CHAPTER 12

Pricing in international
markets
 Learning objectives
1. Understand the principles and strategies of
pricing.
2. Manage the risks of international marketing
arising from foreign exchange fluctuations.
3. Identify sources of export financing.
4. Understand the differences in pricing in
individual markets.
5. Discuss the use of transfer pricing.
6. Examine the role of countertrade.
 Pricing principles and strategies
• Only element of marketing mix that is revenue
generating
• Price:
– attracts potential buyers
– is major competitive tool
– used in positioning
– determines long-term viability of the firm
• Customer inelasticity is highly desirable
• Decisions cannot be made in isolation
 Initial pricing strategy
• Skimming:
– high initial price
– lowered over time
• Market pricing:
– reactive approach
– similar products already exist
 Initial pricing strategy
• Penetration pricing:
– low price
– quick market share
• Multiple-product pricing
‘LIQUID GOLD’, LANDLINE ABC

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 Export pricing strategy
• Pricing policies:
– profit maximisation
– market share
– survival
– percentage ROI
– competitive pricing
• Three international price-setting strategies:
standardised, dual and differentiated
 Export pricing strategy
• Standard worldwide price:
– cost orientation
– same price regardless of buyer
– based on average unit costs of fixed,
variable and export-related costs
Pricing - a critical marketing mix element
Pricing for international markets is complicated due to distance / currency
variation / gov’t policies (e.g. tariffs) / length of distribution channels /
heightened risks.

But marketing strategy principles are the same in that price is connected to and
impacts on the other marketing mix elements. For example,
• Pricing strategy influences Promotion and vice versa
• Costs of Product adaptation will determine Pricing strategy
• Length of distribution channels will determine Pricing strategy

The target market determines the basic premise for pricing strategies:
importance of price with respect to buying behaviour; affordability; price-
quality relationships; marketing-mix reactions, etc. E.g. First world product
may be too sophisticated for less developed market  redesign to
simplify/produce cheaper model for less developed market.
Influencing
Factors / Stages
in the
setting of export
prices
 Export pricing strategy
• Dual pricing:
– domestic and export prices are
differentiated
– cost-plus method
– marginal cost method
 Export pricing strategy
• Market-differentiated pricing:
– demand orientation
– pricing based on dynamic conditions of the
marketplace (changes in competition,
exchange rate changes or other
environmental changes)
– marginal cost approach as a basis
Export pricing strategy
 Incorporating export-related costs
• Modification costs
• Operational costs; for example, personnel,
market research, additional shipping and
insurance costs
• Market entry costs; for example, tariffs and
taxes
 Incorporating export-related costs
• Price escalation:
– when export prices exceed domestic
prices
• Overcoming price escalation:
– shortened distribution channel
– product adaptation
– change tariff or tax classifications
– assemble or produce overseas
 Commercial terms of export
and import
• Incoterms:
– internationally accepted definitions for
terms of sale
– set up by International Chamber of
Commerce (ICC) in 1936
– available in 31 languages
 Terms of sale: Incoterm categories
• ‘E’-terms: buyer gets goods from sellers’
premises
• ‘F’-terms: seller delivers goods to a carrier
appointed by the buyer
• ‘C’-terms: seller has to contract for carriage,
but assumes no risk, loss or damage to the
goods
• ‘D’-terms: seller delivers goods to buyer and
bears all the costs and risks
 Terms of sale: common Incoterms
• Free carrier (FCA)
• Free alongside ship (FAS)
• Free on board (FOB)
• Cost and freight (CFR)
• Cost, insurance and freight (CIF)
• Delivered duty paid (DDP)
• Delivered duty paid/unpaid (DDP/DDU)
• Ex-works (EXW)
Selected
trade
terms
(Incoterms)
 Terms of payment
• Protection
• Terms offered by competitors
• Practices in the industry
• Capacity for financing
• Strength of parties involved
 Terms of payment
• Cash in advance:
– immediate use of the money
• Letter of credit:
– issued by a bank
– bank’s promise to pay
– the most frequently used method
• Documentary collection:
– bank acts as collection agent
 Terms of payment
• The draft (bill of exchange)
– similar to a personal cheque
– a sight draft is payable to whom the draft is
addressed
– time drafts allow for a stipulated delay then
become a banker’s acceptance or a
trader’s acceptance
– date drafts require set date payment
 Terms of payment
• Open account (open terms):
– common in domestic markets
– no payment guarantee
• Consignment selling:
– highly favoured by importers
– payment is deferred until goods are sold
– returning unsold goods can be costly
Methods of payment for exports
 Getting paid for exports
• Minimise the risk of not being paid:
– commercial risk
– non-commercial or political risk
 Getting paid for exports
• Assessing buyers can be complicated by:
– unreliable credit reports
– unavailable audited reports
– differences in financial reporting
– government valuation variations
– currency differences
– exchange controls.
 Managing foreign exchange risk
• Exchange rate fluctuations
• Protect against currency-related risk:
– risk shifting (hedging)
– risk modifying
•Forward exchange market
•Options
•Futures
 Managing foreign exchange risk
• Pass-through
• Absorption
• Pass-through only a portion of the increase
• Pricing-to-market
Impact of exchange rate changes
• Exchange rate example
exchange rate A$1.00 = YEN ¥ 95, so 1 tonne of Australian coal
at A$160/mt = ¥15,200/mt

