International Pricing of product(factors, process,Incoterms,Transfer pricing)

1. Group IV

2. Introduction
International pricing is one of the most critical and complex
issues that multinational firms face so it can give a break or a
boost to company’s revenue. It is Important because:
• Price is the only marketing mix that generates revenue all other
entail costs.
• But having only the price objective is not enough.
• Firm need to look in to other factors like offering cost , demand,
customers etc.

3. Factors Influencing International Price
• Cost
• Competition
• Product Differentiation
• Exchange Rate
• Government Regulations

4. Cost
• One of the most important factor in fixing export price for goods is
the cost.
• Costs of the product—its inputs—including the amount spent on
product development, testing, and packaging required have to be
taken into account when a pricing decision is made
• The direct cost involved in export pricing such as raw materials
should be taken into account.
• Indirect cost like distribution overheads, cost of promotion should
also be considered.

5. Competition
• The competition in the foreign market is much more severe than in
the domestic market, as the exporters have to compete with
foreign producers who manufacture under different environment
and conditions, as well as their country’s regulations.
• The availability of substitute products affects a company’s pricing
decisions .
• Competition from developed countries would be tough because of
the certain established advantages; and developing countries may
have to mark the price to compete in the foreign market.

6. Product Differentiation
If products are well differentiated and if they have built a brand image for themselves,
manufacturers would be in a comfortable position to charge competitively higher prices.
Three types of product differentiation are horizontal, vertical and simple.
1. Horizontal product differentiation distinguishes a product based on one characteristic of
the product; however, consumers are not able to distinguish which product has a higher
quality.
2. Vertical product differentiation is also based on one characteristic of a product, but
consumers are able to distinguish which product has a higher quality.
3. Simple product differentiation is based on distinguishing a product on a numerous amount
of characteristics.
Eg. A company can differentiate its product by packaging it better like soda company packages
its soda in new ergonomic bottle while other company chooses plain aluminium can.

7. Exchange Rate
• Higher prices can be charged on exports for a particular country
which is subject to continuous fluctuations in exchange and
inflation rates.
• Differential pricing strategy can be adopted while fixing price of
goods to be exported. While doing so, the stability of exchange and
inflation rates prevailing in the country should also be taken into
account.

8. Government Regulation
The Government policies in respect of imports and exports must be taken into account while fixing
prices. The importing as well as exporting countries’ governments play an important role in export
pricing.
The Government may influence the price by:
• Controlling the prices directly on certain items by fixing minimum floor price or fixing maximum
ceiling price, beyond which the exporter cannot quote the prices.
• Assistance and incentive: Government of exporting country may provide a number of financial
assistance such as Duty Drawback Scheme, Exemption of Sales tax, exemption of Excise Duty,
Exemption of income-tax, Marketing development Assistance (MDA.) etc.
• Custom duties and taxes: The governments of the importing countries impose duties and taxes. The
exporter should take such expenses while fixing the export price.
• International Agreements: Export prices, at times are bound by international agreements which may
be bilateral or multilateral. The exporter has to abide by this price fixed by agreement and he cannot
fix more price.

9. International Pricing Process
Selecting the Pricing Objective
Determining the Demand
Estimating Costs
Analyzing competitors' costs, prices and offers
Selecting a Pricing method
Selecting the final price

10. Market Skimming Pricing
The market skimming pricing strategy is an attempt to reach a market segment
that is willing to pay a premium price for a particular brand or for a specialized or
unique product. Companies that seek competitive advantage by pursuing
differentiation strategies or positioning their products in the premium segment
frequently use market skimming.
The skimming pricing strategy is also appropriate in the introductory phase of the
product life cycle, when both production capacity and competition are limited.
Penetration Pricing
A market penetration pricing strategy calls for setting price levels that are low
enough to quickly build market share. It should be noted that a first-time exporter
is unlikely to use penetration pricing. The reason is simple: Penetration pricing
often means that the product may be sold at a loss for a certain length of time.
Pricing Strategy

11. Global Pricing Policy
• Ethnocentric Pricing : Extension or ethnocentric pricing calls for the per-unit price of an item to be the
same no matter where in the world the buyer is located. In such instances, the importer must absorb freight and
import duties. The extension approach has the advantage of extreme simplicity because it does not require
information on competitive or market conditions for implementation. The disadvantage of the ethnocentric approach
is that it does not respond to the competitive and market conditions of each national market and, therefore, does not
maximize the company’s profits in each national market or globally.
• Polycentric Pricing : Adaptation or Polycentric pricing permits managers or independent distributors to
establish whatever price they feel is most appropriate in their market environment. There is no requirement that
prices be coordinated from one country to the next. Arbitrage is also a potential problem with the polycentric
approach; when disparities in prices between different country markets exceed the transportation and duty costs
separating the markets, enterprising individuals can purchase goods in the lower-price country market and then
transport them for sale in markets where higher prices prevail.
• Geocentric Pricing : Geocentric pricing is more dynamic and proactive than the other two. A company
using geocentric pricing neither fixes a single price worldwide, nor allows subsidiaries or local distributors to make
independent pricing decisions. Instead, the geocentric approach represents an intermediate course of action.
Geocentric pricing is based on the realization that unique local market factors should be recognized when arriving at
pricing decisions. These factors include local costs, income levels, competition, and the local marketing strategy.

