Chapter 18

Pricing for International Markets

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 Learning Objectives
18-1 Components of pricing as competitive tools in
international marketing
18-2 How to control pricing in parallel import or gray markets
18-3 Price escalation and how to minimize its effect
18-4 Countertrading and its place in international marketing
practices
18-5 The mechanics of price quotations
18-6 The mechanics of getting paid

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 Introduction
Variables Impacting Price
• Tariffs
• Costs
• Attitudes
• Competition
• Currency fluctuations
• Methods of price quotation
• Methods of payment

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 Pricing Policy 1 of 2
Pricing Objectives
• Pricing decisions
• Active instrument to accomplish market objectives
• Company sets prices rather than following market prices
• Achieve objectives: target returns on profit, sales volume

• Static business element

• Views exports as passive contribution to sales volume, and probably
only exports excess inventory
• Places low priority on foreign business

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 Pricing Policy 2 of 2
Parallel Imports
• Firms charge different prices per country
• Parallel (gray) market
• Product sold to developing country for discounted price
• Product exported illegally to other countries for same price
• Results in competition between company and own subsidiaries or
branches

• Exclusive distribution
• Company restricts which retailers can carry product

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 Exhibit 18.1 How Gray Market Goods End Up in
U.S. Stores
1. A major manufacturer agrees to sell its
products, at a price competitive for an
overseas market, to “Buyer X” who
promises to sell the products overseas.
2. The manufacturer ships the goods to
Buyer X.
3. Buyer X has a local freight forwarder at
the port take possession of the goods.
4. Instead of shipping the goods to their
supposed destination, the freight
forwarder (at the behest of Buyer X)
sends them to smaller distributors and
discount outlets in the United States.
5. The freight forwarder sends a bogus bill
of lading to the manufacturer, so the
company believes the goods have been
sold overseas.

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 Approaches to International Pricing 1 of 2
Full-cost pricing
• No unit of similar product is different in cost from others;
each must bear full share of total fixed and variable cost
• Suitable when high variable costs relative to fixed costs
Variable-cost pricing
• Firms are concerned only with marginal or incremental
cost of producing goods to be sold overseas
• Foreign sales are a bonus contribution to net profit
• Practical when fixed costs are high and there is unused
production capacity

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 Approaches to International Pricing 2 of 2
Skimming pricing
• Used to reach segment of market that is price insensitive
and willing to pay a premium price for product
• Used in markets with two income levels: wealthy and poor
Penetration pricing
• Deliberately offering products at low prices
• Competitive maneuver to capture market share

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 Walmart in China
Chinese wait to enter Beijing’s first
Walmart outlet. Thousands crowded
the Sam’s Club store on the far
western edge of Beijing as the world’s
biggest retailer made its first foray
into a major Chinese city. Walmart
now has nearly 200 stores elsewhere
in China; the first opened in 1996.
The low-price-for-good-quality
strategy of Walmart and other mass
© David G. Mcintyre/EPA/REX/Shutterstock
retailers such as Costco and Carrefour,
the French supermarket chain, have
resulted in lower retail prices in
China, Japan, and other Asian
countries they have entered.

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 Price Escalation 1 of 5
Costs of Exporting
• Key cause of price escalation
• Higher cost of product in foreign market than domestic market

• Main elements
• Shipping and packing costs
• Insurance
• Financing costs
• Tariffs, taxes, and administrative costs
• Larger middleman margins
• Exchange rate fluctuations

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 Price Escalation 2 of 5
Tariffs a special form of taxation
• Serve to discriminate against all foreign goods
• Hurt domestic market if counter-tariffs implemented
Administrative fees add to overall export cost
• Obtaining export licenses, import licenses, and other
documents
• Physical arrangement for transportation
• Can reach such a level that they are, in fact, import taxes

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 Price Escalation 3 of 5
Inflation
• Causes higher cost of production and replacement
• Company raises price of good for consumer
• Ultimately excludes many consumers from market

Deflation
• General costs low in market
• All in supply chain pressured to lower costs to make sales
• Company must raise brand value to win consumer trust

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 Price Escalation 4 of 5
Exchange Rate Fluctuations
• World trade contracts difficult to write
• Payment specifications challenging with changing currency
• All major currencies are floating freely relative to one another

