Chapter 6

Pricing for International Markets

.
Chapter Learning Objectives

1. Components of pricing as competitive tools in

international marketing

2. The pricing pitfalls directly related to

international marketing

3. How to control pricing in parallel imports or

gray markets
Chapter Learning Objectives

4. Price escalation and how to minimize its

effect

5. Countertrading and its place in international

marketing practice

6. The mechanics of price quotations

 Pricing Policy
 A. Pricing Objectives:
– 1. As an active means of attaining
marketing objectives
 Companies use this when trying to achieve certain
objectives, profit margins or targeted market
share.
– 2. As a static element in a business
decision
 Companies use this when they are foreign
marketing is not a priority
• The more–control
Usually associated
a company has overwith trying
the final toprice
selling get of
rida of
product, the
better it is able to achieve
excess its marketing goals
inventories
• It is not always possible to control end prices
 Pricing Policy

 B. Parallel Imports
– Where a manufacturing company sells its products to
a specific country; and those products are further sold
to another unintended country
 C. Exclusive Distribution
– Where manufacturers select preferred distributors to
sell its products at premium prices in order to:
 Maintain high profit margins; stock large
assortments; and to maintain the exclusive quality
image.
 This also contributes to parallel imports
 Exhibit 18.1 pg. 534 “How Gray-Market Goods End
Up in the U.S.”
Pricing Policy

 Approaches to International Pricing

– Full Cost vs Variable Cost
 Full Cost is determined by combining the total cost
plus a profit margin to every unit
– Every unit must bear the total cost (including
international units sold)
 Variable cost is determined thru the incremental
cost associated with producing goods for selling
them in international markets
– Can appear to be “dumping”
Pricing Policy
 Approaches to International Pricing
– Skimming Vs. Penetration Pricing
 Skimming is used when the marketplace is
insensitive to price; therefore premium price is
charged
– Market places high value on items either
because of it’s unique features; quality or it has
little or no competition
 Penetration Pricing is used to stimulate market
growth; therefore prices are set low
 Price Escalation
• Price escalation refers to the added costs incurred as a result of
exporting products from one country to another

There are several factors that lead to higher prices:

1. Costs of Exporting: the term relates to situations in

which ultimate prices are raised by shipping costs,
insurance, packing, tariffs, longer channels of
distribution, larger middlemen margins, special taxes,
administrative costs, and exchange rate fluctuations
 Price Escalation (Cont.)

2. Taxes, Tariffs, and Administrative

Costs: These costs results in higher
prices, which are generally passed on to
the buyer of the product

3. Inflation: Inflation causes consumer prices to escalate and the

consumer is faced with rising prices that eventually exclude
many consumers from the market
 Price Escalation (Cont.)
4. Middleman and Transportation Costs: Longer channel
length, performance of marketing functions and higher
margins may make it necessary to increase prices

5. Exchange Rate Fluctuations and Varying Currency

Values: Currency values swing vis-à-vis other currencies on
a daily basis, which may make it necessary to increase prices
Price Escalation
 How to Lower the Effects of Price Escalation
– 1. Lower cost of goods through
 Manufacturing overseas where labor costs are lower
(China)
 Eliminate features or product quality

– Proctor Gamble’s strategy for selling toilet paper in Brazil

– 2. Lower tariffs through
 Reclassification
 Persuading foreign country’s government

 Modification of product to fit in another class

– 3. Lower distribution costs through

 Eliminate or reduction of middlemen
– Especially where value-added taxes are imposed
Price Escalation
 How to Lower the Effects of Price Escalation
– 4. Using Foreign Trade Zones
 Imported goods stored or processed without
imposing tariffs or duties until items leave FTZ
areas and is imported into host country
 FTZ’s can lower costs through:
– Lower duties imposed
– Lower labor costs in importing country
– Lower ocean transportation costs with
unassembled goods (weight and volume are
less)
– Using local materials in final assembly
 See Exhibit 18.4 “How Are Foreign Trade Zones
Used?”
Pricing Issues

 Issues with different methods of pricing strategies:

– 1. Dumping
 Defined as either products that are sold in international
markets below their production cost; or products priced lower
in foreign markets than sold in the company’s domestic
markets
 WTO has set up penalties for dumping thru:

– Countervailing duties
– Minimum Access Volume (MAV)(restricts volume that can
a country can import)
– 2. “Screwdriver Plants”
 Company sets up plants to assemble products in the importing
country where they sell the final products.
 Countertrade as a Pricing Tool
• Countertrade is a pricing tool that every international marketer
must be ready to employ

• There are four distinct transactions in countertrading, which

include:

1. Barter: is the direct exchange of goods between two parties in a transaction

2. Compensation deals: is the payment in goods and in cash
3. Counter-purchase or off-set trade: the seller agrees to sell a product at a
set price to a buyer and receives payment in cash and may also buy goods
from the buyer for the total monetary amount involved in the first contract or
for a set percentage of that amount, which will be marketed by the seller in
its home market
4. Buy-back: This type of agreement is made the seller agrees to accept as
partial payment a certain portion of the output that are produced from the
plant or machinery that are sold to the buyer
Other Pricing Strategies
 3. Transfer Pricing Strategy
– Intra-company transfer of pricing
 4. Administered Pricing
– Attempt by companies within same industry to set
prices in international markets
 Cartels

– OPEC
– Shipping Industry
– Diamond cartel – controlled by DeBeers
– 5. Government Influenced Pricing
 Transfer Pricing Strategy
• Prices of goods transferred from a company’s operations or
sales units in one country to its units elsewhere, which refers to
intracompany pricing or transfer pricing, may be adjusted to
enhance the ultimate profit of the company as a whole

Four arrangements for pricing goods for intracompany transfer are as follows:

1. Sales at the local manufacturing cost plus a

standard markup
2. Sales at the cost of the most efficient producer
in the company plus a standard markup
3. Sales at negotiated prices
4. Arm’s-length sales using the same prices as
quoted to independent customers
Benefits of Transfer Pricing Strategy
1. Lowering duty costs by shipping goods
into high-tariff countries at minimal
transfer prices so that duty base and
duty are low

2. Reducing income taxes in high-tax

countries by overpricing goods
transferred to units in such countries;
profits are eliminated and shifted to
low-tax countries

3. Facilitating dividend repatriation when

dividend repatriation is curtailed by
government policy by inflating prices
of goods transferred