Chapter 11 Export Pricing
Price Dynamics • Pricing is the only revenue generating element of the marketing mix. • Pricing is a means of attracting and communicating an offer to a potential buyer. • Pricing is a competitive tool. • Pricing can be use to position the product or service in the marketplace.
Price Dynamics • Skimming • Using high-priced unique products to achieve the highest possible contribution in a short initial time period, then gradually lowering the price as the market. • Market Pricing • Following competitive pricing in the target market; adjusting production and marketing mix to competitive conditions. • Penetration Pricing • Offering low pricing to generate volume sales which hopefully will compensate for low margins.
EXTERNAL Market-related factors Nature of demand/target audience characteristics Government regulations (e.g., duties) Exchange rate stability Industry-related factors Competition intensity Nature of competition INTERNAL Marketing Mix Product (e.g., old/new; standardized/differentiated Distribution system (e.g., length) Promotion needs (e.g., sales efforts) Company characteristics Extent of internationalization Countries exported to Management attitudes Importance of exports Overall price position of firm The Setting of Export Prices ASSESSMENT OF PRICING ENVIRONMENTS Pricing Policy Selection Pricing Strategy Determination Setting of Specific Price
Customer Purchase Factors ability to pay price-quality relationship reaction to marketing mix market support Pricing Policies Factors profit maximization market share survival return on investment competitive policies copy competitive pricing follow competitive pricing price to discourage competitive entry The Setting of Export Prices
Export Pricing Strategy • Cost-oriented pricing • Standard worldwide price- regardless of buyer’s location in the market(s) • Dual pricing differentiates between domestic and export prices • Cost-plus method allocates domestic and foreign costs to the product. • Marginal cost method considers direct costs of producing and selling exports as floor (lowest) price. • Market-differentiated pricing • based on the dynamics of the marketplace • changes in competition, exchange rates, etc.
Export-Related Costs • Export-related costs • Cost of modifying a product for a foreign market • Operational costs of exporting • Cost incurred in entering the foreign market • Price escalation for exports results from • Clear-cut and hidden costs • Methods for combating price escalation • Reorganize the channel of distribution • Product adaptation • Change tariff or tax classifications • Overseas assembly or production
Terms of Sale • Incoterms are the internationally accepted standard definitions for terms of sale set by the International Chamber of Commerce (ICC) since 1936. • Incoterms • exworks (EXW) • free carrier (FCA) • free alongside ship (FAS) • free on board (FOB) • cost and freight (CFR) • delivered duty paid (DDP) • delivered duty unpaid (DDU)
Negotiating Terms of Payment • Considerations • 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.
The Risk Triangle BUYER’S PERSPECTIVE SELLER’S PERSPECTIVE Source: Adapted from Chase Manhattan Bank, Dynamics of Trade Finance (New York: Chase Manhattan Bank, 1984),5
Terms of Payment Types of Payment • Cash in Advance • Not widely used except for first time transactions • Letter of Credit • Promise to pay • Irrevocable, confirmed, revolving • Drafts • Similar to personal check • Must obtain shipping documents prior to delivery • Documentary collection • Bank acts as collection agent • Draft may be sold at discounted rate for immediate cash
Managing Foreign Exchange Risk • Forward rate exchange market • “the exchange of currencies on a future date at an agreed upon exchange rate” • Spot rate transaction • “the exchange of currencies for immediate delivery” • Possible price manipulation responses to currency movements • Make no change in the dollar price (pass-through). • Decrease the export price (absorption). • Pass-through only a portion of the increase.
WEAK POSITION Stress price benefits Expand product line Shift sourcing to domestic market Cash-for-goods trade Full costing Speed repatriation Minimize expenditure in local currency STRONG POSITION Non-price competition Improve productivity/ cost reduction Sourcing overseas Prioritize exports Countertrade with weak currency countries Marginal-cost pricing Slow collections Buy needed services abroad Exporter Strategies Under Varying Currency Conditions
Sources of Export Financing • Commercial banks • first rate credit risks only • enhanced services • overseas reach • Forfeiting and Factoring • uses bills of exchange or promissory notes to pay at time of shipment • may use discounts to purchase receivables • Official Trade Financing • loans or guarantees
Price Negotiations • Be aware that price is only one part of a comprehensive package. Avoid early price concessions. • Carefully consider concessions that reduce price or profitability. • discounts, payment terms, product features • Know conditions in importer’s market. • Focus negotiations first on substantive issues (quality and delivery), then on price.
Leasing • Reduces the amount of investment required to place the product in service, especially in less developed markets. • May produce a total net income greater than that of an outright sale. • Offers the opportunity to provide ancillary services that increase the total value of the exported asset.
Dumping • Ranges of dumping • Predatory dumping • is intentional selling at a loss to increase market share • Unintentional dumping • occurs when market factors cause the import’s selling price to fall below prices in the exporter’s home market • Remedies for dumping • Antidumping duty • are levied on imported goods sold at less than fair market value • Countervailing duties • are imposed on imports which are subsidized in the exporter’s home country