Because learning changes everything.

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.
• Bitcoin and blockchain protocol.

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 Pricing Policy 1 of 3

Culture may impact price variations

• For example, in cultures high in power distance, consumers are
less price sensitive and rely more on price as a signal of quality.

Pricing activity affected by

• Country in which business is being conducted.
• Type of product.
• Competitive conditions.
• Tax rates in home versus subsidiary countries.

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 Pricing Policy 2 of 3

Pricing Objectives
Pricing decisions
• As an active instrument to accomplish market objectives:
• Company sets prices rather than following market prices.
• Achieve objectives: target returns on profit, sales volume.
• As a 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 3 of 3

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 its own
subsidiaries or branches.
• Pharmaceuticals, luxury goods prone to develop gray markets.
• N95 masks a gray market during the COVID-19 pandemic.
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

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 Approaches to International Pricing 1 of 5

Cost and market considerations

• Cannot sell goods below cost of production or above
what the market will accept.
Strategic pricing
• Segmentation from country to country or market to
market.
• Competitive pricing in the marketplace.
• Price for stability of operations.
• Cultural differences in perceptions of pricing.

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 Approaches to International Pricing 2 of 5

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.

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 Approaches to International Pricing 3 of 5

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 4 of 5

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.
• May be used for public policy reasons; e.g., high
base price on alcohol to discourage consumption.

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 Approaches to International Pricing 5 of 5

Penetration pricing
• Deliberately offering products at low prices.
• Competitive maneuver to capture market share.

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 Walmart in China

Chinese flock to Walmart’s wholesale

outlet Sam’s Club, on the far western
edge of Beijing, where the world’s
biggest retailer made its first foray
into a major Chinese city. Walmart
now has over 400 retail stores and 20
wholesale operations in China; the
first opened in 1996. The low-price-
for-good-quality strategy of Walmart
and other mass 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.

© McGraw Hill LLC David G. Mcintyre/EPA/REX/Shutterstock 13

 Price Escalation 1 of 6

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 intermediary margins.
• Exchange rate fluctuations.
• Cultural factors.
© McGraw Hill LLC Paul Maguire/Shutterstock 14
 Price Escalation 2 of 6

Taxes, Tariffs, and Administrative Costs

Tariffs, or duties, are special form of taxation
• Levied to protect market or increase government revenue.
• Discriminate against all foreign goods.
• Hurt domestic market if counter-tariffs follow.

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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 Tariffs and Price Escalation

A Japanese wholesale store manager of a meat market in Tokyo arranges packs of

beef imported from Australia. Earlier in the day, the government had announced
plans to raise its tariff on refrigerated beef imports to 50 percent from 38.5
percent, following a spike in imports. The price tag reads: “Premium beef, sirloin
steak from Australia @ 258 yen per 100 grams.” Tariffs are one of the main causes
of price escalation for imported products.
© McGraw Hill LLC Everett Kennedy Brown/EPA/Shutterstock 16
 Price Escalation 3 of 6

Inflation
Causes higher cost of production and replacement
Company raises price of good for consumer
• Ultimately excludes many consumers from market.
Spike in inflation in U.S. and abroad caused by
COVID-19

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 Price Escalation 4 of 6

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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 Deflation in Japan

Shoppers look at stacks of discount clothing jutting out on a sidewalk to attract

potential buyers at Tokyo’s Sugamo shopping district. With the stock market
plunging to 16-year lows, talk of deflationary dangers, and a morass of confusion in
its political leadership, Japan appeared to be headed toward a serious economic
crisis. The central bank played down the possibility of deflation, saying that falling
prices show the market is finally opening up to competition.
© McGraw Hill LLC MAHATHIR MOHD YASIN/Shutterstock 19
 Price Escalation 5 of 6

Exchange Rate Fluctuations

World trade contracts are difficult to write
• Payment specifications are 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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 Currency Devaluation

During the mid-1990s, Mexico

knocked three zeroes off the
peso in response to a major
devaluation. Venezuela did the
same in 2008. In 2005 Turkey
knocked six zeroes off its lira
toward its alignment with the
European Union. Both actions
affected perceptions of key
constituencies. Both bills were
worth about 75¢.

