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McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Pricing for International

Markets

Chapter 18

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Learning Objectives

LO1 Components of pricing as competitive tools in

international marketing

LO2 How to control pricing in parallel import or gray markets

LO3 Price escalation and how to minimize its effect

LO4 Countertrading and its place in international marketing practices

LO5 The mechanics of price quotations

LO6 The mechanics of getting paid

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International Pricing

Setting and changing prices are key strategic marketing decisions

Prices both set values and communicate in international markets

An offering’s price must reflect the quality and value the consumer perceives in the product

In setting a price in international markets, different tariffs, costs, attitudes, competition, currency fluctuations, and methods of price quotation need to be taken into account.

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Pricing Policy

The country in which business is being conducted, the type of product, variations in competitive conditions, and other strategic factors affect pricing activity

Active marketing in several countries compounds the variables relating to price policy

An explicitly thought out, defined pricing policy helps avoid setting a price in haste

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Pricing Objectives

In general, price decisions are viewed in two ways:

• Pricing as an active instrument of accomplishing marketing objectives, or

• Pricing as a static element in a business decision

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Pricing Objectives

The more control a company has over the final selling price of a product, the better it is able to achieve its marketing goals

It is not always possible to control end prices

Broader product lines and the larger the number of countries involved, the more complex the process of controlling prices charged to the end user

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Parallel Importation or

Gray Markets

The possibility of a parallel market occurs whenever price differences are greater than the cost of transportation between two markets

On account of competition, firms may have to charge different prices from country to country

Parallel imports develop when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturer’s regular distribution system

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Parallel Importation or

Gray Markets

The possibility of a parallel market occurs whenever price differences are greater than the cost of transportation between two markets

For example, the ulcer drug Losec sells for only $18 in Spain but goes for $39 in Germany; and the heart drug Plavix costs $55 in France and sells for $79 in London

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Parallel Importation or

Gray Markets

Thus, it is possible for an intermediary to buy products in countries where it is less expensive and divert it to countries where the price is higher and make a profit

Exclusive distribution, a practice often used by companies to maintain high retail margins encourage retailers to stock large assortments, or to maintain the exclusive-quality image of a product, can create a favorable condition for parallel importing

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Exhibit 18.1: How Gray Market Goods

End up in U.S. Stores

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Approaches to

International Pricing

Full-Cost Pricing: no unit of a similar product is different from any other unit in terms of cost, which must bear its full share of the total fixed and variable cost.

Variable-Cost Pricing: firms regard foreign sales as bonus sales and assume that any return over their variable cost makes a contribution to net profit

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Approaches to

International Pricing

Skimming Pricing: This is used to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for a product

Penetration Pricing: This is used to stimulate market growth and capture market share by deliberately offering products at low prices

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Price Escalation

Price escalation refers to the added costs incurred as a result of exporting products from one country to another

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Factors in Price Escalation

Costs of Exporting: the term relates to situations in which ultimate prices are raised by shipping costs, insurance, packing, tariffs, longer channels of distribution, larger middlemen margins, special taxes, administrative costs, and exchange rate fluctuations

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Factors in Price Escalation

Taxes, Tariffs, and Administrative Costs: These costs results in higher prices, which are generally passed on to the buyer of the product

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Factors in Price Escalation

Inflation: Inflation causes consumer prices to escalate and the consumer is faced with rising prices that eventually exclude many consumers from the market

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Factors in Price Escalation

Middleman and Transportation Costs: Longer channel length, performance of marketing functions and higher margins may make it necessary to increase prices

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Factors in Price Escalation

Exchange Rate Fluctuations and Varying Currency Values: Currency values swing vis-à-vis other currencies on a daily basis, which may make it necessary to increase prices

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Exhibit 18.2: Sample Causes and Effects

of Price Escalation

Notes: All figures in U.S. dollars; CIF = cost, insurance, and freight; n.a. = not applicable. The exhibit assumes that all domestic transportation costs are absorbed by the middleman. Transportation, tariffs, and middleman margins vary from country to country,but for the purposes of comparison, only a few of the possible variations are shown.

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Exhibit 18.3: How Are Foreign Trade

Zones Used?

Source: Lewis E. Leibowitz, “An Overview of Foreign Trade Zones,” Europe, Winter-Spring 1987, p. 12; “Cheap Imports,” International Business, March 1993, pp. 98-100; “Free-Trade Zones: Global Overview and Future Prospects,” http://www.stat-usa.gov, 2012.

