1. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 13 Global Pricing

3. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. A Global Pricing Framework For the global company Problems of constraints on pricing strategy include Currency exchange risk exposure and credit risks Determining whether to pass on price escalation increase to customers Deciding in which currency to price and what hedging tactics to employ Determining transfer prices

4. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Pricing Basics The Role of Costs The standard pricing procedure for exporting consists of A cost-plus formula The sole reliance on a cost-based pricing system is acceptable only in rare circumstances Experience Curve Pricing Use of cost-based pricing has increased due to the “experience curve” effect The experience curve shows how unit costs go down as successively more units of a product are produced Experience curve pricing has been adopted primarily by companies entering an existing market in the maturity stage

5. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Pricing Basics Competition Determining the prices charged by global and domestic competitors is a key aspect of competitor analysis The premium price differential refers to the degree to which the firm might be granted a higher price by the market because of the particular strengths of its product Demand Fluctuating exchange rates will routinely create problems with revenues and prices in a foreign market A particularly potent threat is the chance of a government devaluation In less severe cases, exchange rate fluctuations do not always affect prices in the manner postulated by economic theory

6. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Pricing Basics Hedging Involves the purchase of insurance against losses because of currency fluctuations A forward contract refers to the sale or purchase of a specified amount of a foreign currency at a fixed exchange rate for delivery or settlement on a agreed date in the future A swap may be defined as the exchange of one currency for another for a fixed period of time Government Intervention Price controls Used as standard solutions to control such problems as hyperinflation in various countries

7. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Pricing Basics Government Intervention Price controls (cont’d) For the global marketer, price controls mean that prices can’t be changed as frequently as might be desirable Under price controls, increases in prices usually need to be officially sanctioned In terms of price discrimination there are very few foreign laws that prohibit discrimination unless justified by cost savings

8. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Transfer Pricing Definition The use of transfer prices for the purpose of profit repatriation is heavily scrutinized by many governments whole tax revenues have diminished because of this practice Arm’s-Length Price from a theoretical point of view The transfer prices set should reflect the prices the subsidiary might encounter in the open market Shifting Resources Many factors related to the level of transfer prices relate to the flow of funds between headquarters and the subsidiaries

9. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CountertradeCountertrade Countertrade The term for transactions in which all or part of the payment is made in kind rather than cash Five kinds of countertrade Barter Compensation deals Counterpurchase Product buy-backs Offset

10. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CountertradeCountertrade Barter The direct exchange of goods between two trading partners Compensation deals Involve payment both in goods and in cash Counterpurchase The most typical version of the countertrade in which two contracts are usually negotiated Product buy-backs The seller accepts output as full or partial payment for the goods sold Offset The seller contracts to invest in local production or procurement to partially offset the sale price

11. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. CountertradeCountertrade Business Evaluation A countertrade option means that The extra costs associated with the negotiations and future sale must be considered Important points for a seller evaluating a countertrade proposal Is this the only way the order can be secured? Can the received goods be sold? How can we maximize the cash portion? Does the invoiced price incorporate extra transaction costs? Are there any import barriers to the received goods? Could there be currency exchange problems if we try to repatriate the earnings from sales in a third country?

12. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. System Pricing Systems Selling or Turnkey Sales Refers to the notion that in many instances the firm is providing the buyer with a complete “package”