1. Copyright © 2001 by Harcourt, Inc.. All rights reserved. Requests for permissions to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. INTERNATIONAL MARKETING 6e Export Pricing Strategies Chapter 11

2. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-2Price u Pricing is the only revenue generating element of the marketing mix. u Pricing is a means of attracting and communicating an offer to a potential buyer. u Pricing is a competitive tool. u Pricing can be use to position the product or service in the marketplace.

3. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-3 Pricing Challenges u Skimming Using high-priced unique products to achieve the highest possible contribution in a short initial time period, then gradually lowering the price as the market.Using high-priced unique products to achieve the highest possible contribution in a short initial time period, then gradually lowering the price as the market. u Market Pricing Following competitive pricing in the target market; adjusting production and marketing mix to competitive conditions.Following competitive pricing in the target market; adjusting production and marketing mix to competitive conditions. u Penetration Pricing Offering low pricing to generate volume sales which hopefully will compensate for low margins.Offering low pricing to generate volume sales which hopefully will compensate for low margins.

4. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-4 The Setting of Export Prices u Factors affecting customer purchasing decisions ability to payability to pay price-quality relationshipprice-quality relationship reaction to marketing mixreaction to marketing mix market supportmarket support Stages in Setting of Prices Source: Reprinted by permission of Harvard Business Review. An excerpt from Alfred R. Oxenfeldt, “Multistage Approach to Pricing,” Harvard Business Review 38 (July-August 1960): 126. Copyright © by the President and Fellows of Harvard College; all rights reserved.

5. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-5 Export Pricing Strategy u Cost-oriented pricing Standard worldwide price- regardless of buyer’s location in the market(s)Standard worldwide price- regardless of buyer’s location in the market(s) Dual pricing differentiates between domestic and export pricesDual pricing differentiates between domestic and export prices –Cost-plus method allocates domestic and foreign costs to the product. –Marginal cost method considers direct costs of producing and selling exports as floor (lowest) price. u Market-differentiated pricing based on the dynamics of the marketplacebased on the dynamics of the marketplace –changes in competition, exchange rates, etc.

6. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-6

7. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-7 Export-related Costs u Export-related costs Cost of modifying a product for a foreign marketCost of modifying a product for a foreign market Operational costs of exportingOperational costs of exporting Cost incurred in entering the foreign marketCost incurred in entering the foreign market u Price escalation for exports results from Clear-cut and hidden costsClear-cut and hidden costs u Methods for combating price escalation Reorganize the channel of distributionReorganize the channel of distribution Product adaptationProduct adaptation Change tariff or tax classificationsChange tariff or tax classifications Overseas assembly or productionOverseas assembly or production

8. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-8 Terms of Sale u Incoterms are the internationally accepted standard definitions for terms of sale set by the International Chamber of Commerce (ICC) since 1936. u Incoterms exworks (EXW)exworks (EXW) free carrier (FCA)free carrier (FCA) free alongside ship (FAS)free alongside ship (FAS) free on board (FOB)free on board (FOB) cost and freight (CFR)cost and freight (CFR) delivered duty paid (DDP)delivered duty paid (DDP) delivered duty unpaid (DDU)delivered duty unpaid (DDU)

9. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-9 Selected Trade Terms EXW FCA (Named Inland Carrier at Named Inland Point of Departure FCA (Named Inland Carrier at Named Inland Port of Exportation FAS (Named Port of Shipment) F.O.B. Vessel (Named Port of Shipment) Origin (Factory, Mine, Plantation, Warehouse) Inland Carrier Dock at Port of Shipment Vessel United States

10. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-10 Selected Trade Terms CFR CFI (Named Port of Destination FAS (Named Port of Shipment) DDU / DDP (Named Place of Destination) Inland Carrier Dock at Port of Destination Vessel Country of Destination Destination

11. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-11 Distribution Adjustment to Decrease Price Escalation Producer Import Agent Processing and Packing Plant Primary Wholesaler Intermediary Wholesaler Small Wholesaler Retailer Producer Import Agent Processing and Packing Plant Retailer Depots Distribution Wholesalers Distribution Centers A. Retail Price: 170 yen/300g package B. Retail Price: 128 yen/300g package A. Conventional Route B. Restructured Route Savings of 25% by restructuring Source: Michael R. Czinkota, “Distribution of Consumer Products in Japan: An Overview,” International Marketing Review 2 (Autumn 1985): 39-51.

12. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-12 Negotiating Terms of Payment u Considerations The amount of payment and the need for protectionThe amount of payment and the need for protection Terms offered by competitorsTerms offered by competitors Practices in the industryPractices in the industry Capacity for financing international transactionsCapacity for financing international transactions Relative strength of the parties involvedRelative strength of the parties involved

13. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-13 The Letter of Credit u Irrevocable versus revocable irrevocable letter cannot be cancelled, guaranteeing paymentirrevocable letter cannot be cancelled, guaranteeing payment u Confirmed versus unconfirmed U.S. bank confirms letter, assumes collection riskU.S. bank confirms letter, assumes collection risk u Revolving versus nonrevolving Most letters are nonrevolving- good only for a single transaction.Most letters are nonrevolving- good only for a single transaction.

14. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-14 Foreign Bank U.S. Company U.S. Bank Foreign Company 12 3 4 5 6&7 Product exported Import / Export Trade Financing u Minimizing the exposure of financial risk u Trade financing using a Letter of Credit (L/C)

15. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-15

16. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-16

17. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-17

18. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-18

19. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-19 Drafts and Documentary Collection u Drafts are similar to personal checks, but have a documentary requirement that the buyer to obtain shipping documents before taking possession of the imported goods.are similar to personal checks, but have a documentary requirement that the buyer to obtain shipping documents before taking possession of the imported goods. u Documentary collection Seller ships goods, then bank acts as agent in collecting payment through a sight or time draft from the importer. The draft becomes a banker’s acceptance and may be sold at a discounted rate if the exporter is in need of immediate cash.Seller ships goods, then bank acts as agent in collecting payment through a sight or time draft from the importer. The draft becomes a banker’s acceptance and may be sold at a discounted rate if the exporter is in need of immediate cash.

20. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-20 Most Advantageous Consignment Consignment Open Account Open Account Documents against Acceptance Documents against Acceptance Letter of Credit Letter of Credit Confirmed Letter of Credit Confirmed Letter of Credit Cash in Advance Cash in Advance Least Advantageous High Risk/High Trust Low Risk/Low Trust The Risk Triangle

21. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-21 Adjusting to Foreign Currency Fluctuations u Forward rate exchange market “the exchange of currencies on a future date at an agreed upon exchange rate”“the exchange of currencies on a future date at an agreed upon exchange rate” u Spot rate transaction “the exchange of currencies for immediate delivery”“the exchange of currencies for immediate delivery” u Possible price manipulation responses to currency movements Make no change in the dollar price (pass-through).Make no change in the dollar price (pass-through). Decrease the export price (absorption).Decrease the export price (absorption). Pass-through only a portion of the increase.Pass-through only a portion of the increase.

22. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-22 Exporter Strategies Under Varying Currency Conditions Weak Position u Stress price benefits u Expand product line u Shift sourcing to domestic market u Cash-for-goods trade u Full costing u Speed repatriation u Minimize expenditure in local currency Strong Position u Non-price competition u Improve productivity/ cost reduction u Sourcing overseas u Prioritize exports u Countertrade with weak currency countries u Marginal-cost pricing u Slow collections u Buy needed services abroad

23. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-23 Price Negotiations u Be aware that price is only one part of a comprehensive package. Avoid early price concessions. u Carefully consider concessions that reduce price or profitability. discounts, payment terms, product featuresdiscounts, payment terms, product features u Know conditions in importer’s market. u Focus negotiations first on substantive issues (quality and delivery), then on price.

24. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-24Leasing u Leasing reduces the amount of investment required to place the product in service, especially in less developed markets.reduces the amount of investment required to place the product in service, especially in less developed markets. may produce a total net income greater than that of an outright sale.may produce a total net income greater than that of an outright sale. offers the opportunity to provide ancillary services that increase the total value of the exported asset.offers the opportunity to provide ancillary services that increase the total value of the exported asset.

25. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-25Dumping u Ranges of dumping Predatory dumpingPredatory dumping –is intentional selling at a loss to increase market share Unintentional dumpingUnintentional dumping –occurs when market factors cause the import’s selling price to fall below prices in the exporter’s home market u Remedies for dumping Antidumping dutyAntidumping duty –are levied on imported goods sold at less than fair market value Countervailing dutiesCountervailing duties –are imposed on imports which are subsidized in the exporter’s home country

26. Copyright © 2001 by Harcourt, Inc. All rights reserved. 11-26 Objectives of Transfer Pricing u Competitiveness in the international marketplace u Reduction of taxes and tariffs u Management of cash flows u Minimization of foreign exchange risks u Avoidance of conflicts with home and host governments over tax issues and repatriation of profits u Internal concerns - goal congruence or subsidiary manager motivation