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  • 7/29/2019 310 310 Pricing



    Based on Philip cateora and RM Joshi- any books is okThink- Suppose your company is putting a new factoryhave to import- computers, heavy machinery, stainless

    steel, generators.Which countries you will prefer?

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    Pricing fundamentals

    Basics of pricing - Cost and existing contributions decide the bottom Demand supply positions and uniqueness of product

    and services decide the top

    Competition or market prices give orientations Company policy to international marketing decide

    actual price- entry at any cost, continuity of business,big volumes or only if better profit

    Others- Country and customer specific pricing Future prospects associated with this contract Payment conditions, foreign exchange fluctuations

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    Factors influencing pricingdecisions in international markets

    cost full cost, marginal cost, Full cost plus mark up, Marginal cost- these prices could attract anti dumping

    Competition- high in India, OECD, China, low in Angola,Mali Algeria

    irregular or unaccounted payments- bribes inBangladesh, India, Russia, Nigeria, Phil, Ukraine

    purchasing power of customers- discussed elsewhere buyers behaviour- performance (in developed countries)

    or price (in poorer countries) based depending on cultureand advancement foreign exchange fluctuations- Singapore $ very stable,

    Indian rupee, GBP moderately stable against dollar

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    Terms of payment in internationaltransactions

    Different terms of payments have different levels of security, speedcost and risk. Major modes-

    advance payment- TTs, Wire, safest, fastest, popular for smallerpayments,

    after signing contracts but before shipment, risky for buyer

    open account or running account- (do not follow Joshi) its purecredit sale. very very risky, normally not in use. Used in case of exports to subsidiary/branch of exporter or to old


    consignment- not popular, shipments on consignment basis, titlewith exporter,

    consignment is sold by agents or company rep. under consultation withshipper rates decided at the time of sale, tentative value declared in GR require warehousing at destination, Used for exports to own subsidiary

    or branch or to old and reliable agents

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    Payments- LC- refer Philip cateorachapter 15

    Letter of credit- most popular specially for biggertransactions

    safest, for shipper and buyer both LC shifts the credit risk from buyer to opening bank

    Could be revocable or irrevocable. Irrevocable is safe asit means that once LC is accepted by exporter it wont berevoked by opener

    Exporter could add further security by asking buyer forconfirmed LC. Confirmation is done by an Indian bank

    and Indian bank take responsibility of paying even ifforeign bank and buyers fail. Confirmation costs extra and restrict the LC. So

    avoided while dealing with old customers

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    Revolving immediate after buyer accept docs andpays the LC is reinstated without opening a new LC

    Back to back and freely transferable-

    Availability of credit- issuing bank authorises their

    corresponding bank in India to honour the docs onopeners behalf, Unless credit stipulate availability with issuing bank,

    nominated bank is authorised to pay In freely negotiable credits any bank is nominated bank.

    These are better for seller as their own bank handle thenegotiation and discount/purchase of drafts If not freely negotiable, credit must be available for

    negotiation with shippers bank

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    Signing Contract is starting point to open LC LCs have universally standard formats with provisions

    for special conditions to be fulfilled by exporter Buyer applies to their bank with copy of contract,

    specifying special instructions. Normally buyers fax/mail a copy of application to shipperfor approval before applying as amendments areexpensive- usd 80 to 180 per amendment

    LCs are not flat payment guarantees, rather based on

    certain contractual fulfillments by shipper. Shippershould examine terms of LC carefully and comply Discrepancies require acceptance by buyer, if not

    accepted, LC become in operational

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    Bills of exchange- like hundis- drawn by sellers onforeign buyers

    Seller take all risks till payments are received Seller draws the draft on buyer with all negotiable and

    original documents for collection through their bankers tobuyers bankers Buyers bank present it to buyer for acceptance and

    payments on sight or on deferred due dates sight mean payment on presentation and acceptance DAP,

    safer than DA. Documents are handed over on payments only or on deferred due dates, Usance or time draft, DA, like 30, 45, 90

    or 120 days or as agreed, BLs are handed over on acceptanceand buyer take delivery. Docs are presented again on due date.Risky, buyer may not pay on due or not at all on some pretext

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    Others- part cash (10-15%) beforeproduction and balance before shipmentor part cash (25%) before production and

    balance bills of exchange/CAD- withregular customers

    Forfaiting and factoring- first is one time

    and second is running arrangement ofdiscounting with bank or others

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    INCOTERMS- www.iccwbo.org

    Known as International commercial term- INCOTERMSdeveloped by International Chambers of commerce-ICC, Paris in 1936. INCOTERMS 2000 is current version

    Define cost risk and obligations of two parties.

    Incoterms apply if mentioned in contract or LC Pre carriage mean transportation up to vessel/port Main carriage mean sea freight UnderF terms- pre carriage paid by seller and main

    carriage by buyer

    UnderC terms pre carriage and main carriage paid byseller but seller risk limited till delivery to main carrier

    UnderD terms all risk and expenditure up to destinationare in seller a/c

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    Terms of delivery

    CPT (carriage Paid To) named place of destination likeCFR any mode

    DAF (Delivered at Frontier) named place, land border,cleared for export but not import

    DES (Delivered Ex Ship) named port of destination likeCFR but CFR delivers at loading port DEQ (Delivered Quay) named port of destination- DEQ

    plus discharging, delivery in dock, not cleared for import DDU (Delivered Duty Unpaid) named place of

    destination, import duty unpaid DDP (Delivered Duty Paid) named place of destination-

    cleared for import, all duties and taxes paid but notunloaded

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    selling a product or commodity below the cost ofproduction or at a lower price in overseas markets ascompared to its price in domestic markets.

