Chapter – VI

Pricing and Terms of Payment

Price is the measure of value of something: an estimate of what
somebody or something is worth
In any country, three basic factors determine the boundaries within
which market prices should be set:
a) Product cost: which establishes a price floor, or minimum price.
Although it is certainly possible to price a product below the cost
boundary, few firms can afford to do this for extended periods of
time.
b) Competitive prices for comparable products create a price
ceiling, or upper boundary.
c) Differences in transportation charges and tariffs cause the landed
price of goods to vary by country. Differences in distribution
practices also affect the final price the end consumer pays.
Basic International Pricing Concepts
• As the experience of many companies show, the global
manager must develop pricing systems and pricing policies that
address price floors, price ceilings, and optimum prices in each
of the national markets in which his or her company operates.
• The task of determining prices in global marketing is
complicated by fluctuating exchange rates, which may bear
only limited relationship to underlying costs.
• A firm's pricing system and policies must also be consistent
with other unique global constraints.
• In addition to the diversity of national markets in all three basic
dimensions- cost, competition, and demand-the international
executive is also confronted by conflicting governmental tax
policies and claims as well as various types of price controls.
Environmental Influences on International Pricing Decisions
a). Currency Fluctuations: Are price adjustments appropriate when
currencies strengthen or weaken? change in currencies' relative
values: changes in the value of a currency in relation to others over
a period of time. There are two extreme positions;
 Fix the price of products in the currency of target country.
 Fix the price of products in home country currency.
• Pricing decisions should be consistent with the company's overall
business and marketing strategy
b). Exchange Rate Clauses: An exchange rate clause allows the buyer
and seller to agree to supply and purchase at fixed prices in each
company's national currency.
• If the exchange rate fluctuates within a specified range, say plus or
minus 5 %, the fluctuations do not affect the pricing agreement
that is spelled out in the exchange rate clause.
c). Pricing in an Inflationary Environment: Inflation requires
periodic price adjustment. These adjustments are necessitated
by rising costs that must be covered by increased selling prices.
d). Government Controls and Subsidies:
 If government action limits the freedom of management to
adjust prices, the maintenance of margins is definitely
compromised.
 In a country that is facing foreign exchange shortage
government officials are under pressure to take some type of
action.
 Government control can also take the form of prior cash
deposit requirements imposed on importers.
 Other government requirements that affect the pricing
decision are profit transfer rules that restrict it
e). Competitive Behavior: pricing decisions are bounded by cost, nature
of demand and by competitive action.
f). Price and Quality Relationships: The authors conclude that the lack
of a strong price-quality relationship appears to be an international
phenomenon. This is not surprising when one recognizes that
consumers make purchase decisions with limited information and
rely more on product appearance and style and less on technical
quality as measured by testing organizations.
g). Global Pricing Policies:
i). Standard Price Policy: An international marketer following a
geocentric approach to international marketing will adopt a standard
price policy.
• Firms that adopt this policy are generally of two types: first, firms
whose products or services are highly visible and allow price
comparisons to be readily made. Second, a firm that sells commodity
goods in competitive markets.
ii). Two- Tiered Pricing Policy:
 Firm that follows an ethnocentric approach will use it.
 Firm sets one price for all its domestic sales and a second price for
all its international sales.
 A firm that adopts this policy commonly allocates to domestic
sales all accounting charges associated with research &
development, administrative overheads, capital depreciation, and
so on.
iii). Market Pricing Policy: International marketers that follow a
polycentric approach to international marketing use it.
Two conditions must met to successfully practice it:
 The firm must face different demand and / or cost conditions in
which it sells its products.
 Firms most likely to use this approach are those that produce and
market their products in many different countries.
Accompany may follow different pricing strategies:
i). Market Skimming:
 It is a deliberate attempt to reach a market segment that is willing to pay a
premium price for a product.
 Initially setting high price
 It is often used in the introductory phase of the product life cycle, when
both production capacity and competition are limited.
 Its goal is to maximize revenue on limited volume and to match demand to
available supply.
ii). Penetration Pricing:
 Use price as a competitive weapon to gain market position.
 Initially setting low price
 Scale-efficient plants and low-cost labor allow these companies to blitz the
market. It should be noted that a first-time exporter is unlikely to use
penetration pricing.