Varying Currency Values

• Impacts consumers’ perceptions of value
• Changes cost of exporting products and impacts price

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 Varying Currency Values and Price

© Jochen Tack/imageBROKER/REX/Shutterstock
McDonald’s Japan announced that it would reduce the price of hamburgers by 30
percent for a month to return to customers the profit the company made by the
strong yen against U.S. dollars in importing the raw materials from abroad.
McDonald’s move created goodwill among its customers at a time when it is forced to
lower prices to “hike” sales in an economy that is suffering a major downturn. This
move is a good example of how differences in the value of currencies can be positive
for a company, as in this case, or negative when the value of the dollar is much
stronger than the local currency.
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 Price Escalation 5 of 5
Middleman and Transportation Costs
• Channel diversity impacts exporting costs
• Varying channel length, marketing patterns, and distribution
infrastructure quality

• Costs difficult to anticipate

• No convenient source of data on middleman costs
• International marketer must rely on experience and research

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 Sample Effects of Price Escalation
A Spiral Effect
• Higher prices lead to lower sales
• Less turnover for middlemen
• Middlemen insist on higher margins to defray costs
• Company must raise prices
• Confines sales to limited segment of market
• Only wealthy customers able to buy product
• Low-income consumers priced out of market

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 Approaches to Reducing Price Escalation 1 of 3
Lowering Cost of Goods
• Lowered cost of manufacturing impacts entire chain
• Manufacture in third country with low labor costs
• Eliminate costly product features

Lowering Tariffs
• Reclassify product into lower customs classification
• Different classifications have different tariff rates
• Product can be modified or repackaged to fit classification

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 Customs Classifications and Tariffs

©Attila Dory/20th Century Fox/Marvel Ent Group/Kobal/REX/Shutterstock

Hugh Jackman portraying Wolverine, an X-Men fictional character from Marvel
Enterprises. A tariff classification issue arose when the company declared the imported
toy characters as nonhuman toys and U.S. Customs said that they were human figure
dolls—tariffs on dolls at that time were 12 percent versus 6.8 percent for toys. U.S.
Customs alleged that the X-Men figures were human figures and thus should be
classified as dolls, not figures featuring animals or creatures, which would mean that
they could be classified as toys. Product classifications are critical when tariffs are
determined.
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 Approaches to Reducing Price Escalation 2 of 3
Lowering Distribution Costs
• Shorter channels keep prices under control
• Fewer middlemen markups; may mean lower overall taxes

Using Foreign Trade Zones

• Free trade zones
• Added charges, taxes, and tariffs can be avoided
• Final price of product not as high; more competitive

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 Approaches to Reducing Price Escalation 3 of 3
Dumping
• Two approaches to dumping international shipments
• Sold at price below cost of production
• Sold in foreign market below price of same goods in home market

• Highly regulated pricing approach

• WTO rules allow for imposition of a duty when goods are dumped
• Countervailing duty or minimum access volume (MAV); restricts
amount country will import of good

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 Leasing in International Markets 1 of 2
Benefits of Leasing
• Opens door to large segment of market
• Nominally financed firms unable to buy but able to lease

• Eases risk of selling new, experimental equipment

• Better maintenance and service on overseas equipment
• Equipment leased and in use helps sell other companies in
that country
• Revenue more stable over time than direct sales

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 Leasing in International Markets 2 of 2
Disadvantages of Leasing
• Inflation
• Leasing attractive in countries prone to spiraling inflation
• Problematic when contract includes maintenance or supply parts;
can lead to heavy losses near end of contract period

• Currency devaluation
• Expropriation
• Political risks

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 Countertrade as a Pricing Tool 1 of 3
Countertrade
• A pricing tool that international marketers should employ
• Willingness to countertrade is a competitive advantage
• Also known as a barter

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 Countertrade as a Pricing Tool 2 of 3
Problems of Countertrading
• Determining the value and potential demand of good
offered as payment is a challenge
• Ways to overcome challenge
• Conduct preliminary research prior to countertrade
• Use a barter house; they specialize in trading goods acquired
through countertrading agreements

