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