International Product and Pricing Strategy: Unit-2

International product and
pricing strategy
Unit-2
Global Marketing Management Global Pricing Strategies
International Pricing Compared to Domestic

Pricing
In International markets, however, pricing decisions are
much
more complex, because they are affected by a number of
additional external factors, such as
• Fluctuation in Exchange Rates

• Accelerating Inflation in Certain Countries
• Use of alternative payment methods such as leasing,
barter and counter-trade
IILM-GSM 2
International Pricing Objectives

In order to determine the price of a new product in the
international market, the objectives are as:
1. Maximum Current Profit
2. Maximum Market share
3. Maximum Market Skimming
4. Product-Quality Leadership
SKIMMIMG High price
PENETRATION
PRICING Low price
07/05/10 7
IILM-GSM
International Pricing Framework

INTERNAL EXTERNAL
Firm-Level Factors Environmental Factor
• Corporate & marketing • Government influences and
objectives constraints: import control,
• Competitive strategy taxes, price control
• Firm positioning • Inflation
• Product development • Currency fluctuation
• Production location • Business cycle stage
• Market entry modes
Product Factors Market Factors

• Stage in PLC • Customers’ perceptions
• Place in product line • Customers’ ability to pay
• Important product features • Nature of competition
• Product positioning • Competitors’ objectives,
• Product cost structure strategies and relative SW
(manufacturing, experience • Grey market appeal
effects, etc)
Pricing Strategies
• Pricing level (first-time)
07/05/10 8
IILM-GSM
International Pricing Framework

INTERNAL EXTERNAL
Firm-Level Factors Environmental Factor
Product Factors Market Factors
Pricing Strategies
• Pricing level (first-time) Other elements
• Price changes over PLC
• Pricing across products of marketing mix
• Pricing across countries
Terms of business
• Terms of sale
• Terms of payment
Firm performance
Sales, shares, contribution
margins, profits, image etc.
07/05/10 9
IILM-GSM
Pricing Approaches for International Markets

The various approaches/ strategies used for pricing in
international markets are as:
1. Cost-based Pricing
2. Full Cost Pricing
3. Marginal Cost Pricing
4. Market-based Pricing
IILM-GSM 6
Pricing Approaches for International

Markets: Cost-based Pricing
• Costs are widely used by firms to determine prices in
international markets especially in the initial stages.
• Generally, new exporters determine export prices on
‘ex-works’ price level and add a certain percentage
of profit and other expenses depending upon the
terms of delivery.
It is a popular myth that costs determine the

price, specially in international markets.
07/05/10
IILM-GSM 7

However, such cost-based pricing methods are not
Optimum because of following reasons:
•The price quoted by the exporter on the basis of cost
calculations may be too low vis-à-vis competitors, thus
allowing importers to earn huge margins.
• The price quoted by the exporters may be too high, making
their goods uncompetitive and resulting in outright rejection
of the offer.
07/05/10
IILM-GSM 8

It is a popular myth that costs determine the
price.
• In fact, it is the interaction of a variety of factors such
as costs, competitive intensity, demand, structure,
consumer behavior etc. that contributes to price
determination in international markets.
• Therefore, a market-based pricing approach is
generally preferred to a cost-based pricing approach.
07/05/10
IILM-GSM 9

Markets: Full Cost Pricing
••It includes adding a mark-up on the product’s cost to determine price.
•Now assume, manufacturer wants to earn a 20 % markup on sales.
• The manufacturer’s markup price is given by:
UNIT COST
Markup price =
(1- Desired return on
sales)
e.g. Phillips, wanted to make a profit on each player but

Japanese competitors priced low and succeed in
building their market share rapidly.
07/05/10
IILM-GSM 10

Markets: Full Cost Pricing
The major benefits of this approach are:
 It ensures fast recovery of investments.
 It is useful for firms that are primarily dependent on
the international markets and register very low
sales in domestic markets.
 It is widely used by exporters in the growth phases
of international marketing.
07/05/10
IILM-GSM 11

