Principles of International Marketing Chapter 17 Global Pricing

Principles of International Marketing Chapter 17 Global Pricing 9 th Edition © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Transfer Pricing • Transfer pricing, or intracorporate pricing, is the pricing of sales to members of the extended corporate family. • Transfer prices can be based on costs or on market prices. • International transfer pricing objectives may lead to conflicting objectives, especially if the influencing factors vary dramatically from one market to another. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Transfer Pricing • Transfer pricing is established to achieve the following objectives: – – – Competitiveness in the international marketplace Reduction of taxes and tariffs Management of cash flows Minimization of foreign exchange risks Avoidance of conflicts with home and host governments © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Transfer Pricing • Use of transfer prices to achieve corporate objectives – The three philosophies of transfer pricing are cost-based, market-based, and arm’s-length price. – The rationale for transferring at cost is to increase the profits of affiliates. – Deriving transfer prices from the market is the most marketing-oriented method because it takes local conditions into account. – Arm’s-length pricing is favored by many constituents, such as governments, to ensure proper intracompany pricing. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Transfer Pricing • Use of transfer prices to achieve corporate objectives – The effect of environmental influences in overseas markets can be alleviated by manipulating transfer prices in principle. – Transfer prices may be adjusted to balance the effects of fluctuating currencies when one partner is operating in a low-inflation environment and the other in one of rampant inflation. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Transfer Pricing • Transfer pricing challenges - Performance measurement – If the firm operates on a profit center basis, consideration must be given to the effect of transfer pricing on the subsidiary’s apparent profit performance and its actual performance. – Cultural differences may be further complicate the issue if the need to subsidize less-efficient members of the corporate family is not made clear. – An adjustment in the control mechanism is used to give appropriate credit to divisions for their actual contributions. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Transfer Pricing • Transfer pricing challenges – Taxation – Transfer prices will involve the tax and regulatory jurisdictions of the countries in which the company does business. – Since 1962, the U. S. government has affirmed the arm’s-length standard as the principal basis for transfer pricing. Because it involves profits © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Within Individual Markets • Pricing within the individual markets in which the company operates is determined by: – – – Corporate objectives Costs Customer behavior and market conditions Market structure Environmental constraints © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Within Individual Markets • Corporate objectives – Global marketers must set and adjust their financial and marketing-related objectives based on the prevailing conditions in each of their markets. – Price changes may be frequent if the company’s objective is to undersell a major competitor. 10%-20% lower – With longer-term unfavorable currency changes, marketers have to improve their efficiency and/or shift production bases. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Within Individual Markets • Costs – Frequently used as a basis for price determination largely because they are easily measured and provide a base under which prices cannot go in the long term. – Varying inflation rates will have a major impact on the administration of prices. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Within Individual Markets • Costs – Prices cannot be increased due to economic conditions. – Strategies for thriving in disinflationary times may include target pricing, introducing innovative products at a modest premium, and getting close to customers by using new technologies. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Within Individual Markets • Demand market factors – Price elasticity of consumer demand must be understood to determine appropriate price levels, especially if cost structures change. – Pricing decisions is closely tied to customer perceptions of the product offering and the marketing communication tied to it. – The success of a particular pricing strategy will depend on the willingness of both the manufacturer and the intermediary to cooperate. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Within Individual Markets • Market structure and competition – Competition helps set the price within the parameters of cost and demand. – Depending on the marketer’s objectives and competitive position, it may choose to compete directly on price or elect for nonprice measures. – Some marketers can fend off price competition by emphasizing other elements of the marketing mix. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Within Individual Markets • Environmental constraints – Multinational corporations must work with governments in the developing countries to establish an economic policy centered on a relatively free market without price controls. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Countertrade • Countertrade is a sale that encompasses more than an exchange of goods, services, or ideas for money. • Conditions that support countertrade are lack of money, lack of value of money, lack of acceptability of money as an exchange medium, or greater ease of transaction by using goods. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Countertrade as a Pricing Tool • Why purchasers impose countertrade: – – – To preserve hard currency To improve balance of trade To gain access to new markets To upgrade manufacturing capabilities To maintain prices of export goods © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Countertrade as a Pricing Tool (continued) • Types of countertrade – Barter - Direct exchange of goods of approximately equal value. Not used very often because difficult to find goods of equal value. Assessing value and disposing of goods is also a problem. – Counterpurchase or offset trade - Seller gets paid but agrees to purchase goods worth the same amount from the buyer. More flexibility in selecting goods and in assessing value. – Compensation deals - Part payment in goods and part in cash. Some cash involved, flexibility in assessing value of goods involved. – Product buyback agreement - Seller agrees to accept as payment a portion of the output or buy it back. Technology transfer, quality assurance, and assured payment. Usually developing or newlyindustrialized nations. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Countertrade • Merits of countertrade – Permits the covert reduction of prices and therefore allows firms and governments to circumvent price and exchange controls. – An excellent mechanism to gain entry into new markets. – Provides stability for long-term sales. – Can ensure the quality of an international transaction. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.