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0. Chapter 11 Export Pricing. Price Dynamics. 0. Price The only element in the marketing mix that generates revenue. Serves as a means of attracting and communicating an offer to a potential buyer. A competitive tool for dealing with rivals and substitutes.
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0 Chapter 11 Export Pricing
Price Dynamics 0 • Price • The only element in the marketing mix that generates revenue. • Serves as a means of attracting and communicating an offer to a potential buyer. • A competitive tool for dealing with rivals and substitutes. • Used to position the product or service in the market. • Pricing problems are technically identical in the domestic and international market, but vary according to the degree of foreign involvement.
Price Dynamics 0 • The alternatives strategies for first-time pricing are: • Skimming - Achieve the highest possible contribution in a short initial time period, and then gradually lower the price as more segments are targeted and more products are available. • Market pricing – Determined based on competitive prices; production and marketing is adjusted to the price. • Penetration pricing – Offer products at a low price to generate volume sales and achieve high market share, to compensate for lower per unit return.
Price Dynamics 0 • Price changes occur when: • a new product is launched. • a change occurs in the overall market conditions. • there is a change in the exporter’s internal situation. • With multiple-product pricing, the various items in the line may be differentiated by pricing them appropriately.
The Setting of Export Prices 0 • Export price setting is influenced by both internal and external factors, as well as their interaction. • Factors to be considered while establishing the basic premise for pricing include • the importance of price in customer decision making, • the strength of perceived price-quality relationships, • and potential reactions to marketing-mix manipulation by marketers • competition
The Setting of Export Prices 0 • Export pricing strategy • The standard worldwide price may be the same regardless of the buyer or may be based on average unit costs of fixed, variable, and export-related costs. • Dual pricing differentiates between domestic and export prices.
The Setting of Export Prices 0 • Export pricing strategy • The two approaches to pricing products for exports are • Cost plus method – Is the true cost, fully allocating domestic and foreign costs to the product; ensures profit margins; however, the firm’s competitiveness is compromised. • Marginal cost method - Considers the direct costs of producing and selling products for export as the floor beneath which prices cannot be set.
The Setting of Export Prices 0 • Market-differentiated pricing • Is based on the dynamic conditions of the marketplace. • Prices change frequently due to changes in competition, exchange rate, or environment.
The Setting of Export Prices 0 • Export-related costs • The unique export-related costs which exist along with the normal costs include: • Cost of modifying a product for a foreign market. • Operational costs of exporting. • Cost incurred in entering the foreign market. • Price escalation • A combined effect of clear-cut and hidden costs. • Results in an increase in export prices over and above the domestic prices.
The Setting of Export Prices 0 • Export-related costs • Creative strategies employed to combat price escalation: • Reorganize the channel of distribution. • Product adaptation. • Use new or more economical tariff or tax classifications. • Assemble or produce overseas.
Exhibit 11.5 - Distribution Adjustment to Decrease Price Escalation 0
Terms of Sale 0 • Incoterms – The internationally accepted standard definitions for terms of sale set by the International Chamber of Commerce (ICC) since 1936. • They are grouped into four categories: • E-terms - Seller delivers the goods to the buyer only at the former’s own premises. • F-terms - Seller delivers the goods to a carrier appointed by the buyer. • C-terms - Seller contracts for carriage without assuming the risk of loss or damage to the goods. • D-terms - Seller bears all costs and risks to deliver goods to the destination determined by the buyer.
Terms of Sale 0 • Common Incoterms used in international marketing: • Ex-works (EXW) • Free carrier (FCA) • Free alongside ship (FAS) • Free on board (FOB) • Cost and freight (CFR); cost, insurance, and freight (CIF) • Carriage paid to (CPT); carriage and insurance paid to (CIP) • Delivered duty paid (DDP) • Delivered duty unpaid (DDU)
Terms of Payment 0 • An exporter’s credit policy determines the degree of risk the firm is willing to assume and the preferred selling terms. • Factors considered for negotiating terms of payment: • The amount of payment and the need for protection. • Terms offered by competitors. • Practices in the industry. • Capacity for financing international transactions. • Relative strength of the parties involved.
Terms of Payment 0 • Cash in advance • Relieves the exporter of all risks and allows for immediate use of the money. • Used for first time transactions or situations where the exporter doubts the importer’s solvency.
Terms of Payment 0 • Letter of credit • An instrument issued by the bank at the request of the buyer. • The bank promises to pay money on presentation of specified documents like the bill of lading, consular invoice, and description of the goods. • Classified as irrevocable versus revocable, confirmed versus unconfirmed, and revolving versus nonrevolving.
Terms of Payment 0 • Drafts • Similar to personal check; an order by one party to pay another. • Buyer must obtain shipping documents before obtaining possession of the goods involved in the transaction. • Documentary collection • The seller ships the goods, and the shipping documents and the draft are presented to the importer through banks acting as the seller’s agent. • The draft , also known as the bill of exchange, may be either a sight draft or a time draft.
Terms of Payment 0 • Banker’s acceptance - A time draft drawn on and accepted by a bank; it is sold in the short-term money market. • Discounting - Selling a draft to the bank at a discount from face value; it can be with recourse or without recourse. • Open account - The normal manner of doing business in the domestic market; also known as open terms. • Consignment selling – Allows the importer to defer payment until goods are actually sold.
Getting Paid for Exports 0 • Commercial risk • Refers to the insolvency of, or protracted payment default by, an overseas buyer. • Results from deterioration of conditions in the buyer’s market, fluctuations in demand, unanticipated competition, or technological changes. • Political risk • Can neither be controlled by the buyer nor the seller.