Markets: Marginal Cost Pricing
• As the intensity of competition in international
markets is much higher than the domestic market,
competitive pricing becomes a precondition for
success.
• A large number of firms adopt this pricing
approach.
Marginal cost is the cost of producing and selling one
more unit. It sets the lower limit to which a firm
can
reduce its price without affecting its overall
profitability.
07/05/10
IILM-GSM 12

ts Marginal Cost
os (MC)
l C
ota
T
Total Cost
Variable
Cost
Fixed Cost
V
a
r
i
Domestic Sales Exports
a
07/05/10
Volume b
17
IILM-GSM l

Major reasons for adopting this approach are:
• In cases where foreign markets are used to dispose of
surplus production, marginal cost pricing provides an
alternate market outlet.
• Products from developing countries seldom compete on
the basis of brand image or unique value, MCP is used as
a tool to penetrate international markets.
Why it makes sense to use Marginal Costing

in Export Pricing?
07/05/10
IILM-GSM 14

Twinkle Illuminations is a Kolkata-based firm with an
installed capacity of producing 10,000 units of
designer lamps per annum with a fixed cost of US$
500,000. The variable cost is US$ 100 per unit. It
sells 5,000 units in domestic market at $230 per unit.
The firm receives an export order for 40,000 units @ US$

130 per unit. Now the firm has to decide whether it would
be able to export 40,000 units at US$ 130 per unit.
Apparently, it does not cover the total cost of US$ 200 per
07/05/10 unit.
IILM-GSM 15

The implication of accepting this order as follows:
• The firm would receive a contribution of US$ 30 per
unit for export.
Contribution = Selling Price – Variable
Price
= US$ 30
It works out a total contribution on 40,000 units as US$
1200,000. It would lose this contribution in case the firm
• does not accept the export order.
The firm finds it difficult to sell beyond 5,000 units in
domestic market; so it has to look for alternative
marketing opportunities overseas.
07/05/10 20
IILM-GSM

Markets: Market-based Pricing
INCOTERMS 2000 and its Applicability
Category Applicable for Applicable for all
sea modes of transport
transport (including water)
only
Departure terms EXW (ex-works)
Shipment terms, FAS (Free alongside FCA (Free carrier)
main carriage ship)
unpaid FOB (Free on
board)
Shipment terms, CFR (cost and freight) CPT (carriage paid to)
main carriage CIF (cost, insurance and CIP (carriage and insurance
unpaid freight) paid to)
Delivery terms DES (delivered ex ship) DAF (delivered at frontier)

DEQ (delivered ex quay) DDU (delivered duty unpaid)
IILM-GSM DDP (delivered duty paid)

Markets: Market-based Pricing
INCOTERMS 2000 and its Applicability
EXW (Ex Works) named place: It refers to any mode of

transportation. The seller makes goods available to the buyer at the
seller’s premises or other location, not cleared for export and not
loaded on a vehicle. The buyer bears all risks and costs involved in
taking the goods from the seller’s premises and thereafter.
FOB (Free on Board) named port of shipment: Maritime and
inland waterway only; seller delivers when the goods pass the
ship’s rail at the named port. The seller clears the goods for export.
CIF (Cost, Insurance and Freight) named port of destination:
The seller delivers the goods when the goods pass the ship’s rail
at the port of export. The seller pays cost and freight for bringing
the goods to the foreign port, obtain insurance against the buyer’s
risk of loss or damage, and clears the goods for export.
IILM-GSM
Pricing Approaches for International Markets:

Market-based Pricing
Top-down Calculation for International Pricing
Consumer Price 1160
VAT 160 + 16%
Market Price minus VAT 1000
Margin retailer 250 = 25%
Price to retailer 750
Margin wholesaler 90 + 12%
Price to wholesaler 660
Margin to importer 33 + 05%
Landed-cost Price 627
Import duties 110 + 20%
Other costs (storage, banking) 17
CIF (port of destination)
07/05/1
500 23
0 IILM-GSM
Pricing Approaches for International Markets:

Market-based Pricing
Top-down Calculation for International Pricing
CIF (port of destination) 500
Transportation costs 130
Insurance costs 6
FOB (port of shipment) 364
Transportation costs factory to port 34
Export price ex-works (EXW) 330
Factory cost price 300
Export profit (per unit) 30
The ‘ex-works’ price US$ 330 is 28.4% of the price paid by the
consumer. It works out to be a ‘multiplier’ of 3.5. This
‘multiplier’ is used as a calculating aid while offering price
quotations in international markets.
IILM-GSM
Factors Affecting Inter n a t i o n al Price
P rem iu m P ric n g.
Determination
• Cost of production
• Trade cycle
• Marketing objectives
• Competition
• Product substitution
• Brand image
• Elasticity of demand
• Stage of product life cycle
• Capacity utilization ratio
• Product differentiation
• Consumer profile
• Exchange rate
Factors Affecting Inte r n a t i o nal Pricing
P em ium P ric i g.
Strategies
• Penetration
Pricing.
• Economy
Pricing.
• Price
Skimming.
• Premium
Pricing.
Factors Affecting International Pricing Strategies
• Psychological Pricing.
• Product Line Pricing.
• Optional Product
• Pricing. Captive Product
• Pricing Product Bundle
• Pricing.
• Promotional Pricing.
• Geographical Pricing.
DEFINITION OF 'DUMPING'
In international trade, the export by a country or company of a product at a price that
is lower in the foreign market than the price charged in the domestic market.
As dumping usually involves substantial export volumes of the product, it often has the
effect of endangering the financial viability of manufacturers or producers of the product
in the importing nation.
Terms of Sale
The delivery and payment terms agreed between a buyer and
a seller.
In international trade, terms of sale also set out
the rights and obligations of buyers and sellers as applicable
in the transportation of goods.
Countertrade as a Pricing Tool

Countertrade is a unique way of setting overseas transactions.
At times, countries experience difficulty in generating
enough foreign exchange to pay for imports. They,
therefore, need to devise creative ways to get the products
they want.
For example, Canada and Australia found that they had to

enter into special agreement with McDonnell Douglas to
pay for military aircraft they wanted to purchase. Thus,
both MNCs and governments often are forced to resort to
creative ways of setting payment, many of which involve
trading of goods for goods as a part of the transaction.
07/05/10 25
IILM-GSM
Terms of Payment in International

Transaction
• Every shipment abroad requires some kind of financing while in
transit. The exporter also needs funds to buy or manufacture its
goods. Similarly, the importer has to carry these goods in inventory
until they are sold.
• Usually, however, some in-between approach is chosen, involving
a combination of financing by the exporter, the importer, and one or
more financial intermediaries.
The terms of payment describe how and when the

money should be transferred to the seller.
07/03/15
IILM-GSM 27
Terms of Payment in International

Transaction
The Five Principal Means of Payment in international trade,
ranked in order of increasing risk to the exporter, are:
1. Cash in Advance
Open
2. Letter of Credit Account
3. Draft
4. Consignment Consignment
Cash in
Advanc
5. Open Account e
International
Trade
Letter of
Draft
Credit
07/03/15
IILM-GSM 28
Payment Terms in International Marketing
1. Cash in Advance
• Cash in advance affords the exporter the greatest
protection because payment is received either before
shipment or upon arrival of the goods (and
presentation of documents).
• Political crises or exchange control in the purchaser’s
country may cause payment delays. In addition, where
goods are made to order, prepayment is usually
demanded, both to finance production and to reduce
marketing risks.
07/03/15
IILM-GSM 29

