1 Pricing for International Markets Broad-based pricing policies Terms of Sale Terms of Payment Countertrade

2 Broad-based pricing policies Cost-based Full Cost - price covers FC+VC (airplanes) Marginal Cost - price covers VC only (semiconductor chips & high volume goods) Market-based Skimming - high price to fewer customers Penetration - low price to more customers

3 1)EXW: price includes only the goods; buyer pays for all shipping/transportation from factory. 2a) FOB (Free on Board): price includes costs of delivery to a named inland point of origin, vessel or port (water transport only). 2b) FCA: like FOB, but inland only; seller pays to load, but buyer picks up other costs 3)FAS (Free Alongside): price includes cost of goods and charges for delivery to the shipping vessel. The buyer is responsible for the cost of loading onto the vessel, transportation, and insurance. 4a) C&F (Cost & Freight): price includes the costs of goods and transportation to the named place of foreign debarkation. The buyer picks up cost of insurance. 4b) CIF (Cost, Insurance, Freight): price includes all costs to a named place of debarkation/landing. Terms of Sale

4 Exporting-related costs that add to price escalation 1.Modifying product for foreign market; manufacturing costs 2.Operational costs: administrative, promotion & shipping costs 3.Entry costs: Taxes Tariffs Inflation, Exchange Rate Fluctuations, Varying Currency Values

5 Example: Cosmetics and Haircare Products to South Africa Effect of Import Duties on Costs Product Category: Destination: Duties & Additional Taxes: Result: Cosmetics and Haircare Products Containing Alcohol. South Africa Import Duty (40%of F.O.B. value of product) Import Surcharges (40% of F.O.B. value of product) Ad valorem excise tax (37.5% of ad valorem value) Value-Added Tax (14% of F.O.B. value + total duties) An item classified as a cosmetic and Haircare product with a F.O.B. value of $ 1 escalates to a final cost of $ 2.73 to the South African importer.

6 Reducing Price Escalation 1) Lower Cost of Goods (Adapt product) –Lower Manufacturing Costs –Eliminate Non-essential Features – Lower Quality 2) Lower Distribution Costs –Shorten Channels of Distribution –Lower Shipping Costs 3) Lower Tariffs –Tariff Reclassification –Product Modification –Partial Assembly –Repackaging 4) Assemble or produce overseas –Free Trade Zones

7 Mary Kay: Peoples Republic of China (PRC) Mary Kay reduces price escalation by: importing only key ingredients (reduces tariffs) & manufacturing in the PRC (lowers labor costs) shortening distribution channels; PRC factory 17 regional beauty ctrs retailers promoters customers exporting to other markets (Malaysia, Phillipines, Thailand) through PRC vs. from U.S. Mary Kay price range: eye shadow applicator $ 0.72 U.S. to perfume $45.91 U.S. Hulme, V.A. (200, Jan-Feb). Mary Kay in China: More than makeup. The China Business Review,

8 Free Trade Zones Firm benefits from using an FTZ: –Foreign goods are exempt from duties as long as they do not enter the country –Goods can be stockpiled (tariff free) in FTZ when quotas are filled or while waiting for better market conditions. –Goods can be assembled without paying tariffs on foreign parts. –Firm can use the FTZ for breaking bulk Tax-free area not considered part of the country in terms of import regulations

9 Free Trade Zones, continued Firm benefits from using an FTZ, cont.: –No duty paid on damaged, scraped and obsolete merchandise –Safer than most ports of entry – bonded warehouse & increased security reduces insurance costs –Products can be labeled as manufactured in the foreign trade zone country when it has a positive country-of-origin image.

10 Puerto Rico FTZ Puerto Rico has the largest, noncontiguous FTZ system in the USA. Companies obtain significant financial savings, since raw material, components and packaging can be transported tax free through these zones and items shipped abroad after processing are exempt from U.S. taxes. Benefits of the FTZ in Puerto Rico include: Deferment of federal customs duties Deferment of Puerto Rico excise tax No payment of Municipal License Taxes on exports outside the USA. No duty paid on damaged, scraped and obsolete merchandise U.S. Customs duties are not owed on labor, overhead and profit attributed to production operations in a FTZ. Reduction of time and effort in the activation process.

11 Cash in Advance Letter of Credit Forfait Draft (Bill of Exchange) Open Account Terms of Sale: Foreign Commercial Payments Risk to Exporter/Seller Least Highest Cost to Importer/Buyer Highest Least

12 Countertrades Barter - direct exchange of goods (no cash) Counterpurchase - payments made in both goods and cash Offset Trade - seller agrees to offset the high cost of the product (e.g., jet fighters) by investing in a foreign industry (e.g., rice, cloth, etc.). Product Buy-Back - cash sale of plant, equipment or technology, with agreement to buy back products manufactured by the equipment