Chapter 11 Export Pricing

1. Chapter 11Export Pricing

2. Economic Social Demographic Marketing Mix Product Price Promotion Place Marketer Target Market Political Cultural Feedback Technological Legal

3. Pricing Dynamics • Price is the only element generating revenue • Pricing strategy involves: skimming, penetration • Depends on the entry strategy of the firm • Pricing Situations could be as follows • First-Time Pricing • Changing Pricing-proactive or reactive • Multiple-Product Pricing

4. ASSESSMENT OF PRICING ENVIRONMENTS • EXTERNAL • Market-related factors • Nature of demand/target audience characteristics • Government regulations (e.g., duties) • Exchange rate stability • Industry-related factors • Competition intensity • Nature of competition • INTERNAL • Marketing Mix • Product (e.g., old/new; standardized/differentiated • Distribution system (e.g., length) • Promotion needs (e.g., sales efforts) • Company characteristics • Extent of internationalization • Countries exported to • Management attitudes • Importance of exports • Overall price position of firm Pricing Policy Selection Pricing Strategy Determination Exhibit 11.2 Stages in Setting Export Prices Setting of Specific Price

5. Export Pricing Strategy • Standardization vs. Adaptation in Pricing • Price differentiation/adaptation can be based on • Cost-plus • Marginal cost • Full vs. variable cost • Market differentiated

6. Reasons for Price Escalation • Cost of exporting • Taxes, tariffs and administrative costs • Inflation/deflation • Exchange rate fluctuations • Varying currency values • Middlemen and transportation costs See Exhibit 11.4 as an example of Price Escalation

7. Overcoming Price Escalation • Lowering cost of goods • Adapt the product • Using efficient method of manufacturing • Global sourcing, off-shore manufacturing, produce overseas • Lowering product quality • Take a lower profit • Lowering distribution costs • Using Foreign Trade Zones (FTZ) • Reorganize the channel of distribution • Use new or more economical tariff or tax classification

8. Term of Sale • Incoterms – the internationally accepted standard definitions for terms of sale set by the International Chamber of Commerce (ICC) • Four Categories • E-terms – Seller make the goods available to the buyer only at the sellers’ own premises • F-terms – Seller is called upon to deliver the goods to a carrier appointed by the buyer • C-terms – whereby the seller has to contact for carriage but without assuming risk of loss or damage to the goods or additional costs after the dispatch • D-terms – seller has to bear all the costs and risks to bring the goods to the destination determined by buyer

9. Selected Trade Terms (Incoterms) • Ex-works (EXW) • Free carrier (FCA) • Free alongside ship (FAS) • Free on board (FOB) • Cost and freight (CFR) • Delivered duty paid (DDP) • Delivered duty unpaid (DDU)

10. Getting Paid for Exports • Risks involved and how to overcome them • Commercial risk • Political risk • Buyers’ credit worthiness • Foreign Exchange risk • Letter of Credit • Methods of Payment

11. Export Import Process Ships Exporter Importer Bill of lading Receives payment Payment Opens Letter of Credit Informs Reimbursement Importer’s Bank Exporter’s Bank Informs

12. Exporter Strategies Under Varying Currency Conditions

13. Methods of Payment (see Exhibit 11.7) • Cash in advance • Letter of credit • Drafts-similar to a personal check • Documentary collection • Banker’s acceptance • Discounting • Open account • Consignment selling

14. Sources of Export Financing International marketers assist their customers abroad in securing appropriate financing • Commercial Banks • Forfaiting and Factoring • Official trade finance

15. Sources of Export Financing The following entities insure credit risks for exports. • Export credit agencies (ECAs) • Export-Import Bank of the United States (Ex-Im Bank) • The Overseas Private Investment Corporation (OPIC) • The Agency for International Development (AID) • The U.S. Department of Agriculture’s Commodity Credit Corporation (CCC) • Small Business Administration (SBA)

16. Leasing • Trade liberalization is expected to benefit lessors both through expected growth in target economies and eradication of country laws and regulations hampering outside lessors. • Total net income from leasing is often higher than it would be if the unit was sold.

17. Dumping • Definition • Predatory vs. Unintentional dumping • Remedies for dumping • Antidumping duty –is a duty imposed on imports alleged to be “dumped” or sold at less than fair market value on a domestic marketplace • Countervailing duties –a duty imposed on imports alleged to be priced at less than fair market value, due to subsidization of an industry by a foreign government

18. Chapter 17 Global Pricing

19. 0 Transfer Pricing • Definition: Intra-corporate pricing, is the pricing of sales to members of the extended corporate family • MNEs engage in transfer pricing to take advantage of the market • Why transfer pricing-Influences/Reasons (see Exhibit 17.1) • Benefits and Costs of transfer pricing • Governments and MNEs are in constant negotiations

20. 0 Transfer Pricing Objectives Transfer pricing is established to achieve the following objectives: • Competitiveness in the international marketplace • Reduction of tariffs and taxes • Management of cash flows • Minimization of foreign exchange risk • Avoidance of conflicts with home and host governments • Internal concerns such as goal congruence and motivation of subsidiary managers

21. 0 Company Performance and Transfer Pricing • Intra-corporate pricing complicates internal control measures • Subsidiary’s profit performance perception issues • Cultural differences regarding efficiency • Dual book keeping • Compensations in budgets and profits plans • Taxation

22. 0 Pricing Within Individual Markets • Pricing within the individual markets is determined by: • Corporate objectives • Costs • Customer behavior and market conditions • Market structure • Environmental constraints • Dealing with financial crisis: Asian, European, and Latin American currency fluctuations

23. 0 Countertrade-Definition and Types • Barter arrangements (simple barter transactions are less popular nowadays) • Counterpurchase (parallel barter agreement) • Buyback (compensation arrangement) • Clearing Arrangements (clearing accounts were firms can deposit and withdraw the results of their countertrade activities) • Switch-trading (credits can be sold or transferred to a third party) • Offset (industrial compensation mandated by governments)

24. 0 Countertrade-Benefits and Costs • Benefits/Reasons are as follows: • Permits the covert reduction of prices and therefore allows firms and governments to circumvent price and exchange controls • Gain entry into new markets • Preserve Hard Currency • Improve BOP Account Performance • Provides stability for long-term sales/market • Force Reinvestment of Proceeds • Costs/Limitations • Requires that accounts be settled on a country-by-country or even transaction-by-transaction basis (uncompetitive goods may be marketed) • May compromise quality, efficiency of production, and lowering of world consumption

25. Organizing for Countertrade: In-House versus Third Parties