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Transfer Pricing

A common pricing practice used to be to price products differently for different markets.  When I worked for Microsoft Canada, for instance, we used to routinely price our products at the US price, converted to Canadian dollars, and then augmented by 10 or 15%… a small price hike that Canadian customers bore for the privilege of being Canadian.  Since the English language version was sold in both the US and Canada, the trick was to jack up prices just high enough that a Canadian customer wouldn't choose to buy "grey market" goods from the US.  European transfer pricing was even higher, as there really isn't much of a market for German, or Scandinavian language products outside of their home markets.

Transfer pricing still exists in some industries, enforced by egregious contract terms which penalize the consumer for cross border shopping.  Just try, for instance, to buy a car and bring it across the border.  Chrysler's contract voids the warranty when you do that.

By and large, however, I thought that the practice had become less common in the internet age.  Software is just bits, and transfer pricing is hard to justify when you're just shipping bits around.  How wrong I was. 

This afternoon I tried to purchase Apple Quicktime Pro 7.1.  I went to Apple.com, found QuickTime Pro for $29.97, added it to my cart, and tried to check out.  Nope… can't put a Canadian credit card or address into the US Apple Store.  Heading over to Apple Canada, I discovered that they're asking $37.99.  The correct price, converted, is $34.76.  To download the same bits in Canada, Apple asks a 9% premium.

Apple isn't the worst violator, though.  Microsoft Canada lists Office 2007 Professional Upgrade for $439, versus $329.95 in the US.  The correctly converted price is $382.74. That's a 14.7% premium.

It's a stupid and greedy practice which should be abandoned.  Canadians already have less disposable income than Americans, due to the tax regime here, and we tend to be much more price conscious than our brethren south of the border.  If prices were lower, these corporations might see higher uptake.  Certainly when I did the MS-DOS 6 launch here in Canada, we saw that.  We priced our software slightly below the US price in order to make a natural C$50 price point, and saw nearly twice the sales.

Transfer pricing: just say no.

{ 6 comments… add one }

  • Jim Courtney March 25, 2007, 5:19 pm

    Two issues:

    1. Transfer pricing is usually referred to, in the accounting world, as the price charged by a parent to a country subsidiary for a product. When I ran Nicolet Canada in the late 1970's/early 80's Nicolet Canada could buy product at a 15% discount (to establish the transfer price) but then were expected to make a 20% gross margin on the final sales to end user customers (usually education, healthcare and industrial enterprises). The real issue here was to balance out a transfer price to a level where the Canadian and US Tax authorities were happy that tax avoidance or tax regime shifting was not an issue in establishing a transfer price. Competition usually took care of whether or not we could make the 20% gross margin.

    2. What you describe above is what I would have called "country market pricing". When I was in the PC Hardware (AST) and software (Quarterdeck) business we let market forces dictate country market price. All our product went through distributors who purchased directly from the parent company – with discounts based on US Suggested Retail pricing — and imported the product. The distributors, who took the foreign exchange risk, would resell to retailers who, in the end, established end user pricing (as required under competition law). Usually customers ended up getting product well below the suggested retail price, driven down by competitive forces within the sales channel. As a subsidiary we would independently bill our parent company our operating costs plus 10% — effectively for providing sales and marketing services; this kept the tax people happy on both sides of the border. (Of course in those days we never had an Internet that would allow e-commerce such as you described with your Apple experience.)

  • Alec March 25, 2007, 5:43 pm

    Correct Jim. It's more aptly described as country market pricing. And yes, usually customers get product well below suggested retail, but the spread between countries still exists if the dealer price in one place is higher than the other.

    In Apple's case, it appears that the store site is hosted on the same server as the US site as well. Moreover, when I made my purchase, what I bought was a license key. 9% extra margin for a license key because I happen to be Canadian?

  • Andrew March 25, 2007, 6:33 pm

    Check out Vonage.ca – talk about bend over and take it !! 42%, I have decided to 'just say no'
    http://beyondthebleedingedge.blogspot.com/2006/09

  • Brad Templeton March 25, 2007, 11:23 pm

    Of course, the more they push these things, the more incentive there is for people to get U.S. credit cards if that's going to be the method of enforcement. So there is some cap on it. It's certainly not hard to get a US billing address for non-physical goods.

    There was also always a fine line on DVD region coding, which also tried to control markets over borders. However, it just became very common as DVD players got cheaper for people outside the USA to get Region 1 DVD players or multiregion players (which was possible due to bugs, or if you used deCSS)

  • Phil Wolff March 26, 2007, 8:28 pm

    So, one world price?

    How would you feel if the price were lower than in the US? If Canadians got the same products for less?

    Also, would it be cool to have lower prices for the same intangible product in the developing world?

  • Alec March 27, 2007, 2:49 am

    I think it's probably more nuanced than one world price, Phil, and there are ways to build product that is different for emerging markets –> localization, as an example. But English product priced differently in two G8 countries? C'mon…

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