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Prepare Your Company for Global Pricing

October 15, 2000 | Das Narayandas, John Quelch, Gordon Swartz | Strategy

As adapting to globalization becomes increasingly necessary, business customers are pressuring suppliers to accept global-pricing contracts (GPCs). So far, most of the benefits of GPCs have redounded to the business customer. Although purchasers may promise a supplier access to international markets, guaranteed production volumes and improved economies of scale and scope, too often they fail to deliver. They may not buy as much as planned, may demand customization that the supplier cannot leverage with other customers, may force the supplier to drop the customer's competitors -- or may fall on hard times and have to scale back commitments. That is why, before signing a contract, suppliers should do due diligence.

According to Das Narayandas of Harvard Business School, John Quelch of the London Business School and Gordon Swartz of Oxford Associates, suppliers must fully understand the customer's global strategy and the business conditions in its respective markets. They also need a firm grasp of their own strategy and local practices. Which GPCs would be suitable and which would be detrimental? Suppliers don't want to turn down all GPCs. They recognize that their global customers may be both their largest customers and their fastest growing ones -- and understandably, they want to share in the benefits of growth.

Using data collected from interviews with global-account managers in diverse industries on four continents, the authors bring the global concepts down to earth to help suppliers navigate the uneven terrain. By exploring why customers want GPCs, under what circumstances the contracts are likely to profit suppliers, and how to successfully implement contracts, Narayandas and his colleagues identify preparation as the key to success. The more information suppliers can gather (for example, about variances in their own pricing in different markets, about the cost to serve the customer, about exchange rates and local regulations), the better their negotiating position. During negotiations, it might be useful to know whether the customer demands the same price in every market regardless of the supplier's varying costs -- yet continues to charge its own customers varying prices.

A carefully negotiated GPC can be a winning outcome for both supplier and customer and can serve as the foundation for a broader, mutually advantageous relationship that extends beyond price.

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