Chapter 11

1. Chapter 11 Export Pricing

2. Price Dynamics in First-time Pricing Skimming pricing – used to achieve highest possible contribution in a short time period Market pricing – product already exists, based on competitive prices, production and marketing must be adjusted to price Penetration pricing – product is offered at a low price intended to generate volume sales and achieve high market share

3. Stages in Setting of Export Prices External Internal • Market related factors Nature of demand/target demographic Government regulations Exchange rate stability • Industry-related factors Competition intensity Nature of competition Marketing mix Product (old/new, standard/differentiated) Distribution system Promotion needs Company characteristics Extent of internalization Countries exported to Management attitudes Importance of exports Overall price position of firm

4. Export Pricing Strategy Standard worldwide price – same price regardless of buyer, or based on average unit costs of fixed, variable, and export-related costs Cost-plus method – true cost, fully allocating domestic and foreign costs to the product Marginal cost method – considers direct costs of producing and selling products for export as the floor beneath which prices cannot be set Market differentiated pricing – according to the dynamic conditions of the marketplace

5. Export Related Costs The cost of modifying the product for foreign markets Operational costs of the export operation: personnel, market research, shipping and insurance costs, overseas promotion Costs incurred in entering foreign market: tariffs and taxes, credit and political risks, foreign exchange risks

6. Methods for Overcoming Export Related Costs Reorganizing of distribution, spaghetti and macaroni in Japan example

7. Methods for Overcoming Export Related Costs • Adapt the product – less expensive ingredients and packaging, unbundling costly features • Work with government to lower tariffs • Land Rover in U.S. overcomes luxury tax by being considered a truck • Assemble or produce overseas • Lower costs of labor

8. Methods of Payment for Export • Cash in advance – no risk for exporter • Consignment selling – payment for goods after sold by importer • Open credit • Letter of credit – issued by a bank at the request of buyer by means of a bank draft • Irrevocable vs revocable - all are considered irrevocable unless stated otherwise. • Confirmed vs unconfirmed - bank assumed risk or not. • Revolving vsnonrevolving - valid for only one transaction, or for more than one.

9. Additional Risks Associated with Credit Credit reports may be unreliable Audited reports may not be available. Financial reports may have been prepared according to a different format. Many governments require that assets be annually reevaluated upward, which can distort results. Statements are in local currency. The buyer may have the financial resources in local currency buy may be precluded from converting to dollars because of exchange controls and other government actions.

10. Managing Foreign Exchange Risk Shifting of risk through foreign currency contractracual hedging Risk modifying by manipulating prices and marketing strategy Forward exchange market – exporter gets a bank to agree to a rate at which it will buy the foreign currency after payment, contractual Option – gives the exporter the right to buy or sell foreign currency at a prespecified price, flexible Futures – similar to forward exchange markets, but in smaller amounts Pass-through - export price decreases in conjunction with increases in the value of import currency to maintain stable prices Absorption – increase in the exchange rate price is absorbed into margin, possibly resulting in loss Pass through only a portion of increase to customer

11. Managing Foreign Exchange Risk Beyond Price Manipulation Refocusing the market to other locations Streamline operations by using more aggressive collection methods, letters of credit or insurance to guarantee payment. Shift in production to lower cost areas

12. Sources of Export Financing Commercial banks – centered around trust, building alliances with foreign banks Forfaiting – importer pays the exporter with bills of exchange or promissory notes guaranteed by a leading bank in the importer’s country Factoring – companies purchase an exporter’s receivables for a discounted price

13. Other Notes Price negotiations should be done carefully and have some comparison basis. Quality and reliability of delivery should be agreed upon first to ensure long term relationship. Leasing is a growing enterprise in international business. Great way to attract new customers to an unfamiliar product.

14. Dumping Low priced imports can trigger accusations of dumping. Can lead to higher tariffs. Proceeds from tariffs given to affected companies within industry. Retaliatory measures can hurt industry as a whole.

