Pricing Decisions in Export Marketing

Pricing Decisions

Learning Outcomes

  • Identify the factors in determining an export price.

  • Analyze the effects of the internet and worldwide web on pricing.

  • Suggest export pricing strategies.

  • Propose currency to be used.

  • Explain price quotations, terms, and calculations.

  • Evaluate transfer pricing issues.

Introduction to Pricing

  • Pricing involves export pricing and pricing within national markets for locally produced/assembled goods.

  • Pricing in export marketing is more difficult than domestic pricing.

  • Prices set in one market may affect operations in other countries.

Determinants of an Export Price

  • Pricing has a powerful and immediate effect on sales and profitability.

  • Factors affecting pricing decisions:

    • Costs

    • Market conditions and customer behavior

    • Competition

    • Legal and political issues

    • General company policies

Costs

  • Cost pricing is simple and suggests fairness.

  • Establish a price floor:

    • Out of pocket, direct, or marginal costs

    • Full costs

  • Costs set price floor; demand sets price ceiling.

  • E-commerce/e-trade tends to lower cost differentials between markets.

  • The Internet's threat to prices and brands:

    • Ways to help offset the internet's effects: price lining, dynamic pricing, and bundling.

    • Using the internet to smooth out demand.

  • Added costs in exporting: investment, additional paperwork and transportation, legal requirements.

Market Conditions (Demand) and Consumer Behavior

  • Value to purchasers sets price ceiling.

  • Value – Utility – Price

  • Estimating demand schedule: asking people; test market; etc.

  • Factors affecting price sensitivity:

    • Customer economics

    • Customer search and usage

    • Competition

  • Demand > Supply, Price spikes.

  • Demand < Supply, Price declines.

  • 'Price sensitive' market & 'Buyer' market.

Factors Affecting Price Sensitivity

  • Customer economics:

    • Will the decision-maker pay for the product themselves?

    • Is the cost of the item a substantial percentage of the total expenditure?

    • Is the buyer the end user? If not, will the buyer be competing on price in the end-user market?

    • In this market, does a higher price signal higher quality?

  • Customer search and usage:

    • Is it costly for the buyer to shop around?

    • Is the time of the purchase or the delivery significant to the buyer?

    • Is the buyer able to compare the price and performance of alternatives?

    • Is the buyer free to switch suppliers without incurring substantive costs?

  • Competition:

    • How is the offering different from competitors' offerings?

    • Is the company's reputation a consideration? Are there other intangibles affecting the buyer's decision?

Competition

  • Pure competition and monopolistic competition are opposite ends of a continuum.

  • Competition determines where prices should be set between floor and ceiling prices.

  • Consider barriers to competitors: product distinctiveness, brand prominence, and effectiveness of distribution.

  • Increased competition in EU has resulted in widespread price cuts.

Legal/Political Influence

  • May set maximum prices for consumer protection.

  • May set minimum prices to protect domestic industries.

  • Antidumping legislation: laws against selling in foreign markets at prices below those in the home country market.

  • Legal restrictions on price differentials, rebates, price escalation, etc. vary from country to country.

  • Limits on setting prices are also affected by elasticity of demand.

Company Policies and Marketing Mix

  • Export pricing affected by past and present corporate philosophy, organizational structure, and managerial policies.

  • Product decisions affect both costs and what consumer is willing to pay.

  • National stereotypes affect how people perceive products, and thus what they are willing to pay for a product from the country (COO, Apple, Honda, QQ).

  • Price disadvantages can be overcome by: product features, technical support, and prompt delivery.

Fundamental Export Pricing Strategy

  • Experience-curve (learning curve) pricing based on expected decline in costs as accumulated volume increases.

  • 'Break-even point' pricing strategy seldom used internationally.

  • Gap between cost and value allows a pricing strategy.

  • Fundamentally what is the pricing objective(s)?

Experience-Curve Pricing

  • Price set below cost leads to a price advantage.

  • Gain in market share and volume.