12. International Commercial Terms of Sale: INCOTERMS
INCOTERMS are 13 Standard terms of delivery across the world. These are divided into four main
components and are built around the main carriage of the shipment.
• EXW/Ex-Works: The seller makes the goods available to be collected at their premises and the buyer
is responsible for all other risks, transportation costs, taxes and duties from that point onwards. This
term is commonly used when quoting a price
EXWE- term
FCA, FAS, FOBF- terms
CFR, CIF, CPT, CIPC- terms
DAF, DES, DEQ, DDU, DDPD- terms
E-Terms

13. F-Terms
• FCA/Free Carrier (named place): The seller delivers the goods to the carrier named by the buyer, at a
specified price, cleared for export. The seller is responsible for loading the goods on the mode of
transport at any location indicated. This term is also used for all modes of transport.
• FAS/Free Alongside Ship (named port of shipment): This term is used for maritime and inland
waterway only, and indicates the sellers’ responsibility is to deliver the goods along-side the vessel at
the named port of shipment, also customs cleared for export.
• FOB/Free on Board (named port of shipment): This term is also used for maritime and inland
waterway only, as the seller delivers the goods across the ships rail, cleared for export. This term is
closely matched to the American Term “FOB Vessel” and is what most buyers mean when they just
use the term “FOB” without any further specification, although the exporter should verify this fact.

14. C-Terms
• CFR/Cost & Freight (named port of destination): This term indicates that the seller would deliver the goods across
the ships’ rail and also prepay the ocean transportation charges to the port of importation. It is intended for use on
maritime and inland waterway shipments only, and requires customs clearance for export. Insurance is not included
in this type of quotation, which most closely resembles the American term C&F.
• CIF/Cost Insurance & Freight (named port of destination): This term is an extension of CFR, adding the
responsibility of the seller to obtain and prepay for insurance against loss on behalf of the buyer. Other than that,
you could say it is “CFR + Insurance” and matches the American Term CIF as well, except for that it is for maritime
and inland waterway only.
• CPT/Carriage Paid To (named place of destination): This term is similar to CFR with the exception that it is for all
modes of transport. The seller must deliver the goods to the carrier; customs cleared for export and prepay the
freight charges to the destination. It does not include the responsibility of the seller to obtain and prepay for
insurance against loss on behalf of the buyer.
• CIP/Carriage & Insurance Paid To (named place of destination): This term is similar to CIF with the exception that it
is used for all modes of transport. The seller is obligated to place the goods on board the carrier; customs cleared
for export, and prepay the freight charges to the destination and obtain insurance against loss on behalf of the
buyer.

15. D-Terms
• DAF/Delivered at Frontier (named place): The term frontier is another name for border. The seller is responsible
for delivering the goods for the buyer’s disposal on any means of transport. This does not include the cost of
unloading the goods or clearing the goods for import, but does require export clearance.
• DES/Delivered Ex Ship (named port of destination): This maritime and inland waterway only term is rarely used
for U.S. exports because of the modes of transport available to us, and is where the seller makes the goods
available to the buyer on board a ship at the port of import not cleared for import and without the container off-
loading charges.
• DEQ/Delivered Ex Quay (named port of destination): This term is rarely used from the U.S., and implies that the
seller also pays for the off-loading charges beyond DES. Quay is another term used for pier or wharf.
• DDU/Delivered Duty Unpaid (named place of destination): This term is used for any mode of transport, and
involves the seller delivering the goods to the buyer, but not with customs clearance for import and not including
off-loading from the delivery vehicle. The buyer is responsible for customs clearance, duties and brokerage. This
term is more useful for smaller shipments and samples delivered via courier without seller responsibility for
customs procedures at the destination.
• DDP/Delivered Duty Paid (named place of destination): DDP represents the greatest responsibility on the part
of the exporter, who is quoting to pre-pay and be responsible for everything in getting the goods delivered to the
buyer’s facility, including customs clearance and the payment of duties.

