18- 0 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Chapter 18 Pricing for International Markets

18- 1 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill International Pricing Approach Full Cost vs Variable Cost Skimming vs Penetration

18- 2 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Costs of Exporting Taxes Tariffs Administrative Costs Inflation Exchange Rate Fluctuations Varying Currency Values

18- 3 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Export Strategies Under Varying Currency Conditions Stress, price benefits