INTERNATIONAL PRICING DECISIONS

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INTERNATIONAL PRICING DECISIONS Chapter
18PRICING FOR INTERNATIONAL MARKETS
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PRICING IN INTERNATIONAL MARKET

• Domestic vs. International Pricing
• Pricing Policy
• Objective of international pricing
• Role of parallel imports (among subsidiaries and
  others)
• Approaches to International Pricing
• Full vs. variable cost
• Skimming vs. penetration strategy

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PRICE ESCALATION

• Price escalation refers to the variation/increase
  in price across countries or over time. Reasons
  include
• Cost of exporting
• Taxes, tariffs and administrative costs
• Inflation/deflation
• Exchange rate fluctuations
• Varying currency values
• Middlemen and transportation costs
• See Exhibit 18.2 Sample Causes and Effects of
  Price Escalation

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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
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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
Jordan 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.
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REDUCING PRICE ESCALATION

• Lowering cost of goods
• Using efficient method of manufacturing
• Off-shore manufacturing
• Global sourcing
• Lowering product quality
• Lowering tariffs (using customs classification)
• Lowering distribution costs
• Using Foreign Trade Zones
• Dumping
• Taking a lower profit

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IS COUNTERTRADE AN ALTERNATIVE?

• Counter trade refers to barters or buy-back
  arrangements. Reasons include
• 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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TRANSFER PRICING

• Definition pricing within company, also known as
  intracompany pricing
• Transfer pricing helps multinationals in managing
  their
• Competitiveness
• Tariff and tax liabilities
• Profits and cash flows
• Foreign exchange risks
• Government restrictions
• Challenges to (and criticisms of) Transfer
  Pricing

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EXPORT-IMPORT PROCESS AND GETTING PAID

• Documentation involved
• Commercial Invoice
• Letter of Credit
• Bill of Lading
• Shippers Export Declaration (country of origin,
  insurance, terms of sale, product classification)
• Getting paid
• Letter of Credit
• Cash in Advance
• Open Accounts
• Forfaiting

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EXPORTS 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.
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EXPORTS 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
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DISCUSSION QUESTIONS

• Explain how pricing differs in international and
  domestic marketing.
• Why price escalation takes place? Explain how we
  can reduce price escalation.
• What is Transfer Pricing? How does it affect the
  competitiveness of multinational companies?
• Define countertrade and explain why we engage in
  countertrade.
• Discuss the documentation involved and the
  payment procedures in export-import process.
• Explain how export strategy of firm can vary due
  to strong/weak currency conditions.