From: “Audi India Raises Vehicle Prices on Rupee Fall“
The past couple of decades have seen tremendous growth in companies in America and Europe entering emerging markets, such as India, China, and Brazil. One of the challenges they have had, and still have, is implementing a global pricing strategy. Several factors make developing a global pricing strategy a challenge: economic factors, regulation, tariffs in different markets, price controls, etc. Two of these factors can have a large impact. One is strategic – currency exchange rate fluctuation – and the other is tactical – global vs. local decision making.
Emerging markets have seen their currencies weaken significantly against the US dollar. The Indian Rupee, for example, has lost ~15% to the dollar since the beginning of 2013. This has some very serious implications for pricing managers. While they cannot control any of these factors influencing their global pricing strategy, they must adapt to them when selling in a specific country.
To hedge some of these currency fluctuation risks, companies source raw materials and manufacture products in the country they sell in. This enables them to limit impact from swings in exchange rates and offers greater pricing flexibility in local markets.
Controlling their own distribution through company owned subsidiaries allows them to have even greater control over final prices, including the ability to adjust prices rapidly. Once companies develop their pricing strategy, they still have to deal with day-to-day pricing decision making. Having a global presence will require companies to figure out where the decisions get made – at corporate or at the local level. Both centralized and the de-centralized approaches have their benefits.
First, having a centralized approach will allow companies to have consistency of pricing and marketing execution across all markets they do business in. Inconsistencies in pricing between regions can create arbitrage opportunities and lead to the emergence of gray markets. This will result in distribution channels beyond the control of the company, leading to lost profits and poor reputation. Second, having a centralized approach will allow for a coordinated competition against global competitors who also operate in the same markets.
Decentralized decision making, on the other hand, will allow teams to make quick decisions at the local level. Timing can be key when you have to respond to competitors’ price changes. Local teams have a better understanding of the market and customer needs, and this information needs to be leveraged for making good decisions.
Having a well-planned global pricing strategy is critical for companies that operate in markets other than in their home market, and there are many factors that go into having a good global pricing strategy. Firms have to take into consideration all of the factors mentioned above when thinking through their pricing for international markets.
Ashwin Somakumar 