Imm unit-06 (global pricing strategies)

07/06/10 1
By :
Prof. Amit Kumar

07/06/10 2
International marketing has become a major concern
for business schools to develop global strategies
to lead and sustain in the much expanded and
competitive arena. Liberalization thus catalyzing
market competition, poses challenge for the
managers in handling the rigors of expanding
global marketplace.
Syllabus aims at providing contemporary
knowledge & skills on issues of global
marketing management.
IILM-GSM
Importance of this course
Global Marketing Management

07/06/10 3
Course: Global Marketing Management
1. Framework of Global Marketing Management
2. Global Marketing Research
3. Decision Making in International Marketing
4. Foreign Market Entry & Export Marketing
5. Product Planning & Development
6. Global Pricing Strategies
7. Global Distribution System
8. Promoting Product Internationally
IILM-GSM
Global Marketing Management

07/06/10 4
IILM-GSM
Global Marketing Management Global Pricing Strategies

07/05/10 5
Contents
• International Pricing Compared to Domestic Pricing
• International Pricing Objectives/ Strategies
• International Pricing Framework
• Pricing Approaches for International Markets
 Cost-based Pricing
 Full-cost Pricing
 Marginal cost pricing
 Market-based Pricing
• Countertrade as a Pricing Tool
• Terms of Payment in International Marketing
IILM-GSM

07/05/10 6
International Pricing Compared to
Domestic Pricing
In International markets, however, pricing decisions are
much
more complex, because they are affected by a number of
additional external factors, such as
• Fluctuation in Exchange Rates
• Accelerating Inflation in Certain Countries
• Use of alternative payment methods such as leasing,
barter and counter-trade
IILM-GSM

07/05/10 7
International Pricing Objectives
In order to determine the price of a new product in the
international market, the objectives are as:
1. Maximum Current Profit
2. Maximum Market share
3. Maximum Market Skimming
4. Product-Quality Leadership
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SKIMMIMG
PENETRATION
PRICING
High price
Low price

07/05/10 8
International Pricing Framework
IILM-GSM
INTERNAL EXTERNAL
Firm-Level Factors
• Corporate & marketing
objectives
• Competitive strategy
• Firm positioning
• Product development
• Production location
• Market entry modes
Environmental Factor
• Government influences and
constraints: import control,
taxes, price control
• Inflation
• Currency fluctuation
• Business cycle stage
Product Factors
• Stage in PLC
• Place in product line
• Important product features
• Product positioning
• Product cost structure
(manufacturing, experience
effects, etc)
Market Factors
• Customers’ perceptions
• Customers’ ability to pay
• Nature of competition
• Competitors’ objectives,
strategies and relative SW
• Grey market appeal
Pricing Strategies
• Pricing level (first-time)

07/05/10 9
International Pricing Framework
IILM-GSM
INTERNAL EXTERNAL
Firm-Level Factors Environmental Factor
Product Factors Market Factors
Pricing Strategies
• Pricing level (first-time)
• Price changes over PLC
• Pricing across products
• Pricing across countries
Terms of business
• Terms of sale
• Terms of payment
Other elements
of marketing mix
Firm performance
Sales, shares, contribution
margins, profits, image etc.

07/05/10 10
Pricing Approaches for International
Markets
IILM-GSM
The various approaches/ strategies used for pricing in
international markets are as:
1. Cost-based Pricing
2. Full Cost Pricing
3. Marginal Cost Pricing
4. Market-based Pricing

07/05/10 11
Markets: Cost-based Pricing
IILM-GSM
• Costs are widely used by firms to determine prices in
international markets especially in the initial stages.
• Generally, new exporters determine export prices on
‘ex-works’ price level and add a certain percentage
of profit and other expenses depending upon the
terms of delivery.
It is a popular myth that costs determine the
price, specially in international markets.

07/05/10 12
IILM-GSM
However, such cost-based pricing methods are not
Optimum because of following reasons:
 The price quoted by the exporter on the basis of
cost calculations may be too low vis-à-vis
competitors, thus allowing importers to earn huge
margins.
 The price quoted by the exporters may be too high,
making their goods uncompetitive and resulting in
outright rejection of the offer.

07/05/10 13
IILM-GSM
It is a popular myth that costs determine the
price.
• In fact, it is the interaction of a variety of factors such
as costs, competitive intensity, demand, structure,
consumer behavior etc. that contributes to price
determination in international markets.
• Therefore, a market-based pricing approach is
generally preferred to a cost-based pricing approach.