© McGraw Hill LLC ©John Graham 21

 Hyperinflation

Zimbabwe suffered through hyperinflation in 2008, which hit 500 trillion percent that
year. The currency was cancelled in 2009 because it had basically become worthless.
In 2015, exchange was reopened at the rate of 35 quadrillion Zimbabwe dollars for a
U.S. dollar. A conversion to smaller notes in 2, 5, and 10 denominations helped the
situation, but today people pay with coins or their mobile phones.

© McGraw Hill LLC Sources: Reuters, June 11, 2015; Ray Ndlovu, “Zimbabwe’s Dollar-Only Exchange Struggles to Win Over Foreigners,” Bloomberg, March 9, 2022. © Bruce Money 22
 Varying Currency Values and Price

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.
© McGraw Hill LLC Jochen Tack/imageBROKER/Shutterstock 23
 Price Escalation 6 of 6

Intermediary and Transportation Costs

Channel diversity impacts Varying channel length, marketing

exporting costs patterns, and distribution infrastructure
quality

Costs are difficult to No convenient source of data on

anticipate intermediary 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 intermediaries
Intermediaries 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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 Exhibit 18.2 Sample Causes and Effects of
Price Escalation
Foreign Example 1: Foreign Foreign Example 3:
Assuming the Same Example 2: Same as 2 but with
Channels with Importer and 10 Percent
Wholesaler Same Margins Cumulative
Domestic Importing Directly and Channels Turnover Tax
Example
Manufacturing net $ 5.00 $ 5.00 $ 5.00 $5.00
Transport, CIF n.a. 6.10 6.10 6.10
Tariff (20 percent CIF value) n.a. 1.22 1.22 1.22
Importer pays n.a. n.a. 7.32 7.32
Importer margin when sold to n.a. n.a. 1.83 1.83
wholesaler (25 percent on cost) +0.73
Wholesaler pays landed cost 5.00 7.32 9.15 9.88
Wholesaler margin (33⅓ percent 1.67 2.44 3.05 3.29
on cost) +0.99
Retailer pays 6.67 9.76 12.20 14.16
Retail margin (50 percent on 3.34 4.88 6.10 7.08
cost) +1.42
Retail price $10.01 $14.64 $18.30 $22.66
Notes: All figures in U.S. dollars; CIF = cost, insurance, and freight; n.a. = not applicable. The exhibit assumes that all domestic transportation costs are absorbed by the intermediary. Transportation,
tariffs, and intermediary margins vary from country to country, but for the purposes of comparison, only a few of the possible variations are shown.
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 Approaches to Reducing Price Escalation 1 of 4

Lowering Cost of Goods

Lowered cost of manufacturing impacts entire chain
• Manufacture in third country with low labor costs.
• Eliminate costly product features.
• Some price reductions enacted for the good of the global
public during the COVID-19 pandemic.

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 Approaches to Reducing Price Escalation 2 of 4

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

Hugh Jackman portraying Wolverine, an X-Men fictional character from

Marvel Enterprises.
© McGraw Hill LLC Attila Dory/20th Century Fox/Marvel Ent Group/Kobal/Shutterstock 29
 Approaches to Reducing Price Escalation 3 of 4

Lowering Distribution Costs

Shorter channels keep prices under control
• Fewer intermediary 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 4 of 4

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

Advantages 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
Seeing equipment in use helps other companies in
that country also consider leasing
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
use.
• 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
goods offered as payment
Parties must know the value of both sides of the
deal, or the countertrade will produce bad results
Ways to overcome the 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

Important venue for countertrading
Several barter houses have auction sites
• Internet exchanges are expanding to include global barter.

