Presented By:Pankaj Agarwal(1215)Rashmi Kumari(1217)Shashank(1218)Srijita Dutta(1220)

International Pricing Decision

Preparation for Export Price Quotation

Global pricing is one of the most critical and complex issues in international marketing.

Price is the only marketing mix instrument that creates revenues. All other elements entail costs.

A company’s global pricing policy may make or break its overseas expansion efforts.

Multinationals also face the challenges of how to coordinate their pricing across different countries.

International Pricing

Significance of export pricing decisions for developing countries:

Lower production & technology base – higher cost of

production

Little bargaining power to negotiate – compelled to sell

products at below cost of production

Less/ marginal value addition of the products – limited

scope for realizing optimal prices

Appropriate pricing strategies with innovation – success in

international markets3

Export pricing & developing countries

4

Pricing Methods

Pri

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Cost based pricing

Full cost pricing

Marginal cost pricing

Market based pricing

• Based on the cost of the product

• Certain percentage of profit and other expenses may be added

to the cost

• No optimum method for following reasons:

– May be too low vis-à-vis competitors, and importers may earn a huge

margin

– May be too high, making goods non competitive and rejection of

offers

5

Cost based pricing

• Used during the initial stages of internationalization

• Adding a mark-up on the total cost determine price

Benefits:

– Ensures fast recovery of investments

– Useful for firms dependent on international markets than domestic

markets

– Eases operation and implementation of marketing strategies

Disadvantages:

– Overlooks prevailing international market price- either uncompetitive due

to high price or low price

6

Full cost pricing

• Marginal cost- cost of producing and selling one more unit

• Sets a lower limit to which a firm can lower its price without

affecting its overall profit

• Fixed cost is recovered from the domestic market and uses

variable costing for international market

• Used when to penetrate international market

7

Marginal cost pricing

• Exporters in developing countries generally are

– price followers than price setters.

– having limitations to offer unique products

• This makes them assess the prevailing price in the international

markets and top down calculation to arrive at the cost of the

product

• Beneficial as it allows to meet the competitor price in the

market

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Market-based pricing

Factors affecting

International Pricing

Competition

Cost

Product Differentiation

Exchange Rate

Government Factor

Economic condition of

the importing country

Should keep low in the short run for a long term gain

May operate at no profit no loss level initially

Cost of promotion

Cost of distribution

Cost

Import substitution

Local as well as foreign

Competition pricing will depend on trade agreement

Initial low cost products can be offered to gain market share

Competition

Can accelerate market share growth

Spurs buying if a strong USP exist

Can create a niche product if put in IPR

Can be used to fix varying prices

Product Differentiation

Exchange rate fluctuation can be offsite in a probabilistic market condition

Higher price can be fixed for a favoured currency payment

Hedging should be done if payments are to be received over a period of time

Uncovered interest rate parity can also be used to neutralize the effects of exchange rate fluctuation

Exchange Rates

Economic Conditions of the Importing Country

Exports should take into consideration:• Per capita income• Spending pattern

Demand means:• Desire to acquire something• Willingness to pay for it• Ability to pay for it

Margin Regulation ( Profit rates )

Price floors and price ceilings indicating lowest and highest price levels

Subsidies provided by the Govt.

Tax concessions as in SEZs

Encouragement to local exporters through finance, inputs at lower indexes

Government Factors

• Purchasing power: of the customers vary widely among

countries. Eg. Mac Donald hamburger prices vary from USD

1.2 in China to USD 4.5 in Switzerland.

Big Mac Index was invented by economist for cross

country comparison of currencies based on Mac

Donald’s Big Mac which is produced locally and in 120

countries simultaneously.

• Buyers’ Behaviour: how demanding and knowledgeable

and how price sensitive they are.

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Cont’d..

Standard Approach

Competitive Pricing

Domestic price plus

Marginal pricing

Pricing Strategies

Standard ApproachSome firms use a standard worldwide price approach where the exporter does not adjust the product price, regardless of any outside factors. This method often limits sales potential, because flexibility is often required to successfully enter a market. However, this approach may work with certain products that are in high demand. An alternative to a standard price might be average pricing, when a certain profit margin is maintained on a worldwide basis, including the domestic market.

Contd….

Competitive PricingCompetitive Pricing is based on evaluating the price of competitive products in the target market

Domestic PricingBegin with the “Ex-Works" or the “FOB Factory” price of product that includes possible sales agents’ commissions or distributor discounts

Marginal PricingBy far, this method is the most logical since it considers all of the direct costs relative to international trade, and does not burden export sales with domestic overhead costs. Begin with the actual cost of manufacture. Add the costs of:1. Product modification for international sale

•  2. Distributor discounts or sales commissions 3. Allowances for promotion or financing 4. Special packaging for international shipping 5. Administrative cost relative to international trade

Contd….

