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.
A. Ways to Reduce Price Escalation
1) Marketing action
2) Government action
Sample Causes and Effects of Price Escalation
Domestic
Example
Manufacturing net
Transport, c.i.f.
Tariff (20 percent c.i.f. value)
Importer pays
Importer margin when
sold to wholesaler
(25 percent) on cost
Wholesaler pays landed cost
Foreign
Example 1:
Assuming the
same channels with
wholesaler importing directly
Foreign
Example 2:
Importer and
same margins
and channels
$ 5.00
n.a.
n.a.
n.a.
$ 5.00
1.10
1.22
n.a.
$ 5.00
1.10
1.22
7.32
n.a.
5.00
n.a.
7.32
1.83
9.15
1.67
6.67
2.44
9.76
3.05
12.20
Retail margin (50 percent on cost) 3.34
Retail price
10.01
4.88
14.64
6.10
18.30
Wholesaler margin
(331/3 percent on cost)
Retailer pays
Foreign
Example 3:
Same as 2 but
with 10 percent
cumulative
turnover tax
$ 5.00
1.10
1.22
7.32
1.83
+0.73 *
2.56
+9.88
3.29
+0.99 *
=4.28
14.16
7.08
+1.42 *
=8.50
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
Price Escalation
The Lower Prices are at Home
New York
Aspirin
$
0.99
London
$
Paris
Tokyo
1.23
$ 7.08
$ 6.53
Mexico City
$
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.
Distribution Adjustment to Decrease Price Escalation
A. Conventional Route
Producer
Import
Agent
Small
Wholesaler
Retailer
Processing
and Packing
Plant
Intermediary
Wholesaler
Primary
Wholesaler
A. Retail Price: 170 yen/300g package
B. Retail Price: 128 yen/300g package
Savings of 25% by restructuring
B. Restructured Route
Producer
Import
Agent
Processing
and Packing
Plant
Depots
Distribution
Wholesalers
Retailer
Distribution
Centers
Copyright © 2001 by Harcourt, Inc. All rights reserved.
Source: Michael R. Czinkota, “Distribution of Consumer Products in
Japan: An Overview,” International Marketing Review 2 (Autumn
11-10
1985): 39-51.
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.
18-9
 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.
Irwin/McGraw-Hill
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
Pricing Challenges
 Skimming
• Using high-priced unique products to achieve the
highest possible contribution in a short initial time
period, then gradually lowering the price as the
market.
 Market
Pricing
• Following competitive pricing in the target market;
adjusting production and marketing mix to
competitive conditions.
 Penetration
Pricing
• Offering low pricing to generate volume sales
which hopefully will compensate for low margins.
Copyright © 2001 by Harcourt, Inc. All rights reserved.
11-3
Export Pricing Strategy
 Cost-oriented
pricing
• Standard worldwide price- regardless of buyer’s
location in the market(s)
• Dual pricing differentiates between domestic and
export prices
– Cost-plus method allocates domestic and foreign costs
to the product.
– Marginal cost method considers direct costs of
producing and selling exports as floor (lowest) price.
 Market-differentiated
pricing
• based on the dynamics of the marketplace
– changes in competition, exchange rates, etc.
Copyright © 2001 by Harcourt, Inc. All rights reserved.
11-5
Pricing for International Markets
IV. Counter-trade: A Sale that
encompasses more than an exchange of
goods and services for money.
A)
B)
C)
D)
Reasons for counter-trade
Difficulties
Trends
Reasons for growth
Pricing for International Markets
V. Terms of Payment
1)
2)
3)
4)
Cash in advance
Open accounts
Letters of credit
Consignment
VI. Leasing
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.
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
Dumping
 Ranges
of dumping
• Predatory dumping
– is intentional selling at a loss to increase market share
• Unintentional dumping
– occurs when market factors cause the import’s selling
price to fall below prices in the exporter’s home market
 Remedies
for dumping
• Antidumping duty
– are levied on imported goods
sold at less than fair market value
• Countervailing duties
– are imposed on imports which are subsidized in the
exporter’s home country
Copyright © 2001 by Harcourt, Inc. All rights reserved.
11-20
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.
1)
2)
3)
4)
5)
Reasons for Increase in Gray Markets
More global products
Fluctuating exchange rates
Pricing policies
Excess supply
“Free rider” opportunities
Pricing for International Markets
X.
1)
2)
3)
Dealing with Gray Markets
Legal action
Adapt products to local markets
Change pricing policies