07/05/10 14
Markets: Full Cost Pricing
IILM-GSM
• It includes adding a mark-up on the product’s cost to
determine price.
• Now assume, manufacturer wants to earn a 20 % markup
on sales. The manufacturer’s markup price is given by:
Markup price =
e.g. Phillips, wanted to make a profit on each player but
Japanese competitors priced low and succeed in
building their market share rapidly.
UNIT COST
(1- Desired return on sales)

07/05/10 15
Markets: Full Cost Pricing
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The major benefits of this approach are:
 It ensures fast recovery of investments.
 It is useful for firms that are primarily dependent on
the international markets and register very low
sales in domestic markets.
 It is widely used by exporters in the growth phases
of international marketing.

07/05/10 16
Markets: Marginal Cost Pricing
IILM-GSM
• As the intensity of competition in international
markets is much higher than the domestic market,
competitive pricing becomes a precondition for
success.
• A large number of firms adopt this pricing approach.
Marginal cost is the cost of producing and selling one
more unit. It sets the lower limit to which a firm can
reduce its price without affecting its overall
profitability.

07/05/10 17
IILM-GSM
Variable Cost
Volume
TotalCost
Domestic Sales Exports
Fixed Cost
Variable
Cost
Total Costs Marginal Cost
(MC)

07/05/10 18
IILM-GSM
Major reasons for adopting this approach are:
• In cases where foreign markets are used to dispose of
surplus production, marginal cost pricing provides an
alternate market outlet.
• Products from developing countries seldom compete on
the basis of brand image or unique value, MCP is used as
a tool to penetrate international markets.
Why it makes sense to use Marginal Costing
in Export Pricing?

07/05/10 19
IILM-GSM
Twinkle Illuminations is a Kolkata-based firm with an
installed capacity of producing 10,000 units of
designer lamps per annum with a fixed cost of US$
500,000. The variable cost is US$ 100 per unit. It
sells 5,000 units in domestic market at $230 per unit.
The firm receives an export order for 40,000 units @ US$
130 per unit. Now the firm has to decide whether it would
be able to export 40,000 units at US$ 130 per unit.
Apparently, it does not cover the total cost of US$ 200 per unit.

07/05/10 20
IILM-GSM
• The firm would receive a contribution of US$ 30 per
unit for export.
Contribution = Selling Price – Variable Price
= US$ 30
It works out a total contribution on 40,000 units as US$
1200,000. It would lose this contribution in case the firm
does not accept the export order.
• The firm finds it difficult to sell beyond 5,000 units in
domestic market; so it has to look for alternative
marketing opportunities overseas.
The implication of accepting this order as follows:

Markets: Market-based Pricing
IILM-GSM
INCOTERMS 2000 and its Applicability
Category Applicable for
sea transport
only
Applicable for all
modes of transport
(including water)
Departure terms EXW (ex-works)
Shipment terms,
main carriage
unpaid
FAS (Free alongside
ship)
FOB (Free on board)
FCA (Free carrier)
Shipment terms,
main carriage
unpaid
CFR (cost and freight)
CIF (cost, insurance and
freight)
CPT (carriage paid to)
CIP (carriage and insurance
paid to)
Delivery terms DES (delivered ex ship)
DEQ (delivered ex quay)
DAF (delivered at frontier)
DDU (delivered duty unpaid)
DDP (delivered duty paid)

IILM-GSM
INCOTERMS 2000 and its Applicability
EXW (Ex Works) named place: It refers to any mode of
transportation. The seller makes goods available to the buyer at the
seller’s premises or other location, not cleared for export and not
loaded on a vehicle. The buyer bears all risks and costs involved in
taking the goods from the seller’s premises and thereafter.
FOB (Free on Board) named port of shipment: Maritime and
inland waterway only; seller delivers when the goods pass the
ship’s rail at the named port. The seller clears the goods for export.
CIF (Cost, Insurance and Freight) named port of destination:
The seller delivers the goods when the goods pass the ship’s rail at
the port of export. The seller pays cost and freight for bringing the
goods to the foreign port, obtain insurance against the buyer’s risk
of loss or damage, and clears the goods for export.

07/05/10 23
IILM-GSM
Top-down Calculation for International Pricing
Consumer Price 1160
VAT 160 + 16%
Market Price minus VAT 1000
Margin retailer 250 = 25%
Price to retailer 750
Margin wholesaler 90 + 12%
Price to wholesaler 660
Margin to importer 33 + 05%
Landed-cost Price 627
Import duties 110 + 20%
Other costs (storage, banking) 17
CIF (port of destination) 500

IILM-GSM
Top-down Calculation for International Pricing
CIF (port of destination) 500
Transportation costs 130
Insurance costs 6
FOB (port of shipment) 364
Transportation costs factory to port 34
Export price ex-works (EXW) 330
Factory cost price 300
Export profit (per unit) 30
The ‘ex-works’ price US$ 330 is 28.4% of the price paid by the
consumer. It works out to be a ‘multiplier’ of 3.5. This
‘multiplier’ is used as a calculating aid while offering price
quotations in international markets.

