INTERNATIONAL PRICING. Pricing: * The only marketing mix element that generates revenues. * A flexible competitive tool. $$$

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Alexia Blake
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1 INTERNATIONAL PRICING Pricing: * The only marketing mix element that generates revenues. * A flexible competitive tool. $$$ International Pricing Situations First-Time Pricing Changing Price Transfer Price 1

2 Transfer Pricing Intra-corporate pricing of sales to members of the extended corporate family. The Parent Corporation A North America $$$ B $$$ Latin America C Africa Objectives of Transfer Pricing Reduction of taxes and tariffs Management of cash flows Minimization of foreign exchange risks Avoidance of conflicts with home and host governments over tax issues and repatriation of profits 2

3 Use of Transfer Pricing Moving Resources into B: Moving Resources out of B: A North America P1 P2 $$$ B $$$ Hong Kong C (or A) Latin America Transfer Pricing Challenges Internal Performance Measurement Discrepancy of a subsidiary s reported and actual profit performance Difficulty in maintaining relationships with subsidiaries that are negatively impacted by transfer pricing. Section 482 of the Internal Revenue Code recognizes four methods to determine arm s length pricing: The comparable uncontrolled price method The resale price method The cost-plus method Any other reasonable method 3

4 First-Time Pricing Skimming Pricing > Initial high price to skim maximum revenues. > Results in fewer, more profitable sales. Penetration Pricing > A low price to attract a large number of buyers. > Results in a larger market share. Market Pricing >Adjust the price to meet competition. >Results in securing exiting position. Bases for Changing Price Improved or adapted product Market Conditions: demand, exchange rate competition Corresponding to new marketing program 4

5 Factors Affecting Pricing Decisions Pricing objective Market demand Costs Competition Channel structure Government regulations Terms of Sales CIF- (Cost, Insurance, Freight) to a named overseas port of import. C&F- (Cost and Freight) to a named overseas port. FAS- (Free Alongside) at a named U.S. port. FOB- (Free on Board) at a named inland point of origin, at a named port, or at a named vessel. EX- (Name Port of Origin). The price quoted covers costs only at the point of origin (example, EX Factory). All other charges are the buyer s concern. 5

6 Who is responsible? FOB (Free on FOB (Free on FAS (Free CIF (Cost Board) Inland Board) Inland Along Side) Insurance, Carrier at Carrier at Vessel or Freight) at Factory Points of Plane at Port Port of Shipment of Shipment Destination Export packing* Buyer Seller Seller Seller Inland freight Buyer Seller Seller Seller Port charges Buyer Buyer Seller Seller Forwarder's fee Buyer Buyer Buyer Seller Consular fee Buyer Buyer Buyer Buyer ** Loading on vessel or plane Buyer Buyer Buyer Seller Ocean freight Buyer Buyer Buyer Seller Cargo insurance Buyer Buyer Buyer Seller Customs duties Buyer Buyer Buyer Buyer Ownership of When goods on When goods When goods When goods goods passes board an inland unloaded by alongside on board air carrier (truck, rail, inland carrier carrier, in or ocean etc.) or in hands hands of air carrier at port of inland carrier or ocean carrier of shipment Methods of Payment Letter of Credit: issued by a bank for the buyer Revocable vs. Irrevocable Confirmed vs. Unconfirmed Revolving vs. Nonrevolving Cash in advance: for custom-made products or when buyer s credibility is in doubt. Documents against payments / documents against acceptance Open Accounts: for trustworthy long-term customer Consignment: pay when product is sold Forfaiting: offer financing then sell receivables 6

7 International Transactions: A Simplified View Foreign Bank 3 U.S. Bank 1 2 6&7 4 Foreign Company Product shipped 5 U.S. Company The Risk/Cost of Payment Terms Risk to Exporter Least Risk Highest Risk Confirmed Irrevocable Documents Documents Cash in Irrevocable Letter of Against Against Open Advance Letter of Credit Credit Payment Acceptance Account Cost to Buyer Highest Cost Least Cost 7

8 Price Escalation in Export Marketing The disproportional increase in final consumer price in the export markets. Contributing Factors Added costs: tariffs, taxes,... Longer Channel Export related costs Price Escalation Exchange rate fluctuations Large middlemen margins 8

9 Methods for combating price escalation Reorganize the channel of distribution Product adaptation Change tariff or tax classifications Overseas assembly or production 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 9

EXW EX WORKS (... named place) FCA. FREE CARRIER (... named place)

EXW EX WORKS (... named place) "Ex works" means that the seller delivers when he places the goods at the disposal of the buyer at the seller s premises or another named place (i.e. works, factory, warehouse,