Global Marketing Management Global Pricing Decisions

1. Global Marketing ManagementGlobal Pricing Decisions MKTG 3231-001 Spring 2014 Mrs. Tamara L. Cohen Class # 19

2. KEY TERMS • Parallel Imports • Full-cost versus variable-cost pricing • Skimming • Penetration pricing • Countertrade • Transfer pricing • Cartels

3. KEY CONCEPTS • Price escalation • causes • how it works • how to bring it down • FTZs • Essential elements of international price quotations

4. Background - 1997 disposable diapers a luxury for most Brazilians 160 million people; average annual income < $4,000 most people used cloth diapers or nothing < 5% market used disposables disposables expensive, bulky, leaky PRICE WAR!Diaper Battles in Brazil P& G launched Pampers Uni. Brazilian economy taking off. Trucked in more diapers from Argentina. Carrefour selling cheap diapers from Mexico. Kimberly-Clark arrived with from Argentina. Strategic global alliance with Unilever as Brazil distributor. + strategic alliance with local co. Prices + Market + Producers

5. Global Perspective –the Price War • Setting right price for product / service = key to success or failure e.g. Hong Kong Disneyland opening-day price $32 (2005) • Price must reflect quality + value consumer perceives in product (as always) • Globalization of world markets intensifies competition among multinational & home-based companies • Marketing manager’s responsibility = set & control actual price of goods in different markets with different variables • Can use price for specific objective - profit, ROI, market share, sales volume, liquidity

6. Parallel Imports Importers buy products from distributors in one country & sell in another country to distributors not part of manufacturer’s regular distribution system • whenever price differences > cost of transportation between 2 markets • also caused by high tariffs • competitive price structures • exclusive distribution - protect high retail margins Major problem for pharmaceutical co’s

7. How Gray-Market Goods end up in U.S. stores overstocked US wholesaler (NOT Kuehne & Nagel!)

8. Full-Cost vs Variable-Cost Pricing • Variable-cost pricing(= marginal cost pricing) • firm concerned only with marginal or incremental cost of producing goods to be sold in overseas markets • practical when high fixed costs + unused production capacity • foreign sales are bonus • Full-cost pricing • company insists that no unit of similar product is different from any other unit in terms of cost • each unit must bear full share of total fixed + variable costs • when company has high variable costs relative to fixed costs

9. Skimming vs PenetrationPricing • Skimming • objective to reach segment of market that is relatively price insensitive - elastic • market is willing to pay premium price for value received • maximize profit when product is new / unique • common in markets with 2 income levels: high & low (no middle) • J&J disposable diaper pricing policy in Brazil before P&G came • Unilever in India before P&G came • Penetration pricing policy • stimulate market & sales growth by deliberately offering products at low prices • to acquire & hold market share as competitive maneuver • common in markets where middle class growing rapidly & company wants to stimulate growth, even when no competition yet • e.g. 2004 soap war in India: P&G vs Unilever

10. P&G vs Hindustan Lever

11. Price Escalation = added cost due to exporting e.g. costs of shipping, insurance, packing, tariffs, longer distribution channels, middlemen margins, special taxes, admin. costs, exchange rate variations • Inflation • in countries with rapid inflation or exchange variation, selling price must be related to cost of goods sold and cost of replacing items • Deflation • essential for company to keep prices low and raise brand value to win trust of consumers • Exchange rate fluctuations • don’t know future value of currency • transactions increasingly being written in terms of supplier’s national currency

12. MORE Price Escalation • Varying currency values • changing values of country’s currency relative to other currencies currency exports & currency exports • cost-plus pricing • Middlemen • channel diversity - especially small retailers • underdeveloped marketing & distribution channel infrastructures - extra costs of warehousing & handling small shipments; also extra costs of financing middlemen can’t bear • Transportation costs • freight, packing, insurance, handling (CIF / FOB) • import tariffs usually based on landed cost

13. How to Bring Down Price Escalation • Lower cost of goods • manufacture in 3rd country • eliminate costly functional features • lower product quality • Lower tariffs • reclassify products into different & lower customs classification e.g. $2.7m Fabergé egg – art ($0) or jewelry ($700,000) • modify product to qualify for lower tariff rate • require assembly or further processing • repackage • Lowering distribution costs • shorter channels – some countries +VAT as pass through channels • reduce or eliminate middlemen - tricky

14. More Ways to Bring Down Price Escalation 4. Use Foreign Trade Zones (FTZs) = free ports • tax-free enclave not considered part of country • postpones payment of duties and tariffs • if finished goods not imported into US from FTZ then no US tariffs apply 5. Dumping • use of marginal (variable) cost pricing • sell goods in foreign country below price of same goods in home market

15. FTZ # 9Hawaii

16. How Are Foreign Trade Zones Used? • 350,000 people employed in FTZs in US • > 60% of merchandise received in FTZs is domestic • total value of merchandise moving through FTZs in US > $500 billion annually • exports from FTZs > $31 billion annually and growing

17. Countertrade as a Pricing Tool Global marketer must know: Which markets will require countertrade? Types of Countertrade • Barter- direct exchange of goods in transaction; saves forex reserves • Compensation deals - part payment in goods, part in cash • Counter-purchase / offset trade - contract #1: seller agrees to sell at set price, payment in cash; contingent on contract #2: original seller agrees to buy goods from buyer for total money in 1st contract or for set %. This is most common type of Countertrade. More common among weak countries. • Product buyback agreement - when sale involves goods/services that produce other goods/services. Drawback when goods bought back are in competition with own similar goods.