07/05/10 25
Countertrade as a Pricing Tool
IILM-GSM
Countertrade is a unique way of setting overseas transactions.
At times, countries experience difficulty in generating
enough foreign exchange to pay for imports. They,
therefore, need to devise creative ways to get the products
they want.
For example, Canada and Australia found that they had to
enter into special agreement with McDonnell Douglas to
pay for military aircraft they wanted to purchase. Thus,
both MNCs and governments often are forced to resort to
creative ways of setting payment, many of which involve
trading of goods for goods as a part of the transaction.

07/05/10 26
Different Types of Countertrade
IILM-GSM
Countertrade occurs when a firm accepts something than
money as payment for its goods or services. Thus,
countertrade is essentially a barter trade.
CounterTrade
Barter
Switch
Trading
Counter
Purchase
OffsetBuy-back

07/03/15 27
Barter:
• Barter is the direct exchange of goods/services
between two parties without a cash transaction.
• In 1993, Eminence S A, one of France’s major cloth
makers, launched a five-year deal to barter $25
million worth of US produced underwear and
sportswear to customers in eastern Europe in
exchange for a variety of goods/services.
• Though examples do exist, barter is not very
common.
IILM-GSM

07/03/15 28
Barter:
• There are two-fold problems associated with barter:
 First, if goods are not exchanged simultaneously, one party
ends up financing the other for a period.
 Secondly, firms engaged in barter run the risk of having to
accept the goods they do not want, cannot use, or having
difficulty reselling at a reasonable price.
• For these reasons, barter is viewed as the most
restrictive countertrade arrangement.
• It is primarily used for one-time only deals in transactions
with trading partners who are not creditworthy or
trustworthy.
IILM-GSM

07/03/15 29
Counterpurchase:
• This is reciprocal buying agreement.
• It occurs when a firm agrees to purchase a certain amount of
materials back from a country to which a sale is made.
• Suppose a US firm sells some products to China. China pays
the US firm in dollars, but in exchange, the US firm agrees to
spend some of its proceeds from the sale on textiles produced
by China.
Thus, although China must draw on its foreign exchange
reserves to pay the US firm, it knows it will receive
some of these dollars back because of the
counterpurchase agreement.
IILM-GSM

07/03/15 30
Counterpurchase:
In one counterpurchase deal, Rolls Royce sold jet parts
to Finland. As part of agreement, Rolls-Royce
agreed to use some of the proceeds from the sale of
purchase Finish-manufactured TV sets that it would
sell in UK.
Brazil has long been exporting vehicles, steel and farm
products to oil producing countries, from which it
buys oil in return.
IILM-GSM

07/03/15 31
Offset:
• An example for an offset deal is that PepsiCo sells its
cola syrup to Russia for roubles and agrees to buy
Russian Vodka at a certain rate for sale in the US.
• Going by this example, offset resembles counterpurchase
agreement. But there is difference. The difference is that
Pepsi can fulfill the obligation with any firm in Russia.
• From an exporter’s perspective, offset is more attractive
than a straight counterpurchase deal because it gives the
exporter greater flexibility to choose the goods that it
wished to purchase.
IILM-GSM

07/03/15 32
Switch Trading:
• Switch trading refers to the use of a specialized
third-party trading house in a countertrade
agreement.
• When a firm enters a counterpurchase or offset deal
with a country, it often ends up with what are called
counterpurchase credits, which can be used to
purchase goods from that country.
• Switch trading occurs when a third-party trading
house buys the firm’s counterpurchase credits and
sells them to another firm that can better use them.
IILM-GSM

07/03/15 33
Switch Trading:
• For example, a US firm concludes a counterpurchase
agreement with Poland for which it receives some
number of counterpurchase credits for purchasing
Polish goods.
• The US firm cannot and does not want any Polish
goods, however it sells the credits to a third-party
trading house at a discount. The trading house finds a
firm that can use the credits and sells at a profit.
IILM-GSM

07/03/15 34
Buyback:
• A buyback also called compensation 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 deal.
• A US chemical company built a plant for an Indian
company and accepted partial payment in cash and
the reminder in chemicals manufactured at the plant.
IILM-GSM

07/03/15 35
CONCLUSION
“Despite the inefficiencies, countertrade is common across
nations and about 20 percent of the world trade is accounted
for by the exchange of goods for goods. In fact, the
governments of developing nations sometimes insists on a
certain amount of countertrade. For example, all foreign
companies contracted by Thai state agencies for work costing
more than 500 million baht ($12.3 million) are required to
accept at least 30 percent of their payment in Thai agriculture
products. Between 1994 and mid-1998 foreign firms purchased
21 billion baht ($517 million) in Thai goods under
countertrade”.
IILM-GSM

07/05/10 36
IILM-GSM
• Every shipment abroad requires some kind of financing while in
transit. The exporter also needs funds to buy or manufacture its
goods. Similarly, the importer has to carry these goods in inventory
until they are sold.
• Usually, however, some in-between approach is chosen, involving
a combination of financing by the exporter, the importer, and one or
more financial intermediaries.
Terms of Payment in International
Transaction
The terms of payment describe how and when the
money should be transferred to the seller.