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 Countertrade as a Pricing Tool 3 of 3
The Internet and Countertrading
• May become most important venue for countertrading
• Several barter houses have auction sites
• Internet exchanges are expanding to include global barter

• Electronic barter economy with a universal e-dollar

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 Price Quotations
Necessary Components
• Clear description of who is responsible for transportation
of goods, including who pays and from which point
• Specification of currency to be used, credit terms, and the
type of documentation required
• Definition of quantity and quality

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 Administered Pricing 1 of 3
Administered Pricing
• An attempt to establish prices for an entire market
• Prices may be arranged through the cooperation of competitors;
national, state, or local governments; or international agreement
• Goal is to reduce or eliminate impact of price competition

• Legality of agreements varies from country to country and

from time to time

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 Administered Pricing 2 of 3
Cartels
• Many companies producing similar products work together
to control markets for goods and services they produce
• Unable to maintain market control for indefinite periods
• Greed by cartel members weakens control

• Legality of cartels is not clearly defined; varies by country

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 The Organization of Petroleum Exporting
Countries (OPEC)

©Bagus Indahono/EPA/REX/Shutterstock
Oil prices quadrupled in the mid-1970s because of OPEC’s control of supplies.
The $100+ per barrel oil you see in this picture was caused by burgeoning
demand in China and around the world in 2008. Pertamina is the Indonesian
national oil company. Indonesia terminated its membership in OPEC in 2009.
Circa 2015, prices had dropped to below $50 per barrel because of slackening
demand worldwide and new production in the United States.
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 Diamond Cartel
The De Beers company is one of the
world’s largest cartels, and for all
practical purposes, it controls most
of the world’s diamonds and thus is
able to maintain artificially high
prices for diamonds. One of the ways
in which it maintains control is
illustrated by a recent agreement
©Will Ragozzino/BFA/REX/Shutterstock

with Russia’s diamond monopoly, in

which De Beers will buy at least $550
million in rough gem diamonds from
Russia, or about half of the country’s
annual output. By controlling supply
from Russia, the second largest
producer of diamonds, the South
African cartel can keep prices high.

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 Administered Pricing 3 of 3
Government-Influenced Pricing
• Establish margins
• Set price floors and ceilings
• Restrict price changes
• Compete in the market
• Grant subsidies
• Act as a purchasing monopsony or selling monopoly
• Encourage businesses to collude in setting manipulative
prices

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 Getting Paid: Foreign Commercial Payments 1 of 6
Basic Arrangements
1. Letters of credit
2. Bills of exchange
3. Cash in advance
4. Open accounts
5. Forfaiting

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 Getting Paid: Foreign Commercial Payments 2 of 6
Letters of Credit
• Afford greatest degree of protection for seller
• Buyers’ credit risk shifted to the bank issuing the letter
• Buyer cannot alter agreement without permission
• Must be exact in their terms and considerations

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 Getting Paid: Foreign Commercial Payments 3 of 6
Bills of Exchange
• Also known as dollar drafts
• Seller assumes all risk until actual dollars received
• Dollar drafts are advantageous for seller
• Can frequently be discounted at bank for immediate payment
• Firm evidence in the case of default and subsequent litigation

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 Getting Paid: Foreign Commercial Payments 4 of 6
Cash in Advance
• Not widely used; places burdens on the customer
• Situations in which this option is used
• When credit is doubtful
• When exchange restrictions within the country delay process
• When the American exporter is unwilling to sell on credit terms

• Partial payment in advance used when the character of

merchandise is such that an incomplete contract would
result in a heavy loss

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 Getting Paid: Foreign Commercial Payments 5 of 6
Open Accounts
• Generally not used in foreign trade, except with long
standing customers with excellent credit or with a
subsidiary or branch of the exporter
• Situations in which this option is not recommended
• The practice of trade is to use some other method
• Special merchandise is ordered or shipping is hazardous
• Political unrest or exchange restrictions exist in country of
importer

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 Getting Paid: Foreign Commercial Payments 6 of 6
Forfaiting
• Occurs when seller cannot offer long-term financing for a
cash-short customer
• Forfaiter assumes risks
• Risk of collecting the importer’s payments
• Political risks present in importer’s country

Factoring
• Bank acts as a collections department for its client

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