GLOBAL PRICINGSUBMITTED BY:

Manish Sabharwal (640)Tarun Tahiliani (627)

Introduction Global pricing is one of the most critical and complex

issues that global firms face so it can give a break or a boost to company’s revenue. It is important because:

Price is the only marketing mix that generates revenue all other entail costs.

Local pricing v/s Global pricing – Image consistency issue

Lack of the coordination in the global market will give rise to gray market or parallel trade situation

4 C’s are the main drivers of global pricing strategies of any company operating internationally: COMPANY, CUSTOMER, COMPETITION and CHANNELS

Company Company includes the goals and costs as the

major factor of global pricing strategies.

Major Goals Include Growth Maximization/revenue maximization Market penetrationProjection of an image Companies objectives and goals are different in

different market. For example. New Balance, the US based shoe maker sells its shoes in France as haute couture rather than athletic shoes and they price it at almost double of the price in US.

CostsCosts are different in different markets because of

various reasons like labor, raw material etc.Costs are very prominent in pricing decision of a firm

because pricing is done to cover the cost involved.Two costs are there Fixed costs Variable costsExport Pricing policies: Cost-Plus Pricing: adds international costs and a

mark-up to the domestic manufacturing cost. Dynamic Incremental Pricing: only variable costs and

a portion of the overhead load (incremental costs) should be recuperated. Exporting-related incremental costs (manufacturing costs, shipping expenses, insurance, and overseas promotional costs).

Customer If costs set the floor for pricing , consumer willingness to pay

sets a ceiling to the price. Consumer’s role in international pricing is derived by these reasons:

Buying powerTaste Habits & Spending patternsAvailability of substitutes

Option to tackle customers issue:DownsizingNiche player targeting upper end Portfolio of productsSell older version at low prices Example: Proctor & Gamble downsized the packet size of Ariel in

Egypt thereby lowering the cash outlay for ordinary consumers.

CompetitionCompetition plays an important role in pricing because we have different kinds of competition in different market:

Number of competitors: Monopoly, Perfect competition

Nature of competition: Global or local players, state owned or private

ownedPosition of company in the competition:

Price leaders or price takersKnockoff items / counterfeit products:

Imitation products offered for sale Smuggled goods.

ChannelsDistribution channels determine the pricing in different ways depending upon:

Length of channels: producer to consumer in how many steps Balance of power between manufacturer and

retailersUnauthorized distribution channels in the gray

markets

For example:US and Germany have direct marketers , supermarkets and specialty retails for personal computers where as in Britain prices are 50 % higher than in Germany with market dominated by Dixons , a retail chain that charges high margins.

Govt. policiesGovernment policies can have a direct or indirect

impact on the pricing policies. Factors that have a direct impact are:

Sales tax ratesTariffsPrice controlsPolicy regarding Floor price/Ceiling price

Factors that have an indirect impact on pricing are:Interest ratesCurrency volatilityInflation

Concept of Price escalation Exporting involves more steps and substantially

higher risks than domestic marketing.To cover the incremental costs (shipping,

insurance, tariffs, etc), the final foreign retail price will often be much higher than the domestic retail price. This is known as price escalation.

Price escalation raises two pressing issues: Sticker shock: willingness of foreign customers

to pay the inflated price Competitiveness: inflated price making the

product less competitive

Managing price escalationRearrange the distribution channel: length of the

channel, or number of layers between manufacturer and end-user. Example: US firms in Japan

Eliminate costly features (or make them optional): core product + optional feature available at extra cost

Downsize the product

Assemble or manufacture the product in foreign markets

Adapt the product to escape  tariffs or tax levies: Range Rover in US.

Pricing in Inflationary Environments There are several alternative ways to safeguard

against inflation Modify components, ingredients, parts and/or –

packaging materials Source materials form low-cost suppliers Shorten credit terms Include escalator clauses in long-term contracts Quote Prices in a stable currency Pursue rapid inventory turnovers Draw lessons from other countries

Global Pricing and Currency Movements Given the sometimes dramatic exchange rate

movements, setting prices in a floating exchange rate world poses a tremendous challenge.

Two major managerial pricing issues  result from currency movements:How much of an exchange rate gain (loss) should be passed through our customers?

Ex: Customer’s price sensitivity, the amount of competition in the export marketIn what currency should we quote our prices?