  • Reduced unit cost.

  • Increase in efficiency.

Pricing Strategies

  • Skimming - Start with a high price, lower as small market at top is exhausted, and repeat.

  • Sliding down the demand curve - Like above, but company reduces prices faster and further to establish itself in the market.

  • Penetration pricing – Set a lower price at the beginning

  • Preemptive pricing - Discourage potential competitors. Take advantage of experience curves.

  • Extinction pricing - Eliminate existing competitors – immoral

Relation of Export to Domestic Price Policies

  • Export prices lower than domestic price

  • Export prices higher than domestic price

  • Export prices on a par with domestic prices

  • Differential pricing

Export Prices Lower Than Domestic

  • Marginal pricing and/or desire for greater markets.

  • Secure market acceptance and initial purchase.

  • Manufacturer willing to absorb additional cost.

  • Due to economies of scale, the manufacturer can enjoy lower production costs.

  • Price dumping issue might occur!

Export Prices Higher Than Domestic

  • Rationale:

    • Extra investment

    • Extra expenses

    • Slower turnover

    • Risk

  • Sometimes it can portray higher value of exported products.

Export Prices On a Par with Domestic Prices

  • Permits pricing felt to be necessary and fair.

  • Gives a feeling of safety when inadequate information is available.

  • Avoids antidumping problems.

  • To ‘fix’ export price Condition: This price policy is normally adopted in the early stage of market entry only !!

Differential Pricing

  • May occur where:

    • There are differential elasticity of demand in different markets

    • There is effective separation of markets

  • Problem of products from low price market going to high price: gray market/parallel imports.

  • Smuggling is still a problem and a major one in some countries (including China).

  • Appropriate for: varying market strategies, product line considerations, product line pricing, and modification requirements.

  • May be used seasonally, cyclically, and occasionally.

Price Quotation (Incoterms)

  • Group E: Departure (EXW - Ex Works)

  • Group F: Main Carriage Unpaid (FCA - Free Carrier, FAS - Free Alongside Ship, FOB - Free On Board)

  • Group C: Main Carriage Paid (CFR - Cost and Freight, CIF - Cost, Insurance and Freight, CPT - Carriage Paid To, CIP - Carriage and Insurance Paid To)

  • Group D: Arrival (DAF - Delivered At Frontier, DES - Delivered Ex Ship, DEQ - Delivered Ex Quay, DDU - Delivered Duty Unpaid, DDP - Delivered Duty Paid)

Incoterms Control

  • "E" group: More Control for Seller, Less for Buyer

  • "F" group

  • "C" group

  • "D" group: Less Control for Seller, More for Buyer

EXW - Ex Works (…named place)

  • The "E"-term is the term in which the seller’s obligation is at its minimum.

  • Seller delivers when goods are placed at the disposal of the buyer.

The “F” –Terms

  • Require the seller to deliver goods for carriage as instructed by the buyer.

  • FCA: Free Carrier

  • FAS: Free Alongside Ship

  • FOB: Free On Board

FCA - Free Carrier (named place)

  • Seller delivers when goods, cleared for export, are delivered to the carrier nominated by the buyer at a named place.

  • Term may be used irrespective of the mode of transport.

  • Seller is obligated to load goods on the arriving vehicle if it arrives at the seller’s premises.

  • Seller is not obliged to unload goods from his vehicle.

FAS - Free Alongside Ship (…named port of shipment)

  • Seller delivers when goods, cleared for export, are placed alongside the vessel

  • Seller is obliged to clear goods for export.

  • The buyer bears all costs and risks of loss or damage to the goods from that moment.

  • Terms can be used for sea or inland waterway transport only.

FOB - Free On Board (…named port of shipment)

  • Seller delivers when goods, cleared for export, pass the ship’s rail at the named port of shipment.

  • The buyer bears all costs and risks of loss or damage to the goods from that point.

  • Term can be used for sea or inland waterway transport only.

