1 pricing for international markets broad-based pricing policies terms of sale terms of payment...

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Pricing for International Markets

• Broad-based pricing policies

• Terms of Sale

• Terms of Payment

• Price escalation

• Countertrade

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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

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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

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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

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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

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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.

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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)

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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

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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.

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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

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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

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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

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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