explain how different income levels, buyer power, and competitive situations in national markets can require different pricing strategies across these markets. • Compare and contrast the ways in which exchange rate fluctuations and inflation rates complicate global pricing. • List various examples of government price controls that global marketers might encounter. • Define dumping and describe how it can constrain pricing strategies. • Understand how the credit and collection infrastructure of a country can affect pricing decision in that country. • Describe how global marketers can manage export price escalation, determine transfer prices, and effectively quote prices in foreign currencies. • Define parallel imports, explain their causes, and list ways in which they may be controlled. • Understand how the credit and collection infrastructure of a country can affect pricing decisions in that country. • Differentiate among various forms of countertrade and balance the risk and opportunities of dealing with noncash exchanges.

3. Chapter Outline • Profit and cost factors that affect pricing • Market factors that affect pricing • Environmental factors that affect pricing • Managerial issues in global pricing

4. Profit and Cost Factors Fixed costs – Do not change over a given range of output Variable costs – Vary directly with output Marginal profit – Amount in excess of variable costs

5. Profit and Cost Factors • Transportation Costs • Tariffs • Taxes • Local production costs • Channel costs

6. Market Factors Income level GNP per capita GDP per capita Disposable income Price elasticity High income = lower elasticity Lower income = higher elasticity Importance of reassessing income level in developing countries

7. Market Factors Culture Buyer Power Competition

8. Environmental Factors Exchange rate fluctuations Inflation rates Price controls Dumping Credit and collection infrastructure

9. Managing under Price Controls Negotiate with government when costs increase Decrease costs by modifying product Leave the market Diversify markets

10. Who Pays for Exporting Costs? CIF Seller pays for insurance and transportation to foreign port of debarkation CFR Seller pays for transportation FOB Seller only pays to deliver goods to the port of export

11. Transfer Pricing • Transfer price – Price paid by importing or buying unit of a firm to the exporting unit of the same firm

12. Quoting Prices in a Foreign Currency • Transaction risk – Risk that a change in exchange rates may occur between the invoicing date and the settlement date of the transaction • Foreign exchange price quotations: • Spot price – Number of dollars to be paid for a particular foreign currency purchased or sold today • Forward price – Number of dollars to be paid in a foreign currency bought or sold 30, 90, or 180 days from today

13. Managerial Responses to Gray Markets • Customize products • Maintain control over distribution and subsidiaries • Alert consumers to potential pitfalls of buying parallel imports such as a nullified warranty • Limit supplies of product in low-price markets • Keep prices within a range of each other to discourage arbitrage Source: “UEA Sees First Imprisonment for Parallel Imports in the Middle East,” Al Bawaba, London, Oct. 12, 2009.

14. Setting Global Prices • Uniform pricing strategy • Requires a company to charge the same price everywhere when that price is translated into a base currency • Difficult to achieve because of different taxes, trade margins, customs duties, and currency fluctuations • Modified uniform pricing strategy • Carefully monitoring price levels in each country and avoiding large gray-trade-enticing gaps

15. Countertrade Barter –Exchange of real goods Compensation Arrangement – Value of export delivery partially offset by an import transaction, or vice versa Full versus partial Triangular

16. Countertrade(cont.) • Offset – Selling company guarantees to use some products or services in the buying country in the final product • Cooperation agreements – Buyback arrangement wherein payment for input good is paid for by output goods