• Exchange rate risk

Exchange risk arises in an international transaction when buyer and seller
use different currencies, and time elapses between sale and payment,
example:
• Autralian coal sold today 10,000mt @ A$160/mt = A$1,600,000
• Exporter sells in YEN; selling price is A$1,600,000 x ¥ 95 = ¥152,000,000
• Payment terms are 30 days from date of shipment (FOB Newcastle)
• Exchange rate today: A$1.00 = ¥95. In 30 days: A$1.00 = ¥100
• Payment received in 30 days: ¥152,000,000/¥100 = A$1,520,000
• Outcome: exporter loses A$1,520,000 – A$1,600,000 = A$80,000
Exchange rate risks
International marketer’s dilemma: sell in own currency to avoid risk
(i.e. A$), or in buyer’s currency (e.g. US$, Yen, Euro)?
– If own currency, may lose sales due to lack of customer
orientation, foreign country regulations, lack of convertibility etc.
– May be contrary to industry norms (some world markets are
denominated in US$, e.g. oil)

Two sources of risk from exchange rate fluctuations:

1. Transaction risk:
only for the period of the transaction e.g. foreign transaction sales
currency depreciates  reduced return to exporter.

2. Competitive risk:
exporter’s own currency is increasing cost of exporter’s production from
home market, (e.g. A$ = US$0.52 in 2001 to US$1.02 in 2013 = 96%
increase). Products are no longer competitive.
Managing Exchange Risk
1. Risk shifting (short term: transaction risk) eg hedging:
• Immediate currency conversion is a ‘spot’ transaction
• Conversion in the future : a bank agrees to fix an exchange rate at a set
date in the future (expressed as a premium or discount on the spot rate,
equal to the interest rate differential between the two countries), thus
giving the exporter certainty regarding their exchange rate. Other options:
currency options & swaps.

2. Risk modifying (long term, strategic - competitive risk):

• Export prices may be adjusted or not depending on market conditions
(‘pass-through’ vs ‘absorption’).
• If competitive risk is too substantial, then refocus on a less affected market,
or ultimately shift production e.g. offshore via FDI
Strategic risk modifying behaviour
Example: Holden is selling its new Monaro to the US (rebadged as
Pontiac GTO). A$ rises against US$ from US$0.60 to US$1.02 (=
70% increase in cost of product compared to GM USA). Options
include:
1. ‘Pass-through’: keep price unchanged and force buyer to
absorb cost  loss of competitiveness potential loss of
market share. Depends on buyer’s level of preference for
product (demand) and level of price sensitivity.
2. ‘Absorption’: reduce export price according to the A$
appreciation  Goal of long-term market share maintenance.
 Managing foreign exchange risk:
beyond price manipulation
• Market refocus
• Streamline operations
• Shift in production
STRONG DOLLAR HURTING
LOCAL TOURISM

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 Sources of export financing
• Commercial banks
• Forfeiting
• Factoring
 Sources of export financing
• Official trade finance (loan or guarantee)
– government or private sector
– provides protection
– encourages competitive offers
– broadens potential markets
– leverage accounts receivable
 Pricing within individual markets:
corporate objectives
• Financial and marketing-related
• Skimming
• Penetration
• Price change frequency
• Product line pricing
 Pricing within individual
markets: costs
• Procurement, manufacturing, logistics and
marketing costs, overheads
• Inflation rates
• Lower costs through offshoring
 Pricing within individual
markets: costs
• Strategies for disinflationary time:
– target pricing
– value pricing
– no-frill products
– adding value
– getting close to customers
 Pricing within individual markets:
demand and market factors
• Demand will set a price ceiling
• Price elasticity of consumer demand
• Customer perceptions of the product offering
and the marketing communication
• Willingness of both the manufacturer and the
intermediary to cooperate
 Pricing within individual markets:
market structure and competition
• Competition helps set the price within cost
and demand parameters:
– bundled prices
– loyalty programs
– selective price cuts
– new products to counter price challenges
– value-adding
 Price skimming
• Price starts high to
– capture large profit margin
– due to novelty of product

