When selling/buying product internationally, it’s vital to understand different approaches the company can take in this intra-corporate transactions. The main goal of transfer pricing is to maximize overall after-tax profits of company. Other goals are as follows: decreasing occurrence of custom duty fee, avoiding the quota restrictions on imported goods and lowering exchange exposure. Therefore, we are going to exam some of the common methods of transfer pricing for international marketing.
Transfer At Cost Approach – this method is commonly used by companies that recognize that sales by global partners contribute to company profitability by creating economy of scale in local manufacturing operations. This tactic adopts lower costs lead to better affiliate implementation, which ultimately profit the entire organization. This method helps keep company’s payments at a minimum. Firms utilizing this approach have no profit expectation on transfer sales. However, their expectation is that the partner will generate the profit by subsequent resale.
Cost-Plus Pricing Approach – firms utilizing this approach are selecting the position that profit must be revealed for any services or products at every phase of movement through the business system. This approach may result in a price that is very irrelevant to competitive or demand situations in international markets.
Market –Based Transfer Price – also referred to arm’s length pricing, this approach is the form of transfer pricing in which the sales transactions happen between two unrelated (arm’s length) parties. This approach can deprive governments of their fair share of taxes from global firms and expose international business to possible double taxation. This method is often utilized in commodity –type goods, where the market price is set without variation.
Cost – Plus Pricing Method- this approach is commonly used by companies who need to show the profit for any product or services at every stage of transfer through the firm’s system. This method is successfully used by many experts, even though cost-plus pricing may result in a price that is unrelated to competitive or demand situations.
Below are some advantages of the international transfer pricing strategies:
Decreasing income taxes in high-tax nations by overpricing commodities transferred to units in such nations; incomes are eliminated and shifted to low-tax nations.
Reducing tax costs by shipping commodities into high-tariff nations at minimal transfer prices so that payment base are low.
Assisting dividend repatriation (process of converting a foreign currency into the currency of one’s own country) when dividend repatriation is controlled by government policy by inflating prices of commodities transferred.
With the economic boom, Chinese customers are becoming one of the significant groups for luxury companies among all different kinds of area from fragrance to cars. In the next five years, with the disposable incomes of consumers rising, the demand for premium brands had grown. However, the high import taxes, unstable currency and the huge difference between the retail price in China and Europe, more than 70% Chinese choose to buy luxury brands in other countries rather than in their local boutique.
Due to the large number of customers choose to purchase luxury good overseas, many luxury brands are facing difficulties in developing in China and received profit losses. Additionally, the huge difference in price created another industry called Daigou. Specifically, Daigou means Chinese who either live in Europe or United States, they helped their customers to purchase luxury goods and ship it to China via post. They declared the value of package on purpose in order to avoid the custom tax of Chinese government. This industry has been in the Chinese grey luxury market for years. In order to maintain a healthy relationship between the luxury brands and Chinese consumers, the government established laws specifically to prevent the increasing number of daigou industry. Firstly, Chinese government opened more than 30 duty free shops at airports and borders to try to attract travelling consumers back to speding at home. Moreover, Chinese customs announced new import duties on popular luxury brands and established stricter customs checks at airport and border patrols for travelling consumers.
For the luxury brands, it is a challenge for them to set their retail price in China since it will significantly affect their future growth. Apparently, different luxury companies chose their own methods and regulations to the Chinese market. For example, although Louis Vuitton still raised their retail prices in China compared to Europe, CHANEL decided to narrow the range between China and Europe retail prices. The following charts describes several brands for the price differences.
Hence, how to properly define the retail price in China is a essential question for all luxury companies.
3D printing could just change the way we look at things, it could also change the way companies manufacture products. Just think of the possibilities that this could open, and the industries that 3D printing could bring to an end! Imagine this, a 3D printer at home, an item that you like online, you purchase the item, download it, print it, and that’s it. You don’t have to drive somewhere to get it, you don’t have to wait for it to ship. Isn’t that going to save you money? isn’t it going to change the way companies work? isn’t it going to change the way companies price their items?
Acoording to this article in HBR, “As applications of the technology expand and prices drop, the first big implication is that more goods will be manufactured at or close to their point of purchase or consumption. This might even mean household-level production of some things. (You’ll pay for raw materials and the IP—the software files for any designs you can’t find free on the web.) Short of that, many goods that have relied on the scale efficiencies of large, centralized plants will be produced locally. Even if the per-unit production cost is higher, it will be more than offset by the elimination of shipping and of buffer inventories. Whereas cars today are made by just a few hundred factories around the world, they might one day be made in every metropolitan area. Parts could be made at dealerships and repair shops, and assembly plants could eliminate the need for supply chain management by making components as needed.”