2. Letter of Credit
• Letter of credit is a letter addressed to the seller, written
and signed by a bank acting on behalf of the buyer.
• In the letter, the bank promises that it will honor drafts
drawn on itself if the seller confirms to the specific
conditions set forth in the letter of credit.
• In exchange for the bank’s agreement, the importer
promises to pay the bank the amount of transaction and
an agreed fee.
• The letter of credit obviously becomes a financial contract
between the issuing bank and a designated beneficiary
that is separate from the commercial transaction.
07/03/15
IILM-GSM 30

2. Letter of Credit: Advantage
1. A LOC reduces uncertainty. The exporter knows all the

requirements for payment because they are stipulated on the letter
Exporter of credit.
2. A LOC also reduces the danger that payment will be delayed or
withheld due to exchange control or other political risk.
1. The LOC ensures that the exporter delivers goods and produces
Importer certain documents which are carefully examined by the bank.
2. Because a letter of credit is as good as cash, the importer can
usually command better credit terms and/or prices.
07/03/15
IILM-GSM 31

2. Letter of Credit: Advantage
“ The letter of credit operations are quite simple. Consider the case
of USA Importers Inc, of Los Angeles. The company is buying spare
auto parts worth $38,000 from Japan Exporter Inc, of Tokyo, Japan.
USA Importers applies for, and receives, letter of credit for $38,000
from its bank, Wells Fargo”.
The actual process is shown in figure as:
07/03/15
IILM-GSM 32

2. Letter of Credit:
1. Purchase Order
USA Japan
Importers 5. Goods shipment Exporter
4. L/C notification
10. Shipping Docs. forwarded
11. L/C paid at maturity
2. L/C application
Shipping documents
L/C, draft &
9. Payment
6.
3. L/C delivered
Wells Fargo 7. L/C draft & documents delivered Bank of
Bank Tokyo
8. Draft accepted & funds remitted
Process preceding creation of L/C

07/03/15 42
Process after creation of L/C
IILM-GSM

3. Draft (also known as Bill of Exchange)
• Draft is written by an exporter on the importer directing the
letter to pay a certain sum on a specified date for having
goods shipped to the importer. The exporter submits the
bill to its banker who collects the stated amount from the
importer’s bank and remits the proceeds to the seller or to
the bearer.
• Draft has three parties- exporter (drawer), importer
(drawee) and the party who is entitled to receive payment
is called the payee.
07/03/15
IILM-GSM 34

3. Draft (also known as Bill of Exchange)
• Draft serves three important functions:

1. It provides written evidence of obligations in a
comprehensive form.
2. It enables both parties to potentially reduce their costs
of financing.
3. It is a negotiable and unconditional instrument.
07/03/15
IILM-GSM 35

4. Consignment
• Under the consignment the exporter sends goods, on
consignment, to the importer who arranges for the sale of
goods and makes payment to the exporter, after deducing
a specified commission.
• Goods on consignment are duly shipped to the importer,
but they are not sold. The exporter (consignor) retains title
to the goods until the importer (consignee) has sold them
to a third party.
• This agreement is normally made only with a related
company because of the high risks involved.
07/03/15
IILM-GSM 36

5. Open Account
• Open account selling is shipping goods first and billing the
importer later.
• The credit terms are arranged between the buyer and the
seller but the seller has little evidence of the importer’s
obligation to pay a certain sum at a certain date.
• Sales on open account, therefore, are made only to a
foreign affiliate or to a customer with which the exporter
has a long history of favorable business dealings.
• The benefits include greater flexibility (no specific
payment dates are set) and involve lower costs, including
fewer bank charges than with other modes of payment.
07/03/15
IILM-GSM 37
Factors of adaptation
 Consumer goods for
daily use
 Local competition
Factors of adaptation
 Different conditions of
use
 Intercultural differencies
in consumer behaviour
and purchasing
behaviour
 Differences in purchasing
power
 Different conditions in
supplying with
production inputs
 Different legislation
Factors
of standardization
 Economics of scale
 High costs of adaptation
process
 Industrial and high tech
products
 Entering the similar
markets
 Export
 Global competition
 Strong image of the
country/producer/brand
Standardisation Vs Adaptation
 In international markets, success depends on satisfying

the market demands. The product or service must be
suitable and acceptable for its purpose.
 According to Doole & Lowe (1999, p.296),

“The main issue for a company about to commence
marketing internationally, is to assess the suitability of
the existing products for international markets.”
 Product policy abroad: firm must decide which aspects

of a product need to be adapted and which can be
standardised.
Standardardisation Vs Adaptation
 Standardisation policy: offering a uniform version of
a product in all of its foreign markets.

