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Pricing for International Markets

Pricing for International Markets. Pricing for International Markets. I. Price Escalation - firms must often adjust their prices upwards in international markets. Reasons: Costs related to transportation, insurance, tariffs, taxes, storage, documentation, packing and middleman margins.

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Pricing for International Markets

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  1. Pricing for International Markets

  2. Pricing for International Markets I. Price Escalation - firms must often adjust their prices upwards in international markets. Reasons: Costs related to transportation, insurance, tariffs, taxes, storage, documentation, packing and middleman margins. A. Ways to Reduce Price Escalation 1) Marketing action 2) Government action

  3. Sample Causes and Effects of Price Escalation Foreign Foreign Foreign Example 1: Example 2: Example 3: Assuming the Importer and Same as 2 but same channels with same margins with 10 percent Domestic wholesaler import- and channels cumulative Example ing directly turnover tax Manufacturing net $ 5.00 $ 5.00 $ 5.00 $ 5.00 Transport, c.i.f. n.a. 1.10 1.10 1.10 Tariff (20 percent c.i.f. value) n.a. 1.22 1.22 1.22 Importer pays n.a. n.a. 7.32 7.32 Importer margin when 1.83 sold to wholesaler +0.73 * (25 percent) on cost n.a. n.a. 1.83 2.56 Wholesaler pays landed cost 5.00 7.32 9.15 +9.88 3.29 +0.99 * Wholesaler margin (331/3 percent on cost) 1.67 2.44 3.05 =4.28 Retailer pays 6.67 9.76 12.20 14.16 7.08 +1.42 * Retail margin (50 percent on cost) 3.34 4.88 6.10 =8.50 Retail price 10.01 14.64 18.30 22.66 Notes: a. All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable. b. The exhibit assumes that all domestic transportation costs are absorbed by the middleman. c. Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown. * Turnover Tax

  4. Price Escalation The Lower Prices are at Home New York London Paris Tokyo Mexico City Aspirin $ 0.99 $ 1.23 $ 7.08 $ 6.53 $ 1.78 Cup of coffee 1.25 1.50 2.10 2.80 0.91 Movie 7.50 10.50 7.89 17.29 4.55 Compact disk 12.99 14.99 23.16 22.09 13.91 Levi 501 jeans 39.99 74.92 75.40 79.73 54.54 Ray-Ban sunglasses 45.00 88.50 81.23 134.49 89.39 Sony Walkman 59.95 74.98 86.00 211.34 110.00 Nike Air Jordans 125.00 134.99 157.71 172.91 154.24 Gucci men's loafers 275.00 292.50 271.99 605.19 157.27 Nikon camera 629.95 840.00 691.00 768.49 1,054.42 SOURCE: "Tourists and Bargains Galore," Fortune, June 13, 1994, p. 12.

  5. Benefits of A Foreign Trade Zone (FTC) • Tariffs may be lower because duties are typically assessed at a lower rate for unassembled versus assembled goods. • If labor costs are lower in the importing country, substantial savings may be realized in the final product costs. • Ocean transportation rates are affected by weight and volume; thus, unassembled goods may qualify for lower freight rates. • If local content, such as packaging or component parts, can be used in the final assembly, there may be further reduction of tariffs. 18-9 Irwin/McGraw-Hill

  6. Pricing for International Markets II. Pricing and the Product Life Cycle 1) Skimming 2) Penetration 3) Market pricing III. Export Pricing Strategy 1) Standard worldwide prices 2) Dual pricing 3) Market differentiated pricing

  7. Pricing for International Markets IV. Counter-trade: A Sale that encompasses more than an exchange of goods and services for money. A) Reasons for counter-trade B) Difficulties C) Trends D) Reasons for growth

  8. Pricing for International Markets V. Terms of Payment 1) Cash in advance 2) Open accounts 3) Letters of credit 4) Consignment VI. Leasing

  9. Leasing in International Markets • Leasing opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash. • Leasing can ease the problems of selling new, experimental equipment, since less risk is involved for users. • Leasing helps guarantee better maintenance and service on overseas equipment. • Equipment leased and in use helps to sell other companies in that country. • Lease revenue tends to be more stable over a period of time than direct sales would be.

  10. Pricing for International Markets VII. Dumping: Selling goods overseas at a price lower than in the exporter’s home country or below cost. A) Predatory vs. unintentional dumping B) Anti-dumping duties C) Countervailing duties

  11. Pricing for International Markets VIII. Gray Marketing - occurs when products are diverted from authorized channels in international markets and are sold at a lower price than is authorized by the manufacturer. IX. Reasons for Increase in Gray Markets 1) More global products 2) Fluctuating exchange rates 3) Pricing policies 4) Excess supply 5) “Free rider” opportunities

  12. Pricing for International Markets X. Dealing with Gray Markets 1) Legal action 2) Adapt products to local markets 3) Change pricing policies

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