Chapter 11 Export Pricing Developed by Cool Pictures

Price Dynamics • Pricing is the only revenue generating element of the marketing mix. • Pricing is a means of attracting and communicating an offer to a potential buyer. • Pricing is a competitive tool. • Pricing can be use to position the product or service in the marketplace. Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Price Dynamics • 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. • Market Pricing – Following competitive pricing in the target market; adjusting production and marketing mix to competitive conditions. • Penetration Pricing – Offering low pricing to generate volume sales which hopefully will compensate for low margins. Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

The Setting of Export Prices ASSESSMENT OF PRICING ENVIRONMENTS INTERNAL EXTERNAL 1 2 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 1 2 3 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 Setting of Specific Price Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

The Setting of Export Prices Customer Purchase Factors • • ability to pay price-quality relationship reaction to marketing mix market support Pricing Policies Factors • • • profit maximization market share survival return on investment competitive policies – copy competitive pricing – follow competitive pricing – price to discourage competitive entry Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Export Pricing Strategy • Cost-oriented pricing – Standard worldwide price- regardless of buyer’s location in the market(s) – Dual 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. • Market-differentiated pricing – based on the dynamics of the marketplace • changes in competition, exchange rates, etc. Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Export-Related Costs • Export-related costs – Cost of modifying a product for a foreign market – Operational costs of exporting – Cost incurred in entering the foreign market • Price escalation for exports results from – Clear-cut and hidden costs • Methods for combating price escalation – – Reorganize the channel of distribution Product adaptation Change tariff or tax classifications Overseas assembly or production Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Terms of Sale • Incoterms are the internationally accepted standard definitions for terms of sale set by the International Chamber of Commerce (ICC) since 1936. • Incoterms – – – – exworks (EXW) free carrier (FCA) free alongside ship (FAS) free on board (FOB) cost and freight (CFR) delivered duty paid (DDP) delivered duty unpaid (DDU) Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Negotiating Terms of Payment • Considerations – The amount of payment and the need for protection. – Terms offered by competitors. – Practices in the industry. – Capacity for financing international transactions. – Relative strength of the parties involved. Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

The Risk Triangle BUYER’S PERSPECTIVE SELLER’S PERSPECTIVE Source: Adapted from Chase Manhattan Bank, Dynamics of Trade Finance (New York: Chase Manhattan Bank, 1984), 5 Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Terms of Payment Types of Payment – Cash in Advance • Not widely used except for first time transactions – Letter of Credit • Promise to pay • Irrevocable, confirmed, revolving – Drafts • Similar to personal check • Must obtain shipping documents prior to delivery – Documentary collection • Bank acts as collection agent • Draft may be sold at discounted rate for immediate cash Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Managing Foreign Exchange Risk • Forward rate exchange market – “the exchange of currencies on a future date at an agreed upon exchange rate” • Spot rate transaction – “the exchange of currencies for immediate delivery” • Possible price manipulation responses to currency movements – Make no change in the dollar price (pass-through). – Decrease the export price (absorption). – Pass-through only a portion of the increase. Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Exporter Strategies Under Varying Currency Conditions WEAK POSITION • Stress price benefits • Expand product line • Shift sourcing to domestic market • Cash-for-goods trade • Full costing • Speed repatriation • Minimize expenditure in local currency Developed by Cool Pictures & Multi. Media Presentations STRONG POSITION • Non-price competition • Improve productivity/ cost reduction • Sourcing overseas • Prioritize exports • Countertrade with weak currency countries • Marginal-cost pricing • Slow collections • Buy needed services abroad Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Sources of Export Financing • Commercial banks – first rate credit risks only – enhanced services – overseas reach • Forfeiting and Factoring – uses bills of exchange or promissory notes to pay at time of shipment – may use discounts to purchase receivables • Official Trade Financing – loans or guarantees Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Price Negotiations • Be aware that price is only one part of a comprehensive package. Avoid early price concessions. • Carefully consider concessions that reduce price or profitability. – discounts, payment terms, product features • Know conditions in importer’s market. • Focus negotiations first on substantive issues (quality and delivery), then on price. Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Leasing • 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. • Offers the opportunity to provide ancillary services that increase the total value of the exported asset. Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.

Dumping • Ranges of dumping – Predatory dumping • is intentional selling at a loss to increase market share – Unintentional dumping • occurs when market factors cause the import’s selling price to fall below prices in the exporter’s home market • Remedies for dumping – Antidumping duty • are levied on imported goods sold at less than fair market value – Countervailing duties • are imposed on imports which are subsidized in the exporter’s home country Developed by Cool Pictures & Multi. Media Presentations Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved.