© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 11 Export Pricing

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price Dynamics 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price Dynamics 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price Dynamics 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Setting of Export Prices 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

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 11.2 – Stages in Setting of Export Prices

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Setting of Export Prices 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Setting of Export Prices 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Setting of Export Prices Market-differentiated pricing –Is based on the dynamic conditions of the marketplace. –Prices change frequently due to changes in competition, exchange rate, or environment.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Setting of Export Prices 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Setting of Export Prices 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit Distribution Adjustment to Decrease Price Escalation

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Terms of Sale Incoterms – The internationally accepted standard definitions for terms of sale set by the International Chamber of Commerce (ICC) since 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Terms of Sale 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)

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit Selected Trade Terms (Incoterms)

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Terms of Payment 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit Methods of Payment for Exports

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Terms of Payment 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Terms of Payment 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit Letter of Credit: Process and Parties

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Terms of Payment 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Terms of Payment 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Getting Paid for Exports 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Getting Paid for Exports 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Foreign Exchange Risk 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Foreign Exchange Risk 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit Exporter Strategies Under Varying Currency Conditions

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Foreign Exchange Risk 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Foreign Exchange Risk 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Financing International marketers assist their customers abroad in securing appropriate financing. Export financing terms affect the final price paid by buyers.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Financing 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Financing 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Financing 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Financing 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Financing 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Financing 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Financing 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Export Financing 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)

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price Negotiations 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Leasing 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Dumping 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.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Dumping 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.