Chapter 18

Pricing for International Markets

McGraw-Hill/Irwin

2005 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Learning Objectives

1.
1. Components
Components of
of pricing
pricing as
as competitive
competitive tools
tools in
in
international
international marketing
marketing
2.
2. The
The pricing
pricing pitfalls
pitfalls directly
directly related
related to
to
international
international marketing
marketing
3.
3. How
How to
to control
control pricing
pricing in
in parallel
parallel imports
imports or
or
gray
gray markets
markets

Chapter Learning Objectives

4.
4. Price
Price escalation
escalation and
and how
how to
to minimize
minimize its
its
effect
effect
5.
5. Countertrading
Countertrading and
and its
its place
place in
in international
international
marketing
marketing practice
practice
6.
6. The
The mechanics
mechanics of
of price
price quotations
quotations

Pricing Policy

A. 2 Pricing Objectives:
1. As an active means of attaining marketing
objectives

Companies use this when trying to achieve certain

objectives, profit margins or targeted market share.

2. As a static element in a business decision

Companies use this when they are foreign
marketing is not a priority
Usually associated with trying to get rid of
excess inventories

The
The more
more control
control aa company
company has
has over
over the
the final
final selling
selling price
price of
of aa product,
product, the
the
better
better itit isis able
able to
to achieve
achieve its
its marketing
marketing goals
goals

ItIt isis not

not always
always possible
possible to
to control
control end
end prices
prices

Pricing Policy

B. Parallel Imports
Where a manufacturing company sells its products to
a specific country; and those products are further sold
to another unintended country
Gray Market situation can occur
See Crossing Borders 18-1 pg. 532 (Levi Strauss)
C. Exclusive Distribution
Where manufacturers select preferred distributors to
sell its products at premium prices in order to:
Maintain high profit margins; stock large
assortments; and to maintain the exclusive quality
image.
This also contributes to parallel imports
Exhibit 18.1 pg. 534 How Gray-Market Goods End
Up in the U.S.

Pricing Policy

Approaches to International Pricing

Full Cost vs Variable Cost
Full Cost is determined by combining the total cost
plus a profit margin to every unit
Every unit must bear the total cost (including
international units sold)
Variable cost is determined thru the incremental
cost associated with producing goods for selling
them in international markets
Can appear to be dumping

Pricing Policy

Approaches to International Pricing

Skimming Vs. Penetration Pricing
Skimming is used when the marketplace is
insensitive to price; therefore premium price is
charged
Market places high value on items either
because of its unique features; quality or it has
little or no competition
Penetration Pricing is used to stimulate market
growth; therefore prices are set low
See Crossing Borders 18.2 pg. 550 (Charmin
using skimming of penetration pricing policies
in Britain?)

Price Escalation
Price
Price escalation
escalation refers
refers to
to the
the added
added costs
costs incurred
incurred as
as aa result
result of
of
exporting
exporting products
products from
from one
one country
country to
to another
another
There
There are
are several
several factors
factors that
that lead
lead to
to higher
higher prices:
prices:
1.

Costs of Exporting: the term relates to

situations in which ultimate prices are
raised by shipping costs, insurance,
packing, tariffs, longer channels of
distribution, larger middlemen margins,
special taxes, administrative costs, and
exchange rate fluctuations

Price Escalation (Cont.)

2.

3.

Taxes, Tariffs, and Administrative

Costs: These costs results in higher
prices, which are generally passed on to
the buyer of the product

Inflation: Inflation causes consumer prices

to escalate and the consumer is faced with
rising prices that eventually exclude many
consumers from the market

Price Escalation (Cont.)

4.

Middleman and Transportation

Costs: Longer channel length,
performance of marketing functions
and higher margins may make it
necessary to increase prices

5.

Exchange Rate Fluctuations and

Varying Currency Values: Currency
values swing vis--vis other currencies
on a daily basis, which may make it
necessary to increase prices

Effects of Price Escalation and Sample Causes

Domestic
Example

18-6

Manufacturing net
Transport, c.i.f.
Tariff (20 percent c.i.f. value)
Importer pays
Importer margin when
sold to wholesaler
(25 percent) on cost
Wholesaler pays landed cost

Foreign
Example 1:
Assuming the
same channels with
wholesaler importing directly

Foreign
Example 2:
Importer and
same margins
and channels

$ 5.00
n.a.
n.a.
n.a.

$ 5.00
6.10
1.22
n.a.

