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Chapter 18

Pricing for International Markets

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International Pricing Approach

Full Cost vs Variable CostFull Cost vs Variable Cost

Skimming vs PenetrationSkimming vs Penetration

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Costs of Exporting

Taxes

Tariffs

Administrative Costs

Inflation

Exchange Rate Fluctuations

Varying Currency Values

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Export Strategies Under VaryingCurrency Conditions

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

When Domestic Currency is WEAK...

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

When Domestic Currency is STRONG...

SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"Business Horizons, May-June 1988, figure 2, p. 58.

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Export Strategies Under VaryingCurrency Conditions

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

When Domestic Currency is WEAK...

When Domestic Currency is STRONG...

SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"Business Horizons, May-June 1988, figure 2, p. 58.

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Sample Causes and Effects of Price Escalation

Manufacturing net $ 5.00 $ 5.00 $ 5.00 $ 5.00Transport, c.i.f. n.a. 1.10 1.10 1.10Tariff (20 percent c.i.f. value) n.a. 1.22 1.22 1.22Importer pays n.a. n.a. 7.32 7.32Importer margin when 1.83sold to wholesaler +0.73 *(25 percent) on cost n.a. n.a. 1.83 2.56Wholesaler 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 14.167.08

+1.42 *Retail margin (50 percent on cost) 3.34 4.88 6.10 =8.50Retail price 10.01 14.64 18.30 22.66

Foreign Foreign ForeignExample 1: Example 2: Example 3:

Assuming the Importer and Same as 2 butsame channels with same margins with 10 percent

Domestic wholesaler import- and channels cumulative Example ing directly turnover tax

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 EscalationThe Lower Prices are at Home

Aspirin $ 0.99 $ 1.23 $ 7.08 $ 6.53 $ 1.78

Cup of coffee 1.25 1.50 2.10 2.80 0.91

Movie 7.50 10.50 7.89 17.29 4.55

Compact disk 12.99 14.99 23.16 22.09 13.91

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

Gucci men's loafers 275.00 292.50 271.99 605.19 157.27

Nikon camera 629.95 840.00 691.00 768.49 1,054.42

New York London Paris Tokyo Mexico City

SOURCE: "Tourists and Bargains Galore," Fortune, June 13, 1994, p. 12.

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Cosmetics and Haircare ProductsImported into South Africa

Effect of Import Duties on Costs

Product Category:

Destination:

Duties:

Additional Taxes:

Result:

Cosmetics and Haircare Products Containing Alcohol.

South Africa

Importer pays duties, Specific Excise Taxes, and Import Surcharges based on F.O.B. value of product.

Ad Valorem Excise Tax assessed on F.O.B. value, plus 15 percent of F.O.B value, plus Import Duty and Value-added Tax based on F.O.B Value, Plus 14% of that value, plus the total of all non-rebated customs 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.

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Cosmetics and Haircare ProductsImported into South Africa

Calculations:

Duties: Import Duty = 40.0%Ad Valorem Excise Tax = 37.5%Import Surcharge = 40.0%VAT = 14.0%

Calculations: Import Duties = $0.40 (40% of F.O.B.Ad Valorem Excise Tax = 0.58 (See Calculations below)Import Surcharge = 0.40 (40% of F.O.B.)

(A) Total Duties = $ 1.38

Calculations: F.O.B. Value = $ 1.0015 Percent of F.O.B. = 0.15Import Duty = 0.40

(B) Subtotal Ad Valorem Value = $ 1.55(C) AD Valorem Tax 37.5% of (B) = 0.58

SOURCE: South Africa's Customs Tariff (USDA Near East) August 1993.

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Cosmetics and Haircare ProductsImported into South Africa

The VAT Tax is calculated as follows:

Calculations: F.O.B. = $ 1.0014% of F.O.B. = 0.14Total duties (A) above = 1.38

(D) Subtotal VAT value $ 2.52(E) VAT = 14% of (D) $ 2.52 0.35

The final cost to the South African importer for these cosmetics is the F.O.B. value, plus all duties, plus the VAT which equals $ 2.73.

Calculations: F.O.B. = $ 1.00Total Duties (A) = 1.38VAT (E) = 0.35

Final cost to importer = $ 2.73

SOURCE: South Africa's Customs Tariff (USDOC Near East) August 1993.

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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

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Lessening in International Markets

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, since less risk is involved for users.

Leasing helps guarantee better maintenance and service on overseas equipment.

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

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

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Countertrades

BarterBarter

Compensation DealsCompensation Deals

Counterpurchase or Offset TradeCounterpurchase or Offset Trade

Product Buy-Back AgreementProduct Buy-Back Agreement

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Why Purchasers ImposeCountertrade Obligations

To Preserve Hard CurrencyTo Preserve Hard Currency

To Improve Balance of TradeTo Improve Balance of Trade

To Gain Access to New MarketsTo Gain Access to New Markets

To Upgrade Manufacturing CapabilitiesTo Upgrade Manufacturing Capabilities

To Maintain Prices of Export GoodsTo Maintain Prices of Export Goods