    WTO consider it unfair trade practice and attract penal

    duty if harm domestic industry of importer types of dumping

    sporadic dumping- occasional not regular

    predatory dumping- it forces competitors out and after gettingcontrol the predator increases price. Developed countries in farm

    products, Japan in electronics, persistent dumping- continuous, China in consumer items and


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    Transfer pricing

    Transfer Pricing relate to pricing amongst different unitsof corporate like- consignment transfers or

    exports to branches, subsidiaries, joint ventures, SIAs or

    otherwise related parties MNCs, with offices and branches in many countries,

    have scope to manipulate prices to exploit- Normally pricing should evenly distribute profits amongst

    producing, procuring and distributing units

    Companies use different units to manipulate taxes income tax by generating major income in planned country

    tariffs in importing country

    Reduced foreign exchange exposures

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    Transfer pricing- Legal frameworks

    Re-invoicing or third country invoicing- such countries have, liberal tax laws and or corporate / head

    office Value additions only assembling/repacking but shown major on


    governments are getting concerned, increasinglyrestrictive and paying special attention to transfer pricingin tax audits.

    Govt. departments compare market based (ArmsLength) transfer pricing to that of related firms transfer

    pricing India introduced laws related to transfer pricing in 2001,

    US in 1994, UK in 1999, Germany 1983, Japan 1986,South Korea 1996, Malaysia 2003, Australia 1994----

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    Grey marketing

    import or export of goods and marketing them throughunauthorized channels

    conditions that create profitable opportunity for a parallelmarket-

    Variations in the value of currencies between countries- Whenthe dollar was high relative to the West German mark, CabbagePatch dolls were purchased from German distributors at whatamounted to a discount and resold in US

    Purposefully restricting the supply of a product in a market.Mercedes-Benz automobile supply was limited in the U.S.

    Americans returning from Germany with cars used to sell, in US,for double the price they paid in Germany. This situationpersisted until the relative value of the dollar to the Markweakened and controlled distribution ended.

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    Grey markets- competition fromwithin

    Parallel importing- when prices are cheaper in home market or inone of overseas markets. importers buy from distributors in homecountry or such cheaper third country and sell them to distributorsnot part of the manufacturers regular channel. Mercedes cars from Germany to US earlier Coke from US and Canada in HK, Taiwan Pampers from Saudi to India

    Re- importing when prices in overseas markets are cheaper thanhome country- Electronics in Japan- Panasonic cordless phones @ $59.95 in NY versus $152 in Tokyo and Sony Walkman @ $89.00 in NY versus $165.23 in Tokyo OTC Medicines in US normally start with USD 15.00, ( own labels @ $

    10.00) for a pack of 30 pills, cost half in Canada and about $ 0.75 inIndia. Prescriptions in US are more expensive

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    Grey markets- competition fromwithin

    Parallel Sale of copyrighted material like,movie and programs on CDs/DVDscommon.

    Taiwan, HK, New Zealand, Australia banparallel trade but Canada and Europe donot if product is official

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    Price escalation in USD for cotton yarn,fabric brand garments using same raw


    Price in Indian market- Rs. 150.00

    CFR price- 174.00 or usd 3.90 or say 4.00

    Import duty for yarn 10% Import duty for for fabric- 25%

    Import duty for garment 50%

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    Price escalation in USD for cotton yarn, fabricbrand garments using same raw material

    Items Yarn/ kg Fabric/kg Ts/Pcloose

    Ts /Pc box


    Stuffing 20

    frt 1500$7000 7000 7000 2800

    Price- India 2.50 2.75 1.50 1.70CIF Price 2.90 3.15 2.00 3.00

    Import duty 0.30 0.80 1.00 1.50

    Importer + 0.80 1.00 1.00 1.50

    repacking xxxx xxxx 0.50 xxxx

    Wholesaler 1.00 1.25 1.15 1.50

    Retailer xx xx 2.85 3.75

    Final price 5.00 6.20 8.50 11.25

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    Escalation- books by S.C.Jain andPhilip Cateora

    When products moveacross borders, additionalcosts are incurred like- cost of the physical

    movement of goods fromexporters godown tobuyers godown

    tariffs and non-tariffbarriers.

    Charges and margins ofintermediaries like buyer,converter, wholesaler,retailer

    This addition of cost overexport price is priceescalation.

    Companies able tocontrol or minimise, someelements of escalation,could expect better profit,price competitiveness

    and above all smootherbusiness

    How to minimise???

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    Options- host country or third



    assembly, repacking

    FTZs- reduction in cost offinancing (escalations)

    shortening channels,


    net rate invoicing,

    consignment sales,

    Unethical options- under invoicing,

    wrong classifications

    bribing custom pass.

    Not possible in allcountries.

    Could attract anti dumping