07/05/10 37
Terms of Payment in International
Transaction
IILM-GSM
The Five Principal Means of Payment in international trade,
ranked in order of increasing risk to the exporter, are:
1. Cash in Advance
2. Letter of Credit
3. Draft
4. Consignment
5. Open Account
International
Trade
Consignment
Open
Account
Cash in
Advance
Letter of
Credit
Draft

07/03/15 38
1. Cash in Advance
• Cash in advance affords the exporter the greatest
protection because payment is received either before
shipment or upon arrival of the goods (and
presentation of documents).
• Political crises or exchange control in the purchaser’s
country may cause payment delays. In addition, where
goods are made to order, prepayment is usually
demanded, both to finance production and to reduce
marketing risks.
Payment Terms in International Marketing
IILM-GSM

07/03/15 39
2. Letter of Credit
• Letter of credit is a letter addressed to the seller, written
and signed by a bank acting on behalf of the buyer.
• In the letter, the bank promises that it will honor drafts
drawn on itself if the seller confirms to the specific
conditions set forth in the letter of credit.
• In exchange for the bank’s agreement, the importer
promises to pay the bank the amount of transaction and
an agreed fee.
• The letter of credit obviously becomes a financial contract
between the issuing bank and a designated beneficiary
that is separate from the commercial transaction.
IILM-GSM

07/03/15 40
2. Letter of Credit: Advantage
1. A LOC reduces uncertainty. The exporter knows all the
requirements for payment because they are stipulated on the letter
of credit.
2. A LOC also reduces the danger that payment will be delayed or
withheld due to exchange control or other political risk.
1. The LOC ensures that the exporter delivers goods and produces
certain documents which are carefully examined by the bank.
2. Because a letter of credit is as good as cash, the importer can
usually command better credit terms and/or prices.
Exporter
Importer
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07/03/15 41
2. Letter of Credit: Advantage
“ The letter of credit operations are quite simple. Consider the case
of USA Importers Inc, of Los Angeles. The company is buying spare
auto parts worth $38,000 from Japan Exporter Inc, of Tokyo, Japan.
USA Importers applies for, and receives, letter of credit for $38,000
from its bank, Wells Fargo”.
The actual process is shown in figure as:
IILM-GSM

07/03/15 42
2. Letter of Credit:
Wells Fargo
Bank
Bank of
Tokyo
USA
Importers
Japan
Exporter
Process preceding creation of L/C
Process after creation of L/C
1. Purchase Order
2.L/Capplication
3. L/C delivered
4.L/Cnotification
5. Goods shipment
6.L/C,draft&
Shippingdocuments
7. L/C draft & documents delivered
8. Draft accepted & funds remitted
9.Payment
10.ShippingDocs.forwarded
11.L/Cpaidatmaturity
IILM-GSM

07/03/15 43
3. Draft (also known as Bill of Exchange)
• Draft is written by an exporter on the importer directing the
letter to pay a certain sum on a specified date for having
goods shipped to the importer. The exporter submits the
bill to its banker who collects the stated amount from the
importer’s bank and remits the proceeds to the seller or to
the bearer.
• Draft has three parties- exporter (drawer), importer
(drawee) and the party who is entitled to receive payment
is called the payee.
IILM-GSM

07/03/15 44
3. Draft (also known as Bill of Exchange)
• Draft serves three important functions:
1. It provides written evidence of obligations in a
comprehensive form.
2. It enables both parties to potentially reduce their costs
of financing.
3. It is a negotiable and unconditional instrument.
IILM-GSM

07/03/15 45
4. Consignment
• Under the consignment the exporter sends goods, on
consignment, to the importer who arranges for the sale of
goods and makes payment to the exporter, after deducing
a specified commission.
• Goods on consignment are duly shipped to the importer,
but they are not sold. The exporter (consignor) retains title
to the goods until the importer (consignee) has sold them
to a third party.
• This agreement is normally made only with a related
company because of the high risks involved.
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07/03/15 46
5. Open Account
• Open account selling is shipping goods first and billing the
importer later.
• The credit terms are arranged between the buyer and the
seller but the seller has little evidence of the importer’s
obligation to pay a certain sum at a certain date.
• Sales on open account, therefore, are made only to a
foreign affiliate or to a customer with which the exporter
has a long history of favorable business dealings.
• The benefits include greater flexibility (no specific
payment dates are set) and involve lower costs, including
fewer bank charges than with other modes of payment.
IILM-GSM

Imm unit-06 (global pricing strategies)

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