Depends on the balance of power between the supplier and the customer

Some companies adopt a single currency

Transfer pricing It refers to the setting, analysis, documentation,

and adjustment of charges made between related parties for good, services, or use of property (including intangible property).

Following criteria should be considered while making transfer pricing decisions:

Tax regimes Local Market conditions Market Imperfections Joint-venture partner Morale of local country managers

Anti dumping regulationDumping: imports are being sold at an “unfair”price

Protectionism

To minimize risk exposure to antidumping actions, exporters might pursue any of these strategies:

Trading-up (move away from low-value to high-value products)

Service Enhancement: differentiate your product by adding support services to the core product

Distribution and Communication: strategic alliances

Set up units in foreign country

Price Coordination When developing a global pricing strategy, one of the

thorniest issues is how much coordination should exist between prices charged in different countries

In deciding how much coordination, several considerations matter:

Nature of customers: With global customers price coordination is must. For ex. In Europe, Microsoft sets prices that differ by not more than 5% between countries

Amount of product differentiation: less differentiation , the larger the need for price coordination.

Nature of Channels: distribution channels can be viewed as intermediate customers.

Nature of competition: Global competition demands a cohesive strategic approach for the entire marketing mix strategy, including pricing.

Market integration

Internal organization

Government regulation

Countertrade Countertrade is an umbrella term used to describe

unconventional trade-financing transactions that involve some form of noncash compensation.

Types:Barter: Exchange of goods or servicesSwitch trading: Practice in which one company sells to another

its obligation to make a purchase in a given countryCounter purchase: Sale of goods and services to a country by a

company that promises to make a future purchase of a specific product from the country

Buyback: occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant's output as partial payment for the contract

Offset: Agreement that a company will offset a hard - currency purchase of an unspecified product from that nation in the future

Motives Behind Countertrade Gain access to new or difficult markets Overcome exchange rate controls or lack of hard

currency Overcome low country credit worthiness Increase sales volume Generate long-term customer goodwill

Shortcomings of Countertrade No in-house use for goods offered by customers Timely and costly negotiations Uncertainty and lack of information on future

prices Transaction costs

CASE 1: McDonald’s Pricing Strategy in India

McDonald's India is a joint-venture company managed by Indians. McDonald’s India, a subsidiary of McDonald’s USA, has expanded its presence in India via 2 joint venture companies – Connaught Plaza restaurants and Hard castle restaurants.

McDonald's opened its doors in India in Vasant Vihar, New Delhi in October 1996

Global Strategy:Customer driven, goal orientedAchieving sustainable, profitable growthDesigned to increase restaurant visits and growBrand loyalty among new & existing customers Further build financial strength

Strategy in IndiaMuch higher degree of adaptability 40% Vegetarians –Vegetarian selections to suit Indian

taste Maharaja Mac replaced Big Mac, Chicken Patty instead

of Beef Respect for local culture- Special Indian menu, No beef

or pork items in India McAloo burger, Veg Salad Sandwich, McMasala & Veg

SaucesRe-formulated own products using spices favoured by

Indians Only vegetable oil used as a cooking mediumCommon Menu- Chicken Nuggets, Fillet-O- Fish, fries,

sodas, shakes

A very popular punch line of Mcdonalds-“Aap ke zamane mein, baap ke zamane ka daam”.

The main reason of this price strategy was to attract the middle class & the lower class of people in India. After this not only the upper class prefers going there but all class of people go there.

Value Pricing: Happy meal – small burger ,fries ,coke + toy Medium Meal Combo- burger ,fries, coke-veg

Rs:75 ,Maharaja Mac Meal Rs: 95 Family Dines under Rs: 300 Price lower than Pak ,Srilanka ,50% lower than U.S.

Break even in 2008 Accumulated losses in initial years but that did not

stop the value pricing strategy so as to reinforce the image of value for money fast food. Continued brand building exercise with full vigour

In September 2009, McDonald’s announced reduction in prices by almost 25% for its lunch and dinner menus. Prices for its extra-value meals like McVeggie and McChicken were reduced to Rs. 85 and 95 respectively from Rs. 110 and 120 respectively. Typically a meal consists of burger, French fries and soft drinks. This strategy was surprising as it came at a time when food prices were increasing by the day.