Also, the idea of a do-it-yourself manufacturer is really coming to the forefront. Similar to the way the Internet leveled the playing the field, solving the challenges of reach and enabling everyone to play, that’s what is happening with manufacturing today. you don’t need all of the capital involved in the creation of things anymore. You now have the opportunity at a small scale, even as a hobbyist, to do it yourself, and to do it fairly eloquently. With 3D printing being applied to materials ranging from chocolate to cells to concrete, and being used by corporations, departments and consumers, organizations need to understand how the future of 3D printing manufacturing technology can be used for a for competitive advantage – before their competitors do. According to CSC, a global leader in providing technology enabled business solutions and services.
Consumers often make decisions based on what they hear or see. Brand awareness is a crucial factor in marketing exertions. Advertising play a huge role imprinting in people’s minds certain brands and what they stand for. With the huge selection of products today, inexperienced consumers use their brand awareness as a numerous choice method in buying products. As consumers, even when we are exposed to another brand that serves the same need, we tend to select the same old brand that we already know. Even if the new brand has a lower price, beacuse as a human nature, we tend to be risk averse and less likely to change. Lets take sports drinks as an example, PowerAde and gatorade, they both serve the same need, have the same flavors, personally i feel they both taste the same. However, Gatorade has a slightly higher price, but, some consumers prefer it on PowerAde. This is because they built an image in there minds that this product serves there needs in a better way. And it is not easy for them to shift to PowerAde.
The video below explains a very interesting fact about how colors can impact our willingness to pay. As human beings we are not all trained to deal with numbers. We tend to look at colors and visuals before looking at prices, and here is where company branding play a huge role. Taking cars as an example, a consumer’s willingness to pay increases if a car’s color is red. The human mind tend to send a signal that it is brighter and better, when in reality it is the same. Another factor that determines how we react towards certain products is advertising. When we watch the same commercial over and over and the brand name keeps on popping in front of our eyes, or we listen to the name very often, we tend to shift towards this certain product. Not because it is better, just because in our minds we created an image that this product is what we desire.
Moreover, brand awareness is also related to pricing, and consumers perception towards prices, specially when consumers are price sensitive. Pricing decisions are very important when launching a certain product. Consumers will link the price to this product, and will make decisions based on this fact. Changing the price later can be critical because of what consumers have perceived in there minds. Lets take chocolate bars as an example, in the 1970’s chocolate prices increased, firms found it hard to simply change the price on candy bars, because this will change there image in consumers minds. What they did is that they simply made chocolate bars smaller in size, selling them for the same price!
Why does success for any business differ from one country to another? And why is understanding the culture a key indicator to the success of a firm? Shopping behaviors differ from society to another, but can these differences influence store prices? Unfortunately they do, this is because price sensitive consumers search for lowest prices, thus, firms adapt there pricing strategy to meet these consumer demands. Lets take Walmart as an example, it is very successful in the US market, however, when it first expanded to China it wasn’t. This was due to many reasons such as having a different culture, labor, infrastructure, demand, suppliers and different competitive dynamics.
Chinese tend to be more selective in there purchasing for groceries than others. They search for lower cost and better quality. They also tend to spend a long time shopping at grocery stores and do not spend much money, while US consumers spend less time and more money. This is because Chinese consumers go to grocery stores on a daily basis, while US consumers go once or twice a week. Retailers’ pricing strategy is generally effected by the selectiveness of Chinese consumers. At start Walmart didn’t offer them what they were looking for, which resulted in losses. In this case, how should Walmart react? They must offer lower prices for a similar quality of goods to Chinese than Americans.
All this said I wonder how come Walmart offer lowest prices and all there marketing campaigns market to this factor, but at the same time Chinese consumers were sensitive to their prices? This is probably because of suppliers in the US, Walmart had a sufficient number of suppliers while in China they didn’t when they first started which made it harder for them to reduce costs, and easier for competitors to offer lower prices. However, after recognizing this, Walmart China managed to solve the issue and build a strong reputation in the Chinese market. Given all the considerations above, we can determine that building a successful competitive advantage in one country doesn’t mean it will succeed in the other. When expanding globally, the firm must add value to what if offer. This is done through understanding and analyzing economic, geographic and cultural systems. And this is what Walmart did, after realizing their mistakes; they managed to engage more in the Chinese culture. They understood the demand and applied cost reduction by having good interaction with retailers, which helped increase their local responsiveness in the Chinese market.
The video below explains differences between Walmart US and China, and how Walmart China managed to overcome some of these differences.