When companies sell their goods abroad, they face a price escalationproblem. A
Gucci handbag may sell for $120 in Italy and $240 in the United States. Why? Gucci
has to add the cost of transportation, tariffs, importer margin, wholesaler margin, and
retailer margin to its factory price. Depending on these added costs, as well as the
currency-fluctuation risk, the product might have to sell for two to five times as much
in another country to make the same profit for the manufacturer. Because the cost
escalation varies from country to country, the question is how to set the prices in dif-
ferent countries. Companies have three choices:- Setting a uniform price everywhere:Coca-Cola might want to charge 60 cents
for Coke everywhere in the world. But then Coca-Cola would earn quite dif-
ferent profit rates in different countries because of varying escalation costs.
Also, this strategy would result in the price being too high in poor countries
and not high enough in rich countries. - Setting a market-based price in each country:Here Coca-Cola would charge what
each country could afford. But this strategy ignores differences in the actual
cost from country to country. Also, it could lead to a situation in which
intermediaries in low-price countries reship their Coca-Cola to high-price
countries. - Setting a cost-based price in each country:Here Coca-Cola would use a standard
markup of its costs everywhere. But this strategy might price Coca-Cola out
of the market in countries where its costs are high.
Another problem arises when a company sets a transfer price(i.e., the price that it
charges to another unit in the company) for goods that it ships to its foreign sub-
sidiaries. Consider the following:■ Hoffman-LaRoche Some years ago, the Swiss pharmaceutical company
Hoffman-LaRoche charged its Italian subsidiary only $22 a kilo for Librium
so that it could report high profits in Italy, where corporate taxes were lower.
It charged its British subsidiary more than $100 per kilo for the same Lib-
rium so that it could make high profits at home instead of in Britain, where
corporate taxes were high. The British Monopoly Commission sued Hoffman-
LaRoche for back taxes and won.If the company charges too high a price to a subsidiary, it may end up paying
higher tariff duties, although it may pay lower income taxes in the foreign country.
If the company charges too low a price to its subsidiary, it can be charged with dump-
ing. Dumping occurs when a company charges either less than its costs or less than
it charges in its home market, in order to enter or win a market. Zenith accused Japan-
ese television manufacturers of dumping their TV sets on the U.S. market. When the
U.S. Customs Bureau finds evidence of dumping, it can levy a dumping tariff on the
guilty company. Various governments are watching for abuses and often force com-
panies to charge the arm’s-length price—that is, the price charged by other competi-
tors for the same or a similar product.
Many multinationals are plagued by the gray-market problem. A gray marketoc-
curs when the same product sells at different prices geographically. Dealers in the low-
price country find ways to sell some of their products in higher-price countries, thus
earning more. For example:■ Minolta Because of lower transportation costs and tariffs, Minolta sold its
cameras to dealers in Hong Kong for a lower price than it sold the same cam-
eras to dealers in Germany. The Hong Kong dealers worked on smaller mar-
gins than the German retailers, who preferred high markups to high volume.
Minolta’s cameras ended up selling at retail for $174 in Hong Kong and $270
in Germany. Some Hong Kong wholesalers noticed this price difference and
shipped Minolta cameras to German dealers for less than they were paying
the German distributor. The German distributor couldn’t sell his stock and
complained to Minolta.part three
Developing
Marketing(^384) Strategies