Ch 18 International Pricing

1
Pricing for International Markets
2
Boundaries for Market Price

• Product costs establish the price floor
• Prices for comparable substitute products create
  the price ceiling

Price Ceiling Optimum Price Price Floor
3
International Pricing Approach
Full Cost vs. Variable Cost
Skimming vs. Penetration
Irwin/McGraw-Hill
4
Pricing Strategies

• Market Skimming
• Charging a premium price
• May occur at the introduction stage of product
  life cycle
• Penetration Pricing
• Charging a low price in order to penetrate market
  quickly
• Appropriate to saturate market prior to imitation
  by competitors

5
Terms of Sale

• Incoterms
• Ex-works seller places goods at the disposal of
  the buyer at the time specified in the contract
  buyer takes delivery at the premises of the
  seller and bears all risks and expenses from that
  point on.
• Delivery duty paid seller agrees to deliver the
  goods to the buyer at the place he or she names
  in the country of import with all costs,
  including duties, paid.

6
Incoterms

• FAS (free alongside ship) named port of
  destination seller places goods alongside the
  vessel or other mode of transport and pays all
  charges up to that point
• FOB (free on board) sellers responsibility
  does not end until goods have actually been
  placed aboard ship
• CIF (cost, insurance, freight) named port of
  destination risk of loss or damage of goods is
  transferred to buyer once goods have passed the
  ships rail
• CFR (cost and freight) seller is not
  responsible at any point outside of factory

7
Costs of Exporting

• ? Taxes
• ? Tariffs
• ? Administrative Costs
• ? Inflation
• ? Exchange Rate Fluctuations
• ? Varying Currency Values
• ? Middlemen and Transportation Cost

18-3
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8
Export Strategies Under Varying
Currency Conditions
When Domestic Currency is WEAK...
When Domestic Currency is STRONG...
Stress, price benefits Expand product line and
add more costly features Shift sourcing and
manufacturing to domestic market Exploit export
opportunities in all markets Conduct conventional
cash-for-goods trade Use full-costing approach,
but use marginal-cost pricing to penetrate
new/competitive markets
Engage in nonprice competition by improving
quality, delivery, and after-sale service Improve
productivity and engage in vigorous cost
reduction Shift sourcing and manufacturing
overseas Give priority to exports to relatively
strong-currency countries Deal in countertrade
with weak-currency countries Trim profit margins
and use marginal-cost pricing
SOURCE S. Tamur Cavusgil, "Unraveling the
Mystique of Export Pricing,"Business Horizons,
May-June 1988, figure 2, p. 58.
Irwin/McGraw-Hill
9
Export Strategies Under Varying
Currency Conditions
When Domestic Currency is WEAK...
When Domestic Currency is STRONG...
Speed repatriation of foreign-earned income and
collections Minimize expenditures in local, host
country currency Buy needed services
(advertising, insurance, transportation, etc.) in
domestic market Minimize local borrowing Bill
foreign customers in domestic currency
Keep the foreign-earned income in host country,
slow collections Maximize expenditures in local,
host country currency Buy needed services abroad
and pay for them in local currencies Borrow
money needed for expansion in local market Bill
foreign customers in their own currency
SOURCE S. Tamur Cavusgil, "Unraveling the
Mystique of Export Pricing,"Business Horizons,
May-June 1988, figure 2, p. 58.
Irwin/McGraw-Hill
10
Sample Causes and Effects of Price Escalation
Foreign Foreign Foreign Example 1 Example
2 Example 3 Assuming the Importer and Same as
2 but same channels with same margins with 10
percent Domestic wholesaler import- and
channels cumulative Example ing
directly turnover tax
Manufacturing net 5.00 5.00 5.00
5.00 Transport, c.i.f. n.a. 6.10 6.10 6.10 Tariff
(20 percent c.i.f. value) n.a. 1.22 1.22 1.22 Impo
rter pays n.a. n.a. 7.32 7.32 Importer margin
when 1.83 sold to wholesaler 0.73 (25
percent) on cost n.a. n.a. 1.83 2.56 Wholesaler
pays landed cost 5.00 7.32 9.15 9.88 3.29
0.99 Wholesaler margin (331/3 percent on
cost) 1.67 2.44 3.05 4.28 Retailer
pays 6.67 9.76 12.20 14.16 7.08 1.42
Retail margin (50 percent on cost) 3.34 4.88 6.1
0 8.50 Retail price 10.01 14.64 18.30 22.66
Notes a. All figures in U.S. dollars c.i.f
cost, insurance, and freight n.a. not
applicable. b. The exhibit assumes that all
domestic transportation costs are absorbed by the
middleman. c. Transportation, tariffs, and
middleman margins vary from country to country,
but for purposes of comparison, only a few of the
possible variations are shown. Turnover Tax
Irwin/McGraw-Hill
11
Price Escalation
The Lower Prices are at Home
New York London Paris Tokyo Mexico City
Aspirin 0.99 1.23 7.07 6.53
1.78 Movie 7.50 10.50 7.89 17.29 4.55 Levi 501
jeans 39.99 74.92 75.40 79.73 54.54 Ray-Ban
sunglasses 45.00 88.50 81.23 134.49 89.39 Sony
Walkman 59.95 74.98 86.00 211.34 110.00 Nike Air
Jordans 125.00 134.99 157.71 172.91 154.24 Nikon
camera 629.95 840.00 691.00 768.49 1,054.42
Los Angeles Madrid Stockholm Berlin Rome
Mariah Carey CD 16.22 16.09 17.82 15.31 20.67 Wind
ows 98 117.99 123.94 179.79 211.20 264.46 Diapers
13.52 5.03 5.42 6.86 10.55
SOURCE Norihiki Shirouzu, Luxury Prices for
U.S. Goods No Longer Pass Muster in Japan, Wall
Street Journal, February 8, 1996, p. B1 and
Elizabeth Fleick, The Cost of Europe Buyer
Beware, Europeans Are Getting Mad as Hell about
Prices, Time International, December 13, 1999,
p. 38.
Irwin/McGraw-Hill
12
Approaches to Lessening Price Escalation