18. Deal that ultimately brought Pepsi to Russian market in early ’70s hinged on famous barter agreement brokered by Kendall: Pepsi concentrate for Stolichnaya vodka. By 1990, barter trade reached $3 billion with Pepsi trading its product not only for vodka but also for ocean going freighters and tankers which were earmarked to be sold as scrap. By this point, Pepsi Co was not just selling syrup but was expanding in fast food business via its Pizza Hut franchise. Pepsi was not able to maintain exclusivity in Russia. With Soviet collapse, Coca-Cola introduced to Russian market and captured significant market share eventually overtaking Pepsi in 2005. 1959landmark event when Pepsi legend Donald M. Kendall, then head of Pepsi-Cola International, first introduced brand to Russians, including then-Soviet Premier Nikita Khrushchev at American National Exhibition in Moscow. Pepsi’s famous barter deal with Russia

19. Bartering to get by in Spain • Spain has been in a recession for the past 5 years; >25% workforce unemployed • New ‘sharing economy’ • Trade produce for services & merchandise • Rent small parcels of land to farm

20. Challenges of Countertrade Problems: • determining market price for goods on offer • finding markets for bartered merchandise • barter houses Europe; Citibank countertrade dept; 3M Global Trading Internet • Universal Currency would replace nat’l currencies: (e-$) • IRTAInternational Reciprocal Trade Associationoperate e-$ clearing house; all goods & services housed in single data base Proactive countertrade strategy instead of reactive strategy • effective for exchange-poor countries & countries in financial crisis Questions before agreement: • Ready market for bartered goods? • Quality of bartered goods consistent & acceptable? • Need expert for negotiations? • Contract price sufficient to cover cost of barter + desired revenue?

21. Transfer Pricing Strategy = price of goods transferred from company’s operations or sales units in one country to its units elsewhere Benefits • enhance ultimate profit of company • lower duty costs • reduce income taxes in high-tax countries • facilitate dividend repatriation when dividend repatriation is curtailed by government policy • facilitate parent-company control Arm’s-length sales = using same prices as quoted to independent customers

22. Google used Transfer Pricing to cut its taxes by $3.1 billion in 3 years US ave. corporate tax rate = 39.25% Google effective tax rate = 2.4% Google moves most foreign profits through Ireland & Netherlands to Bermuda. (“Double Irish” & “Dutch Sandwich”)

23. “Between 2000 and 2011, the U.S. experienced a net loss of 46 Fortune Global 500 company headquarters” High Tax Countries • USA 39.25% • France 34.42% • Belgium 33.99% • Canada 33.5% Low Tax Countries • Ireland 12.5% • Iceland 15% • Hong Kong 17% • Singapore 9% or 17% Tax Havens = no / low tax • British Virgin Islands • Bermuda • Channel Islands • Cayman Islands • Panama • Turks & Caicos • Delaware, USA

24. International Price Quotations Essential Ingredients • PRICE • Credit • Sales terms • Transportation • Currency • Type of documentation required • Define quantity (units of measurement) • Define quality (agreed quality standards)

25. Administered Pricing = attempt to establish prices for entire market • competitor cooperation / governments / international agreement • goal to reduce or eliminate price competition • governments try to lessen effects of destructive competition C A R T E L S = companies producing similar products or services work together to control their markets • may use formal agreements • set prices • establish levels of production & sales • allocate market territories • redistribute profits • may take over entire selling function

26. Cartels OPEC Organization of Petroleum Exporting Countries • controls price of oil • early 1970s OPEC supplied industrial world with 2/3 of its oil, quadrupled price, causing major world recession Trans-Atlantic Conference Agreement • controls shipping • set rates on 70% of cargo between US & northern Europe De Beers • controls diamond market • mines ½ world’s diamonds • takes in another ¼ through contracts with other mines • “outside buying office” buys up last ¼ to protect prices

27. 1890- De Beers cartel created by founder Cecil John Rhodes 1938- De Beers hired NY advertis-ing company to market idea that the larger the diamond on an engage-ment ring, the greater the love 1960s- similar campaign in Japan created diamond ring “tradition” 2004- new diamond anniversary campaign 2009- new campaign “only thing stronger than diamond is love itself” Perceived need to own a diamond appears, if anything, to be increasing. "When you get engaged, you get a diamond." All that glitters …

28. DIAMONDS in mainstream popular culture

29. establish margins set prices and floors or ceilings restrict price changes compete in market grant subsidies act as purchasing monopsony or selling monopoly Governments of producing and consuming countries play ever-increasing role in establishing international prices for commodities e.g. coffee, cocoa, sugar, wheat - world prices Administered Pricing by Government

30. Keys to success in Global Pricing Decisions Pricing is complex and tricky. Work within established marketing objectives and company policy, with enough flexibility for tactical price movement. Important concepts: • control costs that lead to price escalation • Internet facilitates ‘perfect information’ and arbitrage • countertrade tool especially in developing countries • knowledge of local (host country) regulations • transfer pricing (= intracompany pricing), not only to optimize corporate profit, but also to enhance pricing in host country Foreign Trade Zones (FTZs) = regions or ports that are holding areas for imported goods before quotas or customs duties applied

31. Next class: Global Distribution Decisions