$$$ International Pricing Situations GLOBAL PRICING STRATEGY. Transfer Pricing

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Kristian Spencer
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1 GLOBAL PRICING STRATEGY Pricing: * The only marketing mix element that generates revenues. * A competitive tool that affects consumer value. $$$ International Pricing Situations First-Time Pricing When entering foreign markets Changing Price During on-going operation Transfer Price Within multinational corporations Transfer Pricing Intra-corporate pricing of sales to members of the extended corporate family. The Parent Corporation A North America $$$ B $$$ Latin America C Africa 1

2 Objectives of Transfer Pricing Reduction of taxes and tariffs Management of cash flows Minimization of foreign exchange risks Avoidance of conflicts with home and host governments over tax issues and repatriation of profits Use of Transfer Pricing Moving Resources into B: Moving Resources out of B: A North America P1 P2 $$$ B Hong Kong $$$ C (or A) Latin America Transfer Pricing Challenges Internal Performance Measurement Discrepancy of a subsidiary s reported and actual profit performance Difficulty in maintaining relationships with subsidiaries that are negatively impacted by transfer pricing. Section 482 of the Internal Revenue Code recognizes four methods to determine arm s length pricing: The comparable uncontrolled price method The resale price method The cost-plus method Any other reasonable method 2

3 First-Time Pricing Skimming Pricing > Initial high price to skim maximum revenues. > Results in fewer, more profitable sales. Penetration Pricing > A low price to attract a large number of buyers. > Results in a larger market share. Market Pricing >Adjust the price to meet competition. >Results in securing exiting position. The Setting of Export Prices Customer Purchase Factors ability to pay price-quality relationship reaction to marketing mix market support Pricing Policies Factors profit maximization market share survival return on investment competitive policies copy competitive pricing follow competitive pricing price to discourage competitive entry Export Pricing Strategy Cost-oriented pricing Standard worldwide price- regardless of buyer s location in the market(s) Dual pricing differentiates between domestic and export prices Rigid cost-plus method allocates domestic and foreign costs to the product. Flexible cost-plus method allows variations (e.g., discount). Dynamic incremental cost pricing method considers direct costs of producing and selling exports at floor (lowest) price. Market-differentiated pricing based on the dynamics of the marketplace changes in competition, exchange rates, etc. 3

4 Bases for Changing Price Improved or adapted product Market Condition Changes: demand, exchange rate competition Corresponding to new marketing program Factors Affecting Pricing Decisions Pricing objective Market demand Costs Competition Channel structure Government regulations Price Escalation in Export Marketing The disproportional increase in final consumer price in the export markets. Export Jeep Cherokee to Japan Item Amount of Price Escalation Total Ex-works price 0 $19,100 Exchange rate adj. $1,333 $20,433 Shipping $800 $21,233 Customs fees $682 $21,915 Distributor margin $1,569 $23,484 Inspection & prep $1,100 $24,584 Added options, $1,925 $26,509 Final sticker price $5,463 $31,972 Source: The New York Times

5 Contributing Factors Added costs: tariffs, taxes,... Longer Channel Export related costs Price Escalation Exchange rate fluctuations Large middlemen margins Methods for combating price escalation Dumping Ranges of dumping Predatory dumping is intentional selling at a loss to increase market share Unintentional dumping occurs when market factors cause the import s selling price to fall below prices in the exporter s home market Remedies for dumping Antidumping duty are levied on imported goods sold at less than fair market value Countervailing duties are imposed on imports which are subsidized in the exporter s home country 5

MKTG 680. Chapter 8 Exporting, Importing, and Sourcing. Introduction. Introduction. Export Selling vs. Export Marketing

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