• Price reduced as competitors

– enter with substitute products

• Works when:
– Demand is inelastic
– Product is unique, or
– is a technical breakthrough, or
– is legally protected (eg by patent)
– Competitors are slow or their entry is blocked
– Large product development costs need to be recovered

• Examples: pharmaceuticals, consumer electronics

 Penetration pricing
• Price starts low in order to
– flood market and gain initial
– majority market share &
– brand recognition

• Price rises as competitors

– are deterred and market
– dominance is achieved

• Works when:
– Demand is elastic & consumers are price sensitive
– Mass market consumable
– Small profit margins are compensated for by large volume
– Firm can subsidise early losses from other products or markets
– Product has little innovation = no IP protection
– Economies of scale exist for large volume production
– Large competitors exist who could make substitute products

• Example: processed foods

Cost plus pricing
• All costs (domestic cost + export costs, e.g. packing, delivery  FOB) =
$100/unit
• Plus fixed profit margin (e.g. 20%) = $ 20 /unit
• Price to buyer (FOB Sydney) = $120/unit
• Note:
– price is unrelated to competitiveness, affordability or profit
maximisation
– common in retail, services, starting exporters. Professional services
e.g. lawyer fees may charge $420/hr = 1/3rd salaries + 1/3rd office
overheads + 1/3rd profit margin
Marginal cost pricing
Normal export pricing:

Fixed costs (= costs of being in business, e.g. factory, office, admin staff)
= $60/unit
+ Variable costs (= production cost, e.g. materials, power, labour)
= $30/unit
+ Export costs (e.g. packing, shipping) = $ 10/unit
+ Profit (20%) = $20/unit
Total price = $120/unit

Note: Only applies when:

• all fixed costs are covered by the domestic market
• company has excess capacity
• is being used for short-term market penetration. Eventually, as exports
expand and excess capacity is all exhausted, company must capture all costs
in export price.
 Pricing within individual markets:
market structure and competition
• Predatory dumping
• Unintentional dumping
• Anti-dumping duty
• Countervailing duties
 Pricing within individual markets:
environmental constraints
• Government price controls
– tariffs
– taxes
 US TRADE PARTNERS
ANNOUNCE RETALIATORY
TARIFFS

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 Transfer pricing
• Pricing of sales to members of the corporate
family
• Due to different tax rates, different foreign
exchange rates, varying governmental
regulations and other economic and social
challenges
• Requires central management
 Objectives of transfer pricing
• Competitiveness in the international
marketplace
• Reduction of taxes and tariffs
• Management of cash flows
• Minimisation of foreign exchange risks
• Avoidance of conflicts
• Internal concerns – goal congruence,
motivation
Influences
on transfer
pricing
decisions
 Use of transfer prices to achieve
corporate objectives
Three philosophies of transfer pricing:
1. cost-based
2. market-based
3. arm’s-length price
 Transfer pricing challenges
• Performance measurement:
– apparent profit
– actual profit
• Taxation:
– What’s reasonable in the home country?
– What’s reasonable in the host country?
 Countertrade
• A type of barter arrangement
• Historically, no money involved; for
example, General Motors exchanged
cars for a train-load of strawberries
• Ideal when money as an exchange
medium is not acceptable, has no value,
or when there is a product surplus
 Why countertrade?
• Better than financial exchange alone
• Circumvent controls (exchange-rate volatility)
• Entry into new markets
• Long-term sales stability
• Uncompetitive goods may be marketed
• Online global barter economy
• Critics argue that countertrade can erode the
efficiency and quality of production
 Types of countertrade
• Barter arrangements
• Counterpurchase:
– two separate contracts
– may include cash
• Buyback:
– one party supplies technology or
equipment to another to produce goods
– those goods are sold to pay for supplies
 Types of countertrade

• Clearing arrangements:
– use of clearing accounts
– switch-trading
• Offset:
– government-mandated compensation
– defence-related goods and services
WHAT IS BARTERCARD?

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BARTERCARD STORY

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Discussion Question 1: Pricing objectives &
strategies
Using examples,
1. outline the various pricing objectives and identify
appropriate pricing strategies;
2. highlight the factors that influence pricing
objectives and strategies.
Discussion Question 2: Implication of Price Escalation

What are the implications of price escalation for

Australian and New Zealand exporters? How much
is it tied to currency fluctuations?
 Discussion Question 3: Incoterms

In relation to incoterms, which term is best for a

first-time exporter, and why?
Discussion Question 4: Full-cost Pricing Issues

The standard worldwide base price is most likely

looked upon by management as full-cost pricing,
including an allowance for manufacturing overhead,
general overhead and selling expenses.

What factors are overlooked?