 The reason is simple: Penetration pricing often means that the product may
be sold at a loss for a certain length of time.
iii). Market Holding: It is frequently adopted by companies that want to
maintain their share of the market. In single-country marketing, this
strategy often involves reacting to price adjustments by competitors.
• If the competitive situation in market countries is price sensitive,
manufacturers must absorb the cost of currency appreciation by
accepting lower margins in order to maintain competitive prices in
country markets.
iv). Cost Plus/Price Escalation: Companies new to exporting frequently use
a strategy known as cost -plus pricing to gain a toehold in the global
marketplace. Sum of all direct and indirect manufacturing and
overhead costs. An approach used in recent years is known as the
estimated future cost method.
• Cost-plus pricing requires adding up all the costs required to get the
product to where it must go, plus shipping and ancillary charges, and a
profit percentage.
• Price escalation is the increase in a product's price as transportation,
duty, and distributor margins are added to the factory price.
Using Sourcing as a Strategic Pricing Tool against Price Escalation
• Price escalation is the increase in a product's price as transportation, duty,
and distributor margins are added to the factory price. Marketers of
domestically manufactured finished products may be forced to switch to
lower-income, lower-wage countries for the sourcing of certain
components or even of finished goods to keep costs and prices competitive.

A). Dumping
• It is the sale of an imported product at a price lower than that nominally
charged in a domestic market. Types of dumping:
i). Sporadic dumping: occur when a manufacturer with unsold inventories
warts to get rid of distressed and excess merchandise.
One way to find a solution involves destroying excess supplies, as in the
example of Asian farmers dumping small chickens in the sea or burning
them. Another way to solve the problem is to cut losses by selling for any
price that can be realized.
The excess supply is dumped abroad in a market where the product is
normally not sold.
ii). Predatory dumping: Selling at a loss to gain access to a market and perhaps
to drive out competition. Once the competition is gone or the market
established, the company uses its monopoly position to increase price.
iii). Persistent dumping is the most permanent type of dumping, requiring a
consistent selling at lower prices in one market than in others.
 This practice may be the result of a firm's recognition that markets are
different in terms of overhead costs and demand characteristics.
 For example, a firm may assume that demand abroad is more elastic than it is
at home.
 The three kinds of dumping just discussed have one characteristic in
common: each involves charging lower prices abroad than at home.
B) Transfer Pricing
 Transfer pricing refers to the pricing of goods and service bought and sold by
operating units or divisions of a single company. In other words, transfer
pricing concerns intra-corporate exchanges-transactions between buyers and
sellers that have the same corporate parent.
 There are three major alternative approaches to transfer pricing are:
i). Cost-Based Transfer Pricing:
 Because companies define costs differently, some companies using the
cost-based approach may arrive at transfer prices that reflect variable and
fixed manufacturing costs only.
 Alternatively, transfer prices may be based-on full costs, including
overhead costs from marketing, research and development (R&D), and
other functional areas.
ii). Market-Based Transfer Price:
• A market based transfer price is derived from the price required to be
competitive in the international market.
• The constraint on this price is cost. However, as noted previously, there is a
considerable degree of variation in how costs are defined.
• Because costs generally decline with volume, a decision must be made
regarding whether to price on the basis of current or planned volume levels.
• To use market-based transfer prices to enter a new market that is too small
to support local manufacturing,
iii) Negotiated Transfer Prices
 It allow the organization's affiliates to negotiate transfer prices
among themselves. In some instances, the final transfer price
may reflect costs and market prices, but this is not a
requirement.
 The gold standard of negotiated transfer prices is known as an
arm's-length price: the price that two independent, unrelated
entities would negotiate.
Cartels
 It exists when various companies producing similar products
or services work together to control markets.
 It may use formal agreements to set prices. They eliminate
cutthroat competition and “rationalize” business, permitting
greater technical progress and lower prices to consumers.