  • If the intent is not to deliver goods across the ship’s rail, use FCA

The “C” –Terms

  • Require the seller to contract for carriage at his expense – to a specified point.

  • CFR: Cost and Freight

  • CIF: Cost, Insurance, and Freight

  • CPT: Carriage Paid to

  • CIP: Carriage and Insurance Paid to

CFR - Cost and Freight (…named port of destination)

  • Seller delivers when goods, cleared for export, pass the ship’s rail at the named port of shipment.

  • The seller pays the costs and freight necessary to bring the goods to the port of destination, but the buyer bears the risk of loss and additional costs occurring after delivery.

  • Term can be used for sea or inland waterway transport.

  • If the intent is not to deliver goods across the ship’s rail, use CPT

CIF - Cost, Insurance and Freight (…named port of destination)

  • Seller delivers when goods, cleared for export, pass the ship’s rail at the named port of shipment.

  • The seller pays the costs and freight necessary to bring the goods to the port of destination, but the buyer bears the risk of loss and additional costs occurring after delivery.

  • The seller procures marine insurance against the buyer’s risk of loss.

  • Seller is required to obtain insurance only on minimum cover.

  • Term can be used for sea or inland waterway transport.

  • If the intent is not to deliver goods across the ship’s rail, use CIP.

CPT - Carriage Paid To (…named place of destination)

  • Seller delivers the goods, cleared for export, to the carrier.

  • The seller pays the costs of carriage necessary to bring goods to the named destination, but the buyer bears the risk of loss and additional costs occurring after delivery.

  • Term may be used irrespective of the mode of transport.

CIP - Carriage and Insurance Paid To (…named place of destination)

  • Seller delivers the goods, cleared for export, to the carrier.

  • The seller pays the costs of carriage to the named destination, but the buyer bears the risk of loss and additional costs occurring after delivery.

  • The seller procures insurance against the buyer’s risk of loss.

  • The seller is required to obtain insurance only on a minimum cover.

  • Term may be used irrespective of the mode of transport.

The “D” –Terms

  • Require the seller to take the goods all the way to the destination at the border or within the country of import.

  • DAF, DES, DEQ, DDU, DDP

DDU - Delivered Duty Unpaid (…named place of destination)

  • Seller delivers goods to the buyer, not cleared for import, and not unloaded, at the named place of destination.

  • Seller bears all costs and risks (except duty) to bring goods to the named place of destination.

  • Term may be used irrespective of mode of transport.

  • If delivery is to take place at the port, quay, or on board a vessel, DES or DEQ should be used.

DDP - Delivered Duty Paid (…named place of destination)

  • Seller delivers goods to the buyer, cleared for import, and not unloaded, at the named place of destination.

  • Seller bears all costs and risks, including import duty, to bring goods to the named place of destination.

  • Term may be used irrespective of mode of transport.

  • If delivery is to take place at the port, quay, or on board a vessel, DES or DEQ should be used.

DAF - Delivered At Frontier (…named place)

  • Seller delivers goods, cleared for export, at the disposal of the buyer on arriving means of transport.

  • Not unloaded, not cleared for import at a point at the frontier before the customs border of the adjoining country.

  • Term may be used irrespective of the mode of transport when goods are delivered at a land frontier.

  • If delivery is to take place in the port of destination, DES or DEQ should be used.

DES - Delivered Ex Ship (…named port of destination)

  • Seller delivers goods at the disposal of the buyer on board the ship.

  • Not cleared for import at the named port of destination.

  • Seller bears all costs and risks to bring goods to the named port before discharging.

  • Term used only for delivery by sea.

  • If the seller is to bear the costs of discharging the goods, DEQ should be used.

DEQ - Delivered Ex Quay (…named port of destination)

  • Seller delivers goods, not cleared for import, at the disposal of the buyer on the quay at the named port of destination.

  • Seller bears all costs and risks to bring goods to the named port of destination and discharging the goods on the quay.

  • Term used only for delivery by sea.

Mode of Transport and Appropriate Incoterm

  • Any Mode of Transport:

    • EXW: Ex Works (named place..)