15. Chapter 17 Global Pricing

16. Transfer Pricing Pricing within Individual Markets Dealing with Financial Crisis Countertrade

17. Transfer Pricing Is the pricing of sales to members of the extended corporate family Increasing competition, government regulation, accelerating inflation and widely fluctuating exchange rates Because of globalization and consolidation across borders, transfer pricing has to be managed in a world with different tax rates, different foreign exchange rates, different government regulations and other economic and social challenges

18. Transfer Pricing The central management of the multinational corporation establishes the appropriate transfer price to achieve the following objectives Competitiveness in the international marketplace Reduction of taxes and tariffs Management of cash flows Minimization of foreign exchange rates Avoidance of conflicts between home and host governments Internal concerns such as goal congruence and motivation of subsidiary managers

19. Transfer Pricing Factors that have a major influence on intracompany prices (transfer prices) are market conditions in target countries, competition in target countries, corporate taxes at home and in target countries, import restrictions, customs duties, price controls, exchange controls and reasonable profit for foreign affiliates 2 types of challenges for transfer pricing Internal- Concerns the motivation of those affected by the pricing policies of the corporation External- Deals with the relations between the corporation and tax authorities in both the home country and the host country

20. Transfer Pricing 3 philosophies of transfer pricing have emerged overtime: Cost based- Pricing strategy based on the true cost of a product Market based- Derived from the end market prices Arm’s length price- Price that unrelated parties would have reached on the same transaction Good-citizen fiscal approach

21. Transfer Pricing The U.S. government has affirmed the Arm’s Length Standard as the principal basis for transfer pricing. There are six methods of determining an Arm’s Length Price Comparable uncontrolled price method Resale price method Cost-plus method Comparable profits method Profit split method Any other reasonable method

22. Pricing within Individual Markets Pricing decisions are left to local managers with assistance by the parent company Each market has its own unique set: Corporate Objectives Costs Customer Behavior and Market Conditions Market Structure and Competition Environmental Constraints

23. Corporate Objectives Global marketers must set and adjust their objectives both FINANCIAL and MARKET STRUCTURE based on the prevailing conditions in each of their markets Pricing may well influence the overall strategic moves of the company as a whole

24. Costs Costs are frequently used as a basis for price determination Include procurement, manufacturing, logistics, marketing and overhead Offshore

25. Costs Strategies for thriving in disinflationary times include 1)Target Pricing- efficiencies are sought in production and marketing to meet price driven costing 2) Value Pricing- Have everyday low pricing 3) Stripping down products- Offer quality without all the frills 4) Adding Value- By introducing innovative products sold at a modest premium but perceived by customers to be worth it 5) Getting close to Customers- By using new technologies (such as the internet and EDI to track their needs and company costs more closely)

26. Customer Behavior and Market Conditions Customer demand will set a price ceiling in a given market The global marketer must make judgments concerning the quantities that can be sold at different prices in each market Global marketer must understand the price elasticity of consumer demand to determine appropriate price levels Marketer’s freedom in making pricing is closely tied to customer perceptions of the product offering and the marketing communication to it. Example, NUMMI Inc.

27. Market Structure and Competition Competition helps set the price within the parameters of cost and demand Depending on the marketer’s objectives and competitive position, the marketer may choose to compete directly on price or elect for non price measures. Example Japanese Kao low price diskette

28. Environmental Constraints Governments influence prices and pricing In addition to policy measures such as tariffs and taxes the governments may elect to directly control prices

29. Dealing with Financial Crisis Economic crisis have hit many of the world’s emerging markets in the last twenty years. Example Currency crisis in Asia Effective marketing planning and implementation to take on additional significance

30. Dealing with Financial Crisis Pricing coordination The issue of standard worldwide pricing has been mostly a theoretical one. However, coordination of the pricing function is necessary, especially in larger, regional markets, such as the European Union Recent experience has shown that pricing coordination has to be worldwide because parallel imports will surface in any markets in which price discrepancies exists, regardless of distances

31. Countertrade Corporations use countertrade as a competitive tool to maintain or increase market share Management must consider how the acquired merchandise will be disposed of, what the potential for market disruptions is and to what extent the countertraded goods fit with the corporate mission

32. Countertrade Exists when there is a direct exchange of goods over the use of money Viewed by firms and governments as an excellent way to gain entry into new markets

33. Countertrade Five Types Counter purchase- The participating parties sign 2 separate contracts that specify goods and services to be exchanged. If the exchange is not of precisely equal value, some amount of cash will be involved Buyback- One party agrees to supply the technology or equipment that enables the other party to produce goods with which the price of the supplied products or technology is repaid

34. Countertrade Clearing Arrangements- Clearing accounts are established in which firms can deposit and withdraw the results of their countertrade activities Switch Trading- Gives additional flexibility to the clearing account in which credits in the account can be sold or transferred to a third party Offset- Industrial compensation mandated by governments when purchasing defense related goods and services in order to equalize the effect of the purchase on the balance of payments