Sale and Forms of Payment in International Marketing
Terms of sale
• Terms differ from country-to-country. International terms indicate how
buyers and seller divide risks and obligations. The most commonly used
international trade terms include:
a). CIF- (Cost, insurance, freight) to a named overseas port of import. It is
more meaningful to buyer b/c it includes the costs of goods, insurance and
all transportation and miscellaneous charges to the named place of
debarkation.
b). C&F-(cost and Freight) to named overseas port. The price includes cost of
goods and transportation costs to the named place of debarkation. The cost
of insurance is borne by the buyer.
c). FAS- (Free Alongside) at a named port of export. The price includes cost of
goods and charges for delivery of goods alongside the shipping vessel. The
buyer is responsible for the cost of loading on to the vessel, transportation
and insurance.
• Ex (Named Port of origin) the price quoted covers costs only at the point
of origin (example ex factory). All other charges are buyers concern .
 Forms of payment
The four basic forms of international marketing payment:
a) Letter of credit:
 It is an undertaking by a bank, so the seller can look to the
bank for payment
 It shift the buyer’s credit risk to the bank issuing it.
 Seller can draw a draft against the bank issuing it and receive
payments by shipping documents.
 In it, the credit of one or more bank is involved and the seller
risk is reduced considerably
 The Procedure for it begins with completion of the contract
when the buyer goes to a local bank and arranges for the
issuance of a letter of credit, the buyer’s bank then notify its
correspondent bank in seller’s country that the letter has been
issued.
b) Bills of exchange
 It is defined as an unconditional order in writing, addressed by
one person to another signed by the person giving it requiring
the person to whom it is addressed to pay on demand
 When the customer signs it, it becomes accepted and this means
that the customer has accepted the terms and agreed to pay by
the date designated in the document.
 In it the seller assumes all risk until the actual payment is
received. It has one of three time periods- sight, arrival or date.
 A sight draft requires acceptance and payment on presentation
of the draft and often before arrival of the goods.
 An arrival draft requires payment be made on arrival of goods.
A date draft has an exact date of payment and in no way is
affected by the movement of good
 Cont’d….
c) Cash payment in advance
 Cash places unpopular burden on the customer
and typically is used where buyer is unknown or
known to be unstable and there is little
likelihood of further orders being requested and
being paid for.
 It is also used when exchange restrictions within
the country of destination are such that the
return of funds from abroad may be delayed for
an unreasonable period.
 Export Documents and Shipment
• Principal export documents are as follows: -
i). Export Declaration:
- To maintain a statistical measure of the quantity of goods
shipped abroad and to provide a means of determining
whether regulations are being met.
- Declaration presented at the port of exit includes the names
and addresses of the principals involved, the destination of the
goods a full description of the goods and their declared value.
ii). Bill of Lading: a list of merchandise being transported,
especially by ship, together with the conditions that apply to
its transportation. It serves the following purposes
 as a contract for shipment between the carrier and shipper
 as a receipt from the carrier for shipment
 as a certificate of ownership or title to the goods.
iii). Commercial Invoice: Commercial invoice is a bill for good sold stating basic
information about the transaction merchandise description, cost of goods
shipper and seller addresses and delivery and payment terms. It include
information such as the origin of goods, export packing marks
iv). Insurance policy or certificate: It is evidence that insurance has been
obtained to cover stipulated risks, during transit. The risks of shipment due to
political or economic unrest in some countries
v). Export/Import Licenses: In many countries for exporting/importing goods the
exporter/ importer require license.
• Export license is a government document that permits the exporter to export.
Export licenses are of two kinds, they are general export license(GEL) and
validate export license (VEL)
• GEL is any export license covering export commodities for which a VEL is
not required. It requires no formal application.
• VEL is a required document issued by the government authorizing the export
of specified commodities. VEL is a special authorization for a specific
shipment and it is issued only on formal application.
vi). Certificate of product origin: Certificate of product origin confirms that the
goods being shipped were produced in the exporting country. The importing
country may require this so that it can assess tariffs and enforce quotas
 Inspection Certificates
 Inspection certificates may be needed to provide assurance that
the products have been inspected and that they confirm to
relevant standards like absence of disease and pests
 Buyers of agricultural products, grain, foodstuffs and live
animals frequently require inspection certificates, before a
country allows goods to enter its borders.
 For example imported foodstuffs must often meet rigorous
standards regarding pesticides, cleanliness, sanitation and
storage.
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