1

Pricing for International Markets

• Broad-based pricing policies

• Terms of Sale

• Terms of Payment

• Price escalation

• Countertrade

2

Broad-based Pricing Policies

Cost-based

Full Cost - price covers FC+VC (airplanes)

Variable Cost - price covers VC only (semiconductor chips & high volume goods)

Market-based

Skimming - high price to fewer customers

Penetration - low price to more customers

3

Foreign countries attracted to U.S. goods because they cost less

When U.S. Dollar is WEAK...

Foreign countries avoid U.S. goods because they cost more.

When U.S. Dollar is STRONG...

Strategies:

Stress price benefits

Shift manufacturing to U.S. market

Exploit all export opportunities

Conduct conventional currency based trades

Use full-costing approach

Buy needed services (advertising, insurance, transportation, etc.) in U.S.

Bill foreign customers in U.S. currency

Strategies:

Engage in nonprice competition: improved quality, delivery, support

Shift manufacturing overseas

Prioritize exports to strong-currency countries

Deal in countertrade with weak-currency countries

Trim profit margins and use marginal-cost pricing

Buy needed services abroad and pay for them in local currenciesBill foreign customers in their own currency

4

Seller assumes no shipping or transportation costs:

EX (e.g. factory or warehouse): price covers goods only.

Seller assumes costs of shipping to a water port :

FAS (Free Alongside): price includes goods, port charges & delivery to shipping vessel. Buyer assumes costs of loading onto the vessel & other costs.

FOB (Free on Board): price includes costs of goods, delivery, port charges and loading onto the vessel.

Seller assumes costs of shipping to destination port:

C&F (Cost & Freight): to the named place of debarkation. The buyer picks up cost of insurance.

CIF (Cost, Insurance, Freight): price includes all costs to a named place of debarkation/landing.

Terms of Sale

5

Exporting-related costs that add to price escalation

1. Modifying product for foreign market; manufacturing costs

2. Operational costs: administrative, promotion & shipping costs

3. Entry costs: • Taxes, Tariffs• Inflation, Exchange Rate Fluctuations, Varying Currency

Values

6

Cosmetics and Haircare Productsto South Africa

Effect of Import Duties on Costs

Product Category:

Destination:

Duties & Additional Taxes:

Result:

Cosmetics and Haircare Products Containing Alcohol.

South Africa

•Import Duty (40%of F.O.B. value of product)

•Import Surcharges (40% of F.O.B. value of product)

•Ad valorem excise tax (37.5% of ad valorem value)

•Value-Added Tax (14% of F.O.B. value + total duties)

An item classified as a cosmetic and Haircare product with a F.O.B. value of $ 1 escalates to a final cost of $ 2.73 to the South African importer.

7

Pricing in Honduras

• Demand for consumer goods is price elastic• Price is important to import receptivity • U.S. exporters should carefully analyze both cost and market-

based pricing approaches• Price escalation inflates retail price due to taxes on C.I.F.

value, import duties, transportation costs, and distributor margins

• sales tax recently increased from 7% to 12%

Source: Country Commercial Guide: Honduras (1999)

8

Reducing Price Escalation

Lower Cost of Goods Lower Manufacturing Costs Eliminate Non-essential Features Lower Quality

Lower Tariffs Tariff Reclassification Product Modification Partial Assembly Repackaging

Lower Distribution Costs Shorten Channels of Distribution Lower Shipping Costs

Foreign Trade Zones

9

Mary Kay: People’s Republic of China (PRC)

Mary Kay reduces price escalation by:• importing only key ingredients (reduces tariffs) &

manufacturing in the PRC (lowers labor costs)• shortening distribution channels; PRC factory 17

regional beauty ctrs retailers promoters

customers• exporting to other markets (Malaysia, Phillipines,

Thailand) through PRC vs. from U.S.

Mary Kay price range:• eye shadow applicator $ 0.72 U.S. • to perfume $45.91 U.S.

Hulme, V.A. (2000, Jan-Feb). Mary Kay in China: More than makeup. The China Business Review, 42-46.

10

Countertrades

Barter - direct exchange of goods (no cash)

Compensation - payments made in both goods and cash

Counterpurchase (Offset Trade) - seller receives cash for purchase, and agrees to buy a different product back from the buyer in the amount of the original sale (or some % of original sale).

Product Buy-Back - cash sale of plant, equipment or technology, with agreement to buy back products manufactured by the equipment

11

Why Foreign Purchasers ImposeCountertrade Obligations

To Preserve Hard Currency

To Improve Balance of Trade

To Gain Access to New Markets

To Upgrade Manufacturing Capabilities

To Maintain Prices of Export Goods

12

External Price Controls

• Cartels - e.g., shipping cartel, OPEC

• Foreign Government Controls - e.g., Malaysian government is sole buyer of imported rice; Canada Wheat Board controls price Canadian Farmers get for their wheat

13

Cash in Advance

Letter of Credit

Bill of Exchange

Open Accounts

Risk to Exporter/Seller

Least

Highest

Cost to Importer/Buyer

Highest

Least

Arrange for Payment