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Approaches to Lessening

Price Escalation

Lowering Cost of Goods: Firms can lower costs by eliminating costly features in products or by manufacturing products in countries where labor costs are cheaper

Lowering Tariffs: Firms can lower prices by categorizing products in classifications where the tariffs are lower

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Approaches to Lessening

Price Escalation

Lowering Distribution Costs: Firms can design channels that are shorter, have fewer middlemen, and by reducing or eliminating middleman markup

Using Foreign Trade Zones: Firms can manufacture products in free trade zones where the incentive offered is the elimination of local taxes, which keep prices down

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Definitions of Dumping

World Trade Organization (WTO) rules allow for the imposition of a duty when goods are dumped

A countervailing duty or minimum access volume (MAV), which restricts the amount a country will import, may be imposed on foreign goods benefiting from subsidies whether in production, export, or transportation

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Definitions of Dumping

One approach classifies international shipments as dumped if the products are sold below their cost of production

The other approach characterizes dumping as selling goods in a foreign market below the price of the same goods in the home market

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Leasing as a Pricing Tool

Leasing opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash

Leasing can ease the problems of selling new, experimental equipment, because less risk is involved for the users

Leasing helps guarantee better maintenance and service on overseas equipment

Equipment leased and in use helps sell other companies in that country

Lease revenue tends to be more stable over a period of time than direct sales would be

Countertrade as a Pricing Tool

Countertrade is a pricing tool that every international marketer must be ready to employ

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Four Distinct Transactions in

Countertrading

1. Barter: is the direct exchange of goods between two parties in a transaction

2. Compensation deals: is the payment in goods and in cash

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Four Distinct Transactions in

Countertrading

3. Counter-purchase or off-set trade: the seller agrees to sell a product at a set price to a buyer and receives payment in cash and may also buy goods from the buyer for the total monetary amount involved in the first contract or for a set percentage of that amount, which will be marketed by the seller in its home market

4. Buy-back: This type of agreement is made the seller agrees to accept as partial payment a certain portion of the output that are produced from the plant or machinery that are sold to the buyer

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Why Purchasers Impose Countertrade

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

To Force Reinvestment of Proceeds

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Proactive Countertrade Strategy

Is there a ready market for the goods bartered?

Is the quality of the goods offered consistent and acceptable?

Is an expert needed to handle the negotiations?

Is the contract price sufficient to cover the cost of barter and net the desired revenue?

Answering the following questions is suggested before entering into a countertrade agreement:

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Price Quotations

In quoting the price of goods for international sale, a contract may include specific elements affecting the price, such as credit, sales terms, and transportation

Price quotations must also specify the currency to be used, credit terms, and the type of documentation required

A quantity definition might be necessary because different countries use different units of measurement

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Administered Pricing

Administered pricing is an attempt to establish prices for an entire market

Such prices may be arranged through the cooperation of competitors; through national, state, or local governments; or by international agreement.

The legality of administered pricing arrangements of various kinds differs from country to country and from time to time.

A country may condone price fixing for foreign markets but condemn it for the domestic market, for instance.

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Cartels

A cartel exists when various companies producing similar products or services work together to control markets for the types of goods and services they produce

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Diamond Cartel

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Government-Influenced Pricing

Companies doing business in foreign countries encounter a number of different types of government price setting

To control prices, governments may establish margins, set prices and floors or ceilings, restrict price changes, compete in the market, grant subsidies, and act as a purchasing monopsony or selling monopoly

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Getting Paid: Foreign Commercial

Payments

Export letters of credit opened in favor of the seller by the buyer handle most American exports

Another important form of international commercial payment is bills of exchange drawn by sellers on foreign buyers

Cash places unpopular burdens on the customer and typically is used when credit is doubtful, when exchange restrictions within the country of destination are such that the return of funds from abroad may be delayed for an unreasonable period, cash in advance is used

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Getting Paid: Foreign Commercial

Payments

Sales on open accounts are not generally made in foreign trade except to customers of long standing with excellent credit reputations or to a subsidiary or branch of the exporter

Inconvertible currencies and cash-short customers can kill an international sale if the seller cannot offer long-term financing. Unless the company has large cash reserves to finance its customers, a deal may be lost. Forfaiting is a financing technique for such a situation

Exhibit 18.4:

A Letter of

Credit

Transaction

Source: Based on “A Basic Guide to Exporting.” U.S. Department of Commerce, International Trade Administration, Washington, D.C.

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