$ 5.00
6.10
1.22
7.32

n.a.
5.00

n.a.
7.32

1.83
9.15

1.67
6.67

2.44
9.76

3.05
12.20

Retail margin (50 percent on cost) 3.34

Retail price
10.01

4.88
14.64

6.10
18.30

Wholesaler margin
(331/3 percent on cost)
Retailer pays

Notes:

Foreign
Example 3:
Same as 2 but
with 10 percent
cumulative
turnover tax
$ 5.00
6.10
1.22
7.32
1.83
+0.73 *
2.56
+9.88
3.29
+0.99 *
=4.28
14.16
7.08
+1.42 *
=8.50
22.66

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
Irwin/McGraw-Hill

Price Escalation
The Lower Prices are at Home
New York

Paris

Tokyo

1.23

$ 7.07

$ 6.53

7.50

10.50

7.89

17.29

4.55

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

Nikon camera

629.95

840.00

691.00

768.49

1,054.42

Madrid Stockholm Berlin

Rome

Aspirin
Movie

18-7

0.99

Los Angeles
Mariah Carey CD
Windows 98
Diapers

Irwin/McGraw-Hill

London
$

Mexico City
$

1.78

16.22

16.09

17.82

15.31

20.67

117.99

123.94

179.79

211.20

264.46

13.52

5.03

5.42

6.86

10.55

SOURCE: Norihiki Shirouzu, Luxury Prices for U.S. Goods No Longer Pass
Muster in Japan, Wall Street Journal, February 8, 1996, p. B1; and Elizabeth
Fleick, The Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell
about Prices, Time International, December 13, 1999, p. 38.

Price Escalation

How to Lower the Effects of Price Escalation

1. Lower cost of goods through

Manufacturing overseas where labor costs are lower (China)

Eliminate features or product quality
Proctor Gambles strategy for selling toilet paper in Brazil

2. Lower tariffs through

Reclassification
Persuading foreign countrys government
Modification of product to fit in another class

3. Lower distribution costs through

Eliminate or reduction of middlemen

Especially where value-added taxes are imposed

Price Escalation

How to Lower the Effects of Price Escalation

4. Using Foreign Trade Zones
Imported goods stored or processed without
imposing tariffs or duties until items leave FTZ
areas and is imported into host country
FTZs can lower costs through:
Lower duties imposed
Lower labor costs in importing country
Lower ocean transportation costs with
unassembled goods (weight and volume are
less)
Using local materials in final assembly
See Exhibit 18.4 How Are Foreign Trade Zones
Used?

Pricing Issues

Issues with different methods of pricing strategies:

1. Dumping
Defined as either products that are sold in international
markets below their production cost; or products priced lower
in foreign markets than sold in the companys domestic
markets
WTO has set up penalties for dumping thru:
Countervailing duties
Minimum Access Volume (MAV)(restricts volume that can
a country can import)
2. Screwdriver Plants
Company sets up plants to assemble products in the importing
country where they sell the final products.

Countertrade as a Pricing Tool

Countertrade
Countertrade is
is aa pricing
pricing tool
tool that
that every
every international
international marketer
marketer
must
must be
be ready
ready to
to employ
employ
There
There are
are four
four distinct
distinct transactions
transactions in
in countertrading,
countertrading, which
which
include:
include:
1.
2.
3.

4.

Barter: is the direct exchange of goods between two parties in a transaction

Compensation deals: is the payment in goods and in cash
Counter-purchase or off-set trade: the seller agrees to sell a product at a
set price to a buyer and receives payment in cash and may also buy goods
from the buyer for the total monetary amount involved in the first contract or
for a set percentage of that amount, which will be marketed by the seller in its
home market
Buy-back: This type of agreement is made the seller agrees to accept as
partial payment a certain portion of the output that are produced from the
plant or machinery that are sold to the buyer

Other Pricing Strategies

3. Transfer Pricing Strategy

Intra-company transfer of pricing

4. Administered Pricing
Attempt by companies within same industry to set
prices in international markets
Cartels
OPEC
Shipping Industry
Diamond cartel controlled by DeBeers
5. Government Influenced Pricing

Transfer Pricing Strategy

Prices
Prices of
of goods
goods transferred
transferred from
from aa companys
companys operations
operations or
or
sales
sales units
units in
in one
one country
country to
to its
its units
units elsewhere,
elsewhere, which
which refers
refers to
to
intracompany
intracompany pricing
pricing or
or transfer
transfer pricing,
pricing, may
may be
be adjusted
adjusted to
to
enhance
enhance the
the ultimate
ultimate profit
profit of
of the
the company
company as
as aa whole
whole
Four
Four arrangements
arrangements for
for pricing
pricing goods
goods for
for intracompany
intracompany transfer
transfer are
are as
as follows:
follows:
1.
2.
3.
4.

Sales at the local manufacturing cost plus a

standard markup
Sales at the cost of the most efficient producer
in the company plus a standard markup
Sales at negotiated prices
Arms-length sales using the same prices as
quoted to independent customers

Benefits of Transfer Pricing Strategy

1.
1. Lowering
Lowering duty
duty costs
costs by
by shipping
shipping goods
goods
into
into high-tariff
high-tariff countries
countries at
at minimal
minimal
transfer
transfer prices
prices so
so that
that duty
duty base
base and
and
duty
duty are
are low
low
2.
2. Reducing
Reducing income
income taxes
taxes in
in high-tax
high-tax
countries
countries by
by overpricing
overpricing goods
goods
transferred
transferred to
to units
units in
in such
such countries;
countries;
profits
profits are
are eliminated
eliminated and
and shifted
shifted to
to
low-tax
low-tax countries
countries
3.
3. Facilitating
Facilitating dividend
dividend repatriation
repatriation when
when
dividend
dividend repatriation
repatriation is
is curtailed
curtailed by
by
government
government policy
policy by
by inflating
inflating prices
prices
of
of goods
goods transferred
transferred