International pricing strategy for business.

2. INTERNATIONAL
PRICING
STRATEGY

3. Learning
Outcomes
At the end of
the chapter
you should be
able to…
1. Examine the various pricing options and the
complications involved in setting prices in foreign
markets.
2. Identify the major determinants of export prices
and pricing methods.
3. Describe the steps involved when setting prices
for products sold abroad.

4. International Pricing Strategy
Pricing Approaches
Determinants of Export Prices and Pricing Methods
Pricing Standardization vs Adaptation Policy
Currency Devaluation and Revaluation
Setting Export Prices to Sell Competitively

5. Price is what customers pay to get the product or
service. While other marketing elements are known
as cost-centered elements, the pricing function is
considered revenuecentered.

6. Pricing Standardization
vs
Adaptation Policy

7.  The firm can standardize its pricing decisions by charging
the same price for a product in every foreign market in
which it operates.
 This is a difficult strategy to maintain because of
differences in local taxes, export taxes, distribution
channels, marketing costs, and freight and insurance
rates.

8.  The advantage of this strategy is that it is very flexible
and allows the firm to modify its prices according to
changes in the market and competitive conditions.

9. Determinants of Export Prices and
Pricing Methods

10. Basic factors that influence the setting of an export price are as follows:
1. Environmental Factors

11. Basic factors that influence the setting of an export price are as follows:
2. Market Factors

12. Basic factors that influence the setting of an export price are as follows:
3. Company Internal Factors

13. Pricing Approaches

14.  There are many pricing approaches that a firm could
use, ranging from cost-plus pricing to penetration
pricing.
 Actual pricing methods are usually cost, market, or
competition oriented approaches.

15. Cost-Plus Pricing
 The traditional method of price calculation is the “cost-
plus” approach.
 In this method, the cost structure determines the firm’s
pricing structure and its profitability.

16.  In international pricing, the same cost factors apply as
in the domestic market; but the price calculation will
include the components of the domestic price plus the
additional costs that are specific to export transactions.
 There are basically two ways of calculating this aspect:
the historical accounting cost method and the estimated
future cost method.

17.  There are additional costs when going abroad,
including transportation, special packaging, freight
and insurance costs, storage costs, local taxes,
intermediary costs, etc. All these sets of factors add up
and lead to price escalation.

18. Price Escalation

19. We can identify three main constituents of costs associated with
exporting:
1. Order getting costs
2. Order handling costs (direct to export)
3. Order handling costs (export overhead)

20. Retrograde Pricing
 Retrograde pricing is
obtained by working
backward from an
established or accepted range
of marketing prices and
simultaneously working
forward from the cost side.

21. Competitive Pricing
 Whilst costs are important, they should be looked at
alongside the prices of competitive products in the
target markets.

22. This involves four steps:
i. Estimation of demand schedules.
ii. Estimation of incremental and full manufacturing
and marketing costs to achieve projected sales
volumes.
iii. Selection of price which offers the highest
contribution.
iv. Inclusion of other elements of the marketing mix.

23. Market Pricing
 For certain products, firms can
charge “what the market can
bear.” If the supplier is one of a
few, despite all the problems
associated with price fixing,
the market may be able to bear
a high price.

24. Transfer Pricing
 This refers to a multinational firm’s pricing of goods and
services between its headquarters and subsidiaries.
 It is used to transfer funds from one market to another, to
reduce a firm’s tax liabilities, and to circumvent exchange
control regulations.
 Transfer pricing is more appropriate to those organizations
with decentralized profit centers.

25. The benefits of transfer pricing for international firms include:
• Lowering duty costs by shipping goods into high-tariff
countries at minimal transfer prices, so that the base duty level
is low.
• 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.
• Facilitating dividend repatriation, when this is curtailed by
government policy.

26. Across national boundaries the system gets complicated by taxes,
joint ventures, attitudes of governments, and so on. There are four
basic approaches to transfer pricing.
1. Transfer at cost
2. Transfer at direct cost plus overheads and margin
3. Transfer at a price derived from end market prices
4. Transfer at “arm’s length”

27. Dumping Price
 In economics, “dumping” is a kind of predatory pricing,
especially in the context of international trade.
 It occurs when manufacturers export a product to
another country at a price either below the price charged
in its home market or below its cost of production.

28.  The purpose of this act is sometimes to increase
market share in a foreign market or to drive out
competition.
 Dumping is considered illegal in many countries.

29. Countertrade
 Countertrade is when a company sells a product in
another country and receives some form of
compensation other than money.
 Various forms of countertrade exist, including
barter, compensation deals, counter-purchase,
product buy-backs, and offsets.

31.  Countertrade is used in order to gain access to new or
difficult markets; to overcome exchange-rate controls
or lack of hard currency; to overcome low country
creditworthiness; to increase sales volume; and to
generate long-term customer goodwill.

32. Due to the shortcomings of countertrade, it is important for international
marketers to evaluate the countertrade offer by considering several
questions:
 Is this the only way the order can be secured?
 Can the received goods be sold?
 How can we maximize the cash portion?
 Does the invoiced price incorporate extra transaction costs?
Are there import barriers to the received goods?
 Could there be currency exchange problems if we repatriate
the earnings from sales in a third country?

33. Currency Devaluation
and Revaluation

34.  Devaluation is a reduction in value of one currency vis-à-vis other
currencies, while revaluation is an increase in currency value.
 Devaluation makes exports cheaper and imports more expensive,
which in turn increases aggregate demand.
 An increase in aggregate demand leads to demand pull inflation,
while currency devaluation increases inflation because imports
become more expensive, which causes cost push inflation.

35. Setting Export Prices to
Sell Competitively

36. Pricing products for export requires several steps, but there are
five main ones:
2. Analyze the Market Situation
1. Define Pricing Objectives
3. Calculate Costs

37. Cost items in a business are traditionally divided into three
kinds:
i. Fixed costs
ii. Variable Costs
iii. Semi-variable Costs

38. Formulae for cost calculations, usually expressed in this form:

39. 4. Establish Target Price Structure
5. Present Price Quotations