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 Price Quotations

Necessary Components When Quoting Prices

• 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/eliminate impact of price competition.
• U.S. price-fixing scandals have spanned the range from
grocery store chicken to tuition collusion among Ivy League
universities.
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
Difficult for law enforcement to track criminal
cartels (e.g., illegal drugs, human trafficking)

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 The Organization of Petroleum
Exporting Countries (OPEC)

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 $50 per barrel because of slackening
demand worldwide and new production in the United States.
© McGraw Hill LLC Bagus Indahono/EPA/Shutterstock 40
 Exhibit 18.4 The Volatility of Oil Prices
(Average spot, U.S.$/barrel)

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© McGraw Hill LLC Sources: Statista, 2022; [Link], 2022. 41

 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
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.

© McGraw Hill LLC Will Ragozzino/BFA/REX/Shutterstock 42

 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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 Price Controls in China

This signage near Guilin, China,

at first glance suggests to
foreigners the gasoline price
posting typical in most countries.
But, no: This listing refers to
available octanes. In China, the
government controls pricing at
its state-owned gas stations, so
there is no reason to look for
bargains or to smile at the
prices! At the end of 2018, the
price of gas in China was about
$4 per gallon, as it was in Turkey;
$6 in the United Kingdom, $8 in
Norway, $1 in Egypt, and $.01,
that’s right, one cent, in oil-
rich, car-poor Venezuela.
© McGraw Hill LLC ©John Graham 44
 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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 Exhibit 18.5 A Letter-of-Credit Transaction 1 of
2

Here is what typically happens when payment is made by an irrevocable letter of credit confirmed by
a U.S. bank. Follow the steps in the illustration below.
1. Exporter and customer agree on terms of sale.
2. Buyer requests its foreign bank to open a letter of credit.
3. The buyer’s bank prepares a letter of credit (LC), including all instructions, and sends the letter of
credit to a U.S. bank.
4. The U.S. bank prepares a letter of confirmation and letter of credit and sends to seller.
5. Seller reviews LC. If acceptable, it arranges with freight forwarder to deliver goods to designated
port of entry.
6. The goods are loaded and shipped.
7. At the same time, the forwarder completes the necessary documents and sends documents to the seller.
8. Seller presents documents, indicating full compliance, to the U.S. bank.
9. The U.S. bank reviews the documents. If they are in order, it issues seller a check for the amount of sale.
10. The documents are airmailed to the buyer’s bank for review.
11. If documents are in compliance, the bank sends documents to buyer.
12. To claim goods, buyer presents documents to customs broker.
13. Goods are released to buyer.

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 Exhibit 18.5 A Letter-of-Credit
Transaction 2 of 2

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© McGraw Hill LLC Source: Based on “A Basic Guide to Exporting,” U.S. Department of Commerce, International Trade Administration, Washington, DC. 48
 Dual Currencies in Cuba

Cuba instituted two currencies in 1994,

when the country was reeling from the loss
of subsidies from the Soviet Union, on which
it had relied during the cold war. The two
currencies were the Cuban peso (CUP—which
features portraits of leaders) and the Cuban
convertible peso (CUC, which features
statues). Both types are shown here, and
you could exchange them for euros or
Canadian dollars, but not U.S. dollars, based
on government restrictions on trade with
Cuba. The convertible Cuban peso was
pegged to the U.S. dollar, at a 1-to-1 value,
to stabilize its value. The non-convertible
Cuban peso was used only for domestic
transactions, at a worth of 1/25 of its
convertible brother. In 2020, Cuba ended its
dual-currency system, which produced
inefficiency in the public sector and
corruption in black-market currency trades.

Source: “Cuba’s Currency—Double Trouble,” The Economist, November 23, 2013, online; “Cuba Ends Its Dual-Currency System,” The Economist,
© McGraw Hill LLC December 16, 2020, online. (top: ©Bruce Money; bottom: ©John Graham) 49
 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
Used when:
• Credit is doubtful.
• Exchange restrictions within the country delay process.
• U.S. 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 used in foreign trade only with:
• Long-standing customers with excellent credit.
• Subsidiary or branch of the exporter.
Use not recommended when:
• 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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