    • FCA: Free Carrier (named place..)

    • CPT: Carrier Paid To (named place of destination.

    • CIP: Carrier & Insurance Paid to (named place of

    • DAF: Delivered at Frontier (named place..)

    • DDU: Delivered Duty Unpaid (named place of d..)

    • DDP: Delivered Duty Paid (named place of d…)

  • Maritime and Inland Waterway Transport Only:

    • FAS: Free Alongside Ship

    • FOB: Free On Board

    • CFR: Cost and Freight

    • CIF: Cost, Insurance, and Freight

    • DES: Delivered Ex Ship

    • DEQ: Delivered Ex Quay

Selecting Terms

  • Whether shipment will be made on domestic or foreign carriers.

  • Availability of insurance coverage (e.g. _%, risks)

  • Availability of information on costs (e.g. CIF or CIP).

  • Exporter’s need for cash (e.g. ‘E’ or ‘F’ groups, FCR, FAS, FOB).

  • Currency convertibility problems (e.g. FOB)

  • Requirements of the government of the importing nation.(e.g. FOB).

Transfer Pricing

  • For products transferred to foreign subsidiaries or partially owned foreign operations.

  • Prices to wholly or partially owned operations are defined as transfer prices.

  • Transfer Price: Exporter and importer are from the same organization but allocated in different countries.

  • Export transactions normally occur between the parent company and overseas subsidiaries.

  • Merchandise could be finished products, components/spare parts, or materials/equipment.

Transfer Pricing Scenarios

  • Scenario 1.1: Wholly-owned overseas subsidiaries

    • Parent Organization (Home Mkt: UK, Corporate Tax: 40%)

    • Overseas Subsidiary (Host Mkt: M'sia, Corporate Tax: 10%)

    • Transfer Price (Higher or Lower)?

  • Scenario 1.2: Wholly-owned overseas subsidiaries

    • Parent Organization (Home Mkt: UK, Corporate Tax: 10%)

    • Overseas Subsidiary (Host Mkt: M'sia, Corporate Tax: 40%)

    • Transfer Price (Higher or Lower)?

  • Scenario 2: Partially-owned overseas subsidiaries

    • Parent Organization (Home Mkt: UK, Corporate Tax: 40%)

    • Overseas Subsidiary (Host Mkt: M'sia, Corporate Tax: 10%)

    • Equity: 50:50 OR 40:60 OR 70:30

    • Transfer Price (Higher or Lower)?

Decentralization and Profit Centers

  • Transfer pricing arises only when a company decentralizes managerial authority and responsibility, making each unit responsible for operating profitably.

  • Flexibility in setting transfer prices may be:

    • Limited by law

    • Used for managerial control

    • Used to influence the location of recorded profits

  • How to set transfer price?

    • 3 key concerns: Competition, Cost, & Government policy (e.g. Corporate tax).

Setting of Transfer Price (TP)

  • Scenario 1: With wholly-owned overseas subsidiaries:

    • TP is determined by the difference in corporate tax rate between the home country and host country.

    • The main purpose of TP is to legally maximize the organization’s overall profit and minimize the total corporate tax paid to government(s).

    • If the corporate tax in the home market is lower than the corporate tax in the host country, a higher TP is preferred; and vice versa.

Transfer Pricing to Wholly Owned Foreign Subsidiaries

  • Basis: competitive market prices, costs, and legal restrictions.

  • Transfer prices affect customs duty and location of profits.

  • Legal tests: reasonable, business purpose for price.

  • May involve negotiation or bargaining to provide fairness to both buying and selling divisions (of the same company).

  • Negotiation may take much time and effort and may result in squabbles.

  • If both buyer and seller are profit centers, prices should be ‘competitive.’

Transfer Pricing to Partially Owned Foreign Enterprises

  • Involves who gets what share of profits as well as above.

  • Thus the issue of fairness is involved.

Next chapter

Chap 12: Financing and Methods of Payment