16. Price Quotations
Seller's and buyer's
names and
addresses.
Buyer's reference
number and date
of inquiry.
Listing of
requested
products and brief
description.
Price of each
Appropriate gross
and net shipping
weight
Appropriate total
cubic volume and
dimensions packed
for export
Trade discount Delivery point Terms of sale Terms of payment
Insurance and
shipping costs
Validity period for
quotation
Total charges to be
paid by customer
Estimated shipping
date from Seaport
or airport
Currency of sale

17. What is it?
• One of the most important issues in international taxation
• Happens when two related companies trade with each other
• Most commonly seen: companies that are part of the same multinational group
• When such entities transact with each other, a transfer price is used to determine
costs – lower/higher than the prevailing market price of the goods or services
• For example, when a US-based subsidiary of Coca-Cola buys something from a
French-based subsidiary of Coca-Cola

18. Why is it important to study?
• An estimate:
60% - 70% of today’s international trade happens within, rather than between,
multinationals: that is, across national boundaries but within the same
corporate group
* OECD

19. Why MNCs do it?
• Different divisions of a multi-entity company are:
in charge of their own profits
responsible for their own return on invested capital (ROIC)
• Artificially distort the price at which the trade is recorded, to minimise the overall
tax bill

20. Is it Illegal?
• Not, in itself, illegal or necessarily abusive
• Illegal:
Transfer mispricing
Transfer pricing manipulation
Abusive transfer pricing
• Tax revenue is lost by governments, i.e., Tax Avoidance NOT evasion
• Losers: Both developing & developed countries
• Winners: MNCs, accountancy & legal firms, and economic consultants

23. How is it done?
World Inc.
Africa U.S.
Tax Haven
“Subsidiaries”
Africa Inc. U.S. Inc.
Haven Inc.
Crop grown,
harvested &
processed
Transported
& Sold
Sold at artificially low
price
Sold at artificially
high price
Artificial Low
Profits ->
Artificial Low
Tax Bill
Artificial Low
Profits ->
Artificial Low
Tax Bill
Very High
Artificial
Profits ->
No Taxes

24. What is the result?
• This game have not resulted in more efficient or cost-effective production,
transport, distribution or retail processes in the real world
• Profits shifted artificially out of both U.S. and African country
• Higher profits for MNCs
• Huge amount of fees for accountancy and legal firms, and economic consultants

25. How to deal with it?
• The “Arm’s Length” Principle: endorsed by the OECD & the United Nations Tax
Committee – country by country reporting is important
• A transfer price should be the same as if the two companies involved were indeed two
unrelated parties negotiating in a normal market
• Acceptable: it is the product of genuine negotiation in a market
• Implementation: company’s financial reporting and strict documentation that is
included in financial reporting documents for auditors and regulators
• Reality: Difficult to implement: no market comparisons are there - intellectual property
such as monopoly products, brand, patents, trademarks, and other proprietary
information

26. Barter
Switch Trading
Counter Purchase
Buyback
Compensation Trade
Offset
Countertrade means exchanging goods or services which are paid for, in whole or
part, with other goods or services, rather than with money.
A monetary valuation can however be used in counter trade for accounting
purposes.

27. Exchange of goods or services directly for other goods or services without the use of money as means
of purchase or payment.
Examples : Indo Iraq Wheat and Rice for Oil deal
Example of Barter Trade
This means if Country B sells mining equipment to Country A in return for cigars - they will
probably hold some of the mining equipment back until they have made some good profit from the
cigars.
COUNTRY A : CIGAR COUNTRY B: MINING EQUIPTMENT

28. •It involves at least three parties. This means a country may barter goods from another
country which may be of no use to itself so it sells the goods to other country for hard
cash
•Expands Exports
•Enables party to achieve satisfactory outcome
Example- Switch Trading :
•Brazil exported corn to Germany and received products in return. Germany did not
use corn , so it sold the corn to other countries for hard cash.
COUNTRY 1 COUNTRY 2 COUNTRY 3
EXPORT
IMPORT
Export Imported goods from country 2 by country 1 to country 3

29. • Counter purchase occurs when a firm agrees to purchase a certain
amount of materials in future back from a country to which a sale is
made.
• Volume of trade does not have to be equal (may be covered by cash)
• More flexible than barter
It occurs when a firm builds a plant in a country - or supplies
technology, equipment, training, or other services to the country and
agrees to take a certain percentage of the plant's output as partial
payment for the contract.

30. Compensation trade is a form of barter in which one of the flows is
partly in goods and partly in hard currency.
Agreement by one nation to buy a product from another, subject to
the purchase of some or all of the components and raw materials
from the buyer of the finished product, or the assembly of such
product in the buyer nation.
Example : Party A and Country B enter a contract where Party A
agrees to buy sugar from country B and manufacture candy. Country
B then buys the candy.

31. Complex Commercial Transaction
Small firms find it difficult to take on board the additional Cost
Working Capital Concerns

32. Counter-trade: A Pricing Tool
Cashless
Transactions :
Importer’s Incentive
Least resistance
for FDI
Sales growth &
Expansion
strategy
Gain foreign
contracts for
future sales
Avoid bad-debt
situations
Build Customer
relationship
Find low cost
purchasing
Sources
Risk
Diversification
Counter trade is a result of Innovative pricing to tackle the burden of
generating foreign currency on importer. It carries following benefits to the
Parties.

33. Inputs by
Rahul Deva
Nishant Bharti
Saurabh Kafaltiya
Shrey Raj Shrivastava
Umed Yadav
Vivek Pal