chapter 18 pricing for international markets. i.price escalation - firms must often adjust their...

Chapter 18

Pricing for International Markets


I. Price Escalation - firms must often adjust their prices upwards in international markets.

Reasons: Costs related to transportation, insurance, tariffs, taxes, storage, documentation, packing and middleman margins.

A. Ways to Reduce Price Escalation

1) Marketing action

2) Government action

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

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.

Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-10

Distribution Adjustment to Decrease Price EscalationDistribution Adjustment to Decrease Price Escalation

ProducerProducerImportImportAgentAgent

Processing Processing and Packing and Packing PlantPlant

Primary Primary WholesalerWholesaler

Intermediary Intermediary WholesalerWholesaler

Small Small WholesalerWholesaler RetailerRetailer

ProducerProducer ImportImportAgentAgent

Processing Processing and Packing and Packing PlantPlant

RetailerRetailerDepotsDepots

Distribution Distribution WholesalersWholesalers

Distribution Distribution CentersCenters

A. Retail Price: 170 yen/300g packageA. Retail Price: 170 yen/300g packageB. Retail Price: 128 yen/300g packageB. Retail Price: 128 yen/300g package

A. Conventional RouteA. Conventional Route

B. Restructured RouteB. Restructured Route

Savings of 25% by restructuringSavings of 25% by restructuring

Source: Michael R. Czinkota, “Distribution of Consumer Products in Japan: An Overview,” International Marketing Review 2 (Autumn 1985): 39-51.


II. Pricing and the Product Life Cycle1) Skimming

2) Penetration

3) Market pricing

III. Export Pricing Strategy1) Standard worldwide prices

2) Dual pricing

3) Market differentiated pricing


Pricing ChallengesPricing Challenges

SkimmingSkimming•• Using highUsing high--priced unique products to achieve the priced unique products to achieve the

highest possible contribution in a short initial time highest possible contribution in a short initial time period, then gradually lowering the price as the period, then gradually lowering the price as the market.market.

Market PricingMarket Pricing•• Following competitive pricing in the target market; Following competitive pricing in the target market;

adjusting production and marketing mix to adjusting production and marketing mix to competitive conditions.competitive conditions.

Penetration PricingPenetration Pricing•• Offering low pricing to generate volume sales Offering low pricing to generate volume sales

which hopefully will compensate for low margins.which hopefully will compensate for low margins.


Export Pricing StrategyExport Pricing Strategy

CostCost--oriented pricingoriented pricing•• Standard worldwide priceStandard worldwide price-- regardless of buyer’s regardless of buyer’s

location in the market(s)location in the market(s)

•• Dual pricing differentiates between domestic and Dual pricing differentiates between domestic and export pricesexport prices

–– CostCost--plus method allocates domestic and foreign costs plus method allocates domestic and foreign costs to the product.to the product.

–– Marginal cost method considers direct costs of Marginal cost method considers direct costs of producing and selling exports as floor (lowest) price.producing and selling exports as floor (lowest) price.

MarketMarket--differentiated pricingdifferentiated pricing•• based on the dynamics of the marketplacebased on the dynamics of the marketplace

–– changes in competition, exchange rates, etc.changes in competition, exchange rates, etc.


IV. Counter-trade: A Sale that encompasses more than an exchange of goods and services for money.

A) Reasons for counter-trade

B) Difficulties

C) Trends

D) Reasons for growth


V. Terms of Payment1) Cash in advance2) Open accounts3) Letters of credit4) Consignment

VI. Leasing

Leasing 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.


VII. Dumping: Selling goods overseas at a price lower than in the exporter’s home country or below cost.

A) Predatory vs. unintentional dumping

B) Anti-dumping duties

C) Countervailing duties

C opyright © 2001 by H arcourt, Inc. A ll r ights reserved. 11-20

D um pingD um ping

R anges of dum pingR anges of dum ping•• Predatory dum pingPredatory dum ping

–– is intentional selling at a loss to increase m arket shareis intentional selling at a loss to increase m arket share

•• Unintentiona l dum pingUnintentiona l dum ping–– occurs when m arket factors cause the im port’s selling occurs when m arket factors cause the im port’s selling

price to fa ll below prices in the exporter’s hom e m arketprice to fa ll below prices in the exporter’s hom e m arket

R em edies for dum pingR em edies for dum ping•• Antidum ping dutyAntidum ping duty

–– are levied on im ported goods are levied on im ported goods sold at less than fair m arket valuesold at less than fair m arket value

•• Countervailing dutiesCountervailing duties–– are im posed on im ports w hich are subsidized in the are im posed on im ports w hich are subsidized in the

exporter’s hom e countryexporter’s hom e country

Pricing for International MarketsVIII. Gray Marketing - occurs when products are diverted

from authorized channels in international markets and are sold at a lower price than is authorized by the manufacturer.

IX. Reasons for Increase in Gray Markets

1) More global products

2) Fluctuating exchange rates

3) Pricing policies

4) Excess supply

5) “Free rider” opportunities


X. Dealing with Gray Markets

1) Legal action

2) Adapt products to local markets

3) Change pricing policies

chapter 18 pricing for international markets. i.price escalation - firms must often adjust their...

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