• ? Lower Cost of Goods
• Lower Manufacturing Costs
• Eliminate Functional Features
• Lower Quality
• ? Lower Tariffs
• Tariff Reclassification
• Product Modification
• Partial Assembly
• Repack aging
• ? Lower Distribution Costs
• Shorten Channels of Distribution
• Lower Shipping Costs
• ? Foreign Trade Zones

18-8
Irwin/McGraw-Hill
13
Countertrade

• Countertrade occurs when payment is made in some
  form other than money
• Options
• Barter
• Counterpurchase
• Offset

14
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
Irwin/McGraw-Hill
15
Transfer Pricing

• Pricing of goods, services, and intangible
  property bought and sold by operating units or
  divisions of a company doing business with an
  affiliate in another jurisdiction
• Intra-corporate exchanges
• Cost-based transfer pricing
• Market-based transfer pricing
• Negotiated transfer pricing

16
Benefits of Intracompany or Transfer Pricing

• Lowering duty costs by shipping goods into
  high-tariff countries at minimal transfer prices
  so that duty base and duty are low.
• Reducing income taxes in high-tax countries by
  overpricing goods transferred to units in such
  countries profits are eliminated and shifted to
  low-tax countries. Such profit shifting may also
  be used for dressing up financial statements by
  increasing reported profits in countries where
  borrowing and other financing are undertaken.
• Facilitating dividend repatriation when
  dividend repatriation is curtailed by government
  policy. Invisible income may be taken out in the
  form of high prices for products or components
  shipped to units in that country.

18-13
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17
Gray Market Goods

• Trademarked products are exported from one
  country to another where they are sold by
  unauthorized persons or organizations
• Occurs when product is in short supply, when
  producers use skimming strategies in some
  markets, and when goods are subject to
  substantial mark-ups

18
Dumping

• Sale of an imported product at a price lower than
  that normally charged in a domestic market or
  country of origin.
• Occurs when imports sold in the US market are
  priced at either levels that represent less than
  the cost of production plus an 8 profit margin
  or at levels below those prevailing in the
  producing countries
• To prove, both price discrimination and injury
  must be shown