Global Marketing Management A European Perspective Global Pricing

Global Marketing Management A European Perspective Global Pricing Warren J. Keegan Bodo B. Schlegelmilch

Overview z Environmental Influences on Pricing Decisions z Different Approaches to International Price Setting z Standardisation vs. Differentiation z Dumping z Grey Markets and Parallel Imports z Transfer Pricing z Summary Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 2

Learning Objectives z Know about the complexity of international price setting z Appreciate which external and internal factors influence international pricing z Learn about different approaches to setting prices z Be aware of factors promoting or inhibiting international price standardisation z Know how to react to dumping by competitors z Learn which key issues are involved in transfer pricing Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 3

Global Pricing: Important Concepts z Rigid Cost-Plus Pricing and Flexible Cost-Plus Pricing z Dynamic Incremental Pricing z Price Corridor z Dumping z Parallel Imports and Grey Markets z Transfer Pricing z Principle of Arm`s Length Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 4

Environmental Influences on Pricing Decisions (1) z Currency Fluctuations y. Two positions: x. Fix prices in country target markets x. Fix prices in home-country currency y. Pricing should be consistent with the company`s marketing strategy z Inflation y. Inflation is a persistent upward change in price levels y. Inflation requires periodic price adjustments Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 5

Environmental Influences on Pricing Decisions (2) z Government Controls and Subsidies y. In countries, which are undergoing severe financial difficulties, governments may restrict price increases or prescribe fixed prices z Competitive Behaviour and Market Demand y. Pricing decisions are also dependent on the nature of demand competitive action Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 6

Rigid Cost-Plus Pricing z Adding up all the costs required to get the product to where it is sold z All costs incurred in getting a product to an international market are taken into account z Cost-Plus Pricing sometimes ignores competitive conditions z Rigid cost-plus pricing is mostly used by companies new to foreign business Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 7

Flexible Cost-Plus Pricing z Flexible cost-plus pricing is based on the same principle as rigid-cost plus pricing z However: Prices may vary, if the market situation requires (e. g. the nature of the customer, the size of the order or the intensity of local competition) Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 8

Dynamic Incremental Pricing z Price setting practice which is based on the idea that fixed costs occur regardless of whether the company is successful or not z The goal is to regain at least variable costs and international marketing and promotion costs in export ventures z This strategy is also known as penetration pricing z Penetration pricing means that the product may be sold at a loss for a certain time to gain market share Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 9

Standardisation vs. Differentiation in International Pricing z It is an important question whether prices should be standardised across markets or differentiated between international markets z Companies do not act consistently z Cross-subsidisation: a company uses financial resources from one area to compete in another area Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 10

Influences on Prices Standardisation vs. Differentiation Reduction of Trade Barriers Competitive Situation Decreasing Transportation Costs Optimal Prices! Price Nivellation? Future Developments External Drivers Customer Preferences Cost Situation External Drivers Factors Driving Price Standardisation Active Retailers/Grey Markets/Global Sourcing Inflation/Exchange Rates Improved. Communication and Information Flow Regulations/ Tariffs and Duties Increasing Brand Globalisation/ Standardisation Keegan/Schlegelmilch Global Marketing Management: A European Perspective Company-Related Drivers Market-Related Drivers Factors Driving Price Differentiation Chapter 12 / 11

An International Price Corridor Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 12

Decision Making Framework for International Pricing Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 13

Dumping z A company exports a product at a price lower than the price it normally charges in its own home market z Dumping is an important global pricing issue, because it is sometimes regarded as unfair competition z Organisations like the WTO or OECD have issued guidelines how to treat these problematic situations Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 14

Grey Markets and Parallel Imports z Distribution of trademarked products in a country through channels unauthorised by the trademark owner z Grey marketers take advantage of price differences between markets by re-importing branded merchandise from low-price to high-price markets z Parallel Imports reduce or cannibalise sales by authorised channel members in high-price countries Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 15

Transfer Pricing z Pricing transactions between buyers and sellers that belong to the same corporation z The approach used will vary with the nature of the firm: y. Cost-Based Transfer Pricing y. Market-Based Transfer Pricing y. Negotiated Transfer Pricing Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 16

Tax Regulations and Transfer Prices z Companies sometimes use transfer prices to shift profits from high-tax to low-tax countries z The principle of arm`s length is a way of establishing a transfer price between company units. The price shall amount to what two independent, unrelated entities would negotiate Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 17

Summary z There are three different approaches to price setting y. Rigid-cost pricing y. Flexible-cost pricing y. Dynamic incremental pricing z Dumping refers to selling products in international markets at prices below those in the home country z Grey Markets z Transfer Pricing Keegan/Schlegelmilch Global Marketing Management: A European Perspective Chapter 12 / 18