Getting Paid for Exports 0 • Complications in assessing the buyer’s credit worthiness: • Credit reports may not be reliable. • Audited reports may not be available. • Financial reports may have been prepared according to a different format. • Many governments require that assets be annually re-evaluated upward, which can distort results. • Statements are in local currency. • The buyer may have the financial resources in local currency but may be precluded from converting to dollars because of exchange controls and other government actions.
Managing Foreign Exchange Risk 0 • To prevent currency related risks, the exporter can: • Shift the risk through foreign currency contractual hedging. • Modify the risk by manipulating prices and other elements of a marketing strategy. • Forward exchange market • The exporter gets the bank to agree to a rate at which it will buy the foreign currency the exporter receives when the importer makes payment. • The rate is either a premium or a discount on the current spot rate.
Managing Foreign Exchange Risk 0 • Currency option - Gives the holder the right to buy or sell foreign currency at a prespecified price on or up to a prespecified date. • Currency futures market - Conceptually similar to forward market; however, the minimum transaction sizes are considerably smaller than the forward market.
Exhibit 11.13 - Exporter Strategies Under Varying Currency Conditions 0
Managing Foreign Exchange Risk 0 • Techniques to adjust pricing in view of either a more favorable or an unfavorable domestic currency rate: • Pass through – Make no change in the price, resulting in a less favorable price in foreign currencies and, most likely, lower sales. • Absorption - Decrease the export price in conjunction with increases in the value of the currency to maintain stable export prices in foreign currencies. • Pass-through only a portion of the increase.
Managing Foreign Exchange Risk 0 • Pricing-to-market - Destination-specific adjustment of mark-ups in response to exchange-rate changes. • Adjustment strategies beyond price manipulation for managing foreign exchange risks: • Market refocus. • Streamlined operations. • Shift in production.
Sources of Export Financing 0 • International marketers assist their customers abroad in securing appropriate financing. • Export financing terms affect the final price paid by buyers.
Sources of Export Financing 0 • Commercial banks • Provide assistance to only first rate credit risks. • Provide enhanced services which help exporters monitor and expedite their international transactions. • Marketers should assess the overseas reach of banks to avail greater market coverage.
Sources of Export Financing 0 • Forfaiting • Forfaiting provides the exporter with cash at the time of shipment. • The importer uses bills of exchange or promissory notes to pay the exporter at the time of shipment. • The exporter sells them to a third party at a discount from their face value for immediate cash.
Sources of Export Financing 0 • Benefits accrued by the exporter through forfaiting: • Reduction of risk. • Simplicity of documentation. • Cent percent coverage. • Helps to avoid content or country restrictions. • The major issues about forfaiting are availability and cost.
Sources of Export Financing 0 • Factoring houses • May purchase an exporter’s receivables for a discounted price. • Provide the exporter with a complete financial package that combines credit protection, accounts-receivable bookkeeping, and collection services.
Sources of Export Financing 0 • Forfaiting and factoring methods differ in three significant ways: • Factors usually want a large percentage of the exporter’s business, while most forfaiters work on a one-shot basis. • Forfaiters work with medium-term receivables, while factors work with short-term receivables.
Sources of Export Financing 0 • Forfaiting and factoring methods differ in three significant ways: • Factors usually do not have strong capabilities in the developing countries, since forfaiters usually require a bank guarantee, most are willing to deal with receivables from these countries. • Forfaiters work with capital goods, factors typically with consumer goods.
Sources of Export Financing 0 • Official trade financing can take the form of either a loan or a guarantee, including credit insurance. • Advantages of trade financing by the government are: • Protection in the riskiest part of an exporter’s business. • Protection against political and commercial risks over which the exporter does not have control. • Encouragement to exporters to make competitive offers by extending terms of payment. • Broadening of potential markets by minimizing exporter risks. • Possibility of leveraging exporter accounts receivable. • Opportunity for commercial banks to remain active in the international finance arena.
Sources of Export Financing 0 • The following entities insure credit risks for exports. • Export credit agencies (ECAs) • The Export-Import Bank of the United States (Ex-Im Bank) • The Overseas Private Investment Corporation (OPIC) • The Agency for International Development (AID) • The U.S. Department of Agriculture’s Commodity Credit Corporation (CCC) • The Small Business Administration (SBA)
Price Negotiations 0 • Pricing is the most sensitive issue in business negotiations; the exporter should discuss it as part of a comprehensive package and should avoid price concessions early on in the negotiations. • Carefully consider concessions that reduce price or profitability; example: discounts, payment terms, product features. • Revisit competitive prices to ascertain that the price reflects market conditions accurately. • Focus negotiations first on substantive issues (quality and delivery), then on price.
Leasing 0 • Trade liberalization is expected to benefit lessors both through expected growth in target economies and eradication of country laws and regulations hampering outside lessors. • Allows market penetration for the firm’s products, which is not possible through outright sale. • Total net income from leasing is often higher than it would be if the unit was sold.
Dumping 0 • Selling goods overseas at a price lower than in the exporter’s home market or below the cost of production, or both. • Ranges of dumping • Predatory dumping – Intentionally selling at a loss in another country in order to increase its market share at the expense of domestic producers. • Unintentional dumping - Result of time lags between the dates of sales transaction, shipment, and arrival.
Dumping 0 • Remedies for dumping • Antidumping duty - Levied on imported goods sold at less than fair market value. • Countervailing duties - Imposed on imports which are subsidized in the exporter’s home country. • To minimize the risk of being accused of dumping, the marketer can focus on value-added products and increase differentiation by including services in the product offering.