Example of Export Price Escalation

The following is a basic example of the difference between a domestic sale followed by an export sale where the wholesaler imports directly.Expense Domestic

ExampleExport Example(same channel, wholesaler Import)

Manufacturing $3.25 $3.25

Transportation(CIF) NA $1.10

Tariff (20% of CIF) NA $0.87

Wholesaler pays landed cost $3.25 $5.22

Wholesale margin $1.08 $1.73

Retailer pays $4.33 $6.95

Retailer Margin $2.17 $3.48

Retail Price $6.5 $10.48

International Commercial Terms of Sale: INCOTERMS

INCOTERMS are divided into four main components and are built around the main carriage of the shipment.

E-Terms (origin terms):EXW/Ex-Works (named place): This represents the least amount of responsibility on the part of the exporter in moving the goods to the destination. It indicates the seller makes the goods available to the buyer at the seller’s premises or other location, not cleared for export through customs and not loaded on any vehicle.

F-Terms (pre-main carriage terms): These terms represent some responsibility upon the buyer to quote the price of making the goods available at an airport, usually with FCA, or a seaport, with FAS and FOB.

FCA/Free Carrier (named place): The seller delivers the goods to the carrier named by the buyer, at a specified price, cleared for export. The seller is responsible for loading the goods on the mode of transport at any location indicated. This term is also used for all modes of transport.

Contd..

FAS/Free Alongside Ship (named port of shipment): This term is used for maritime and inland waterway only, and indicates the sellers’ responsibility is to deliver the goods along-side the vessel at the named port of shipment, also customs cleared for export.

FOB/Free on Board (named port of shipment): This term is also used for maritime and inland waterway only, as the seller delivers the goods across the ships rail, cleared for export. This term is closely matched to the American Term “FOB Vessel” and is what most buyers mean when they just use the term “FOB” without any further specification, although the exporter should verify this fact.

C-Terms (main carriage terms):

These terms include the price of freight as well as all other incidentals, including insurance in the case of CIF and CIP.CFR/Cost & Freight (named port of destination): This term indicates that the seller would deliver the goods across the ships’ rail and also prepay the ocean transportation charges to the port of importation. It is intended for use on maritime and inland waterway shipments only, and requires customs clearance for export. Insurance is not included in this type of quotation, which most closely resembles the American term C&F.

CIF/Cost Insurance & Freight (named port of destination): This term is an extension of CFR, adding the responsibility of the seller to obtain and prepay for insurance against loss on behalf of the buyer. Other than that, you could say it is “CFR + Insurance” and matches the American Term CIF as well, except for that it is for maritime and inland waterway only.

Contd..

CPT/Carriage Paid To (named place of destination): This term is similar to CFR with the exception that it is for all modes of transport. The seller must deliver the goods to the carrier; customs cleared for export and prepay the freight charges to the destination. It does not include the responsibility of the seller to obtain and prepay for insurance against loss on behalf of the buyer.

CIP/Carriage & Insurance Paid To (named place of destination): This term is similar to CIF with the exception that it is used for all modes of transport. The seller is obligated to place the goods on board the carrier; customs cleared for export, and prepay the freight charges to the destination and obtain insurance against loss on behalf of the buyer.

D-Terms (post-main carriage or arrival terms):

DAF/Delivered at Frontier (named place): The term frontier is another name for border. The seller is responsible for delivering the goods for the buyer’s disposal on any means of transport. This does not include the cost of unloading the goods or clearing the goods for import, but does require export clearance.

DES/Delivered Ex Ship (named port of destination): This maritime and inland waterway only term is rarely used for U.S. exports because of the modes of transport available to us, and is where the seller makes the goods available to the buyer on board a ship at the port of import not cleared for import and without the container off-loading charges.

DEQ/Delivered Ex Quay (named port of destination): This term is rarely used from the U.S., and implies that the seller also pays for the off-loading charges beyond DES. Quay is another term used for pier or wharf.

Contd..

DDU/Delivered Duty Unpaid (named place of destination): This term is used for any mode of transport, and involves the seller delivering the goods to the buyer, but not with customs clearance for import and not including off-loading from the delivery vehicle. The buyer is responsible for customs clearance, duties and brokerage. This term is more useful for smaller shipments and samples delivered via courier without seller responsibility for customs procedures at the destination.

DDP/Delivered Duty Paid (named place of destination): DDP represents the greatest responsibility on the part of the exporter, who is quoting to pre-pay and be responsible for everything in getting the goods delivered to the buyer’s facility, including customs clearance and the payment of duties.

Example of an invoice

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