Adaptation policy: offering a product to targeted
foreign consumers altered to specific tastes, preferences
and needs.Adaptation can concern all the characteristics
of the product.
 Decision between standardisation and adaptation is not
mutually exclusive rather it is a matter of degree
 A certain degree of adaptation of a product is required
in international markets.
International Product Strategies
Straight Product Product

Extension Adaptation Innovation
The firm adopts The company caters The firm designs a

the same policy to the needs and product from scratch
used in its wants for foreign
home market. of its foreign customers.
customers.
Source: W.J. Keegan, Multinational Product Planning: Strategic Alternatives,
Journal of Marketing, 33, 1969, pp.58-62
Adaptation
•Optional
Mandatory Product
Product Adaptation
Adaptation
Government
 Physical regulations
distribution
LocalElectrical

 use conditions
current standards
 Climatic conditions
 Measurement
 Space constraint
systems
 Consumer demographics as
 Operating
• related to physical appearance
systems
 User's habits
 Environmental characteristics
 Price
 Limiting product movement
• across national borders (gray
• marketing)
 Historical preference or local
Factors Affecting Adaptation
Regional,
Product Company
Country, or Local
Characteristics Considerations
Characteristics
Decision to Alter the Domestic Product
Source: Adapted from V. Yorio, Adapting Products for Export (New

York: Conference Board, 1983), 7. Reprinted with permission.
Considerations in adapting products
Macro- Government
Target Market Competition
environment
Regulations
 Who buys  Geography  Tariffs  Price

the product?  Climate  Labeling  Performance
 Who uses  Economic  Patents/  Design or
the product?  Socio- trademarks style
 How is it cultural  Taxes  Patent
used?  Political/  Other protection
 Where/ why/ legal  Brand
when is it name
bought?  Package
 Services
22
NEW PRODUCT
DEVELOPMENT
PROCESS.
4
8
CONTEN
T
 New Product.
 New Product Development & Process.
 Conclusion.
4
9
New
product.
 A product is anything that can be offered to a market to satisfy needs and
wants.
 A New product is any product which is perceived by the customer as being
new.
New product Categories…….

1:New to the world.
2:New to the product lines.
3:Additions to the existing product line.
4:Improvements & revisions of existing products.
5:Repositioning.
6:Cost reductions. 3
New Product development
Process
 New Product Development is the development of original products, product
improvements, product modifications, and new brands through the firm’s own
R & D efforts. This process consist of following steps.
1. Idea Generation.
2. Idea Screening.
3. Concept Development & Testing.
4. Marketing Strategy Development.
5. Business Analysis.
6. Product Development.
7. Market Testing.
8. Commercialization. 4
1.Idea Generation .
 Idea generation is continuous, systematic search for new
product opportunities.
 Ideas form using creativity generating techniques and generated
through firm’s Internal Sources & external Sources.
5
2
2.Idea
Screening.
 Filtering the ideas to pick out good ones & dropping the poor ones.
 It involves a preliminary elimination process in which a large number of

product ideas are screened in terms of the organization’s objectives, policies,
technical feasibility, and financial viability.
 Total ideas are categories into three group. They are, promising ideas,
marginal ideas and rejected ideas.
 In screening ideas, the companies normally face 2 serious errors & they must
try to avoid these mistakes.
1. DROP ERROR 2. GO ERROR 5
3
3. Concept Development &
Testing.
 Here, the Product Idea is converted into product concept.
 Product Ideas means Possible product that company may offer to the market.
 A product concept is a detailed version of the idea stated in meaningful consumer
terms
 When developing product concept following criteria should be consider.

Who will use the product.
What primary benefit should this product provide.
When will this product be consumed.
 Concept Testing means presenting the product concept to target

consumers, physically or symbolically, and getting their rea 7
ctions.
4.Marketing Strategy Development.
After concept testing, for concepts that qualify a preliminary marketing strategy
is created to introduce new product into market.
55
5.Business
Analysis.
 This stage will decide whether from financial as well as marketing point of
view, the project is beneficial or not.
In Business Analysis ,
 Estimate likely selling price based upon competition and customer feedback.
 Estimate sales volume based upon size of market.
 Estimate profitability and break-even point.
 If above are match with the company's objectives, then the new
product concept moves to product development stage.
56
6.Product
Development.
•Up to now, the product has existed only as a word
description, a drawing.
•  The company will now determine whether the

product idea can translate into a technically and
Produce a feasible product.
commercially Test the Conduct focus Make
physical prototype
group customer adjustment
product
57
7. Market Testing.
 Now the product is ready to be branded with a name, logo, and packaging
and go into a preliminary market testing.
 Marketing Testing involves placing a product for sale in one or more

selected areas and observing its actual performance under the proposed
marketing plan.
 Methods for market testing:

1. Sales wave research.
2. Simulated test marketing.
3. Controlled testing marketing.
4. Test markets. 11
8.Commercialization.
 After successful market testing, new product comes to commercialisation
stage.
 During this stage, production of new product on a commercial basis is rapidly
built up and implementing a total marketing plan.
 For formally launching a New Product, the following decisions to be taken:

A) When to launch (Timing)
B) Where to launch (Geographic Strategy)
C) To Whom (Target-Market Prospects)
D) How to launch (Introductory Market Strategy)
12
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International product and

International Pricing Compared to Domestic

• Fluctuation in Exchange Rates

International Pricing Objectives

SKIMMIMG High price

International Pricing Framework

Product Factors Market Factors

International Pricing Framework

Product Factors Market Factors

Pricing Approaches for International Markets

Pricing Approaches for International

It is a popular myth that costs determine the

Pricing Approaches for International

Pricing Approaches for International

Pricing Approaches for International

e.g. Phillips, wanted to make a profit on each player but

Pricing Approaches for International

Pricing Approaches for International

Pricing Approaches for International

Pricing Approaches for International

Why it makes sense to use Marginal Costing

Pricing Approaches for International

The firm receives an export order for 40,000 units @ US$

Pricing Approaches for International

Pricing Approaches for International

Delivery terms DES (delivered ex ship) DAF (delivered at frontier)

Pricing Approaches for International

EXW (Ex Works) named place: It refers to any mode of

Pricing Approaches for International Markets:

Pricing Approaches for International Markets:

• Pricing. Captive Product

• Pricing Product Bundle

Countertrade as a Pricing Tool

For example, Canada and Australia found that they had to

Terms of Payment in International

The terms of payment describe how and when the

Terms of Payment in International

Payment Terms in International Marketing

Payment Terms in International Marketing

Payment Terms in International Marketing

1. A LOC reduces uncertainty. The exporter knows all the

Payment Terms in International Marketing

The actual process is shown in figure as:

Payment Terms in International Marketing

Process preceding creation of L/C

Payment Terms in International Marketing

Payment Terms in International Marketing

• Draft serves three important functions:

Payment Terms in International Marketing

Payment Terms in International Marketing

 In international markets, success depends on satisfying

 According to Doole & Lowe (1999, p.296),

 Product policy abroad: firm must decide which aspects

Straight Product Product

The firm adopts The company caters The firm designs a

Decision to Alter the Domestic Product

Source: Adapted from V. Yorio, Adapting Products for Export (New

 Who buys  Geography  Tariffs  Price

 New Product Development & Process.

New product Categories…….

 It involves a preliminary elimination process in which a large number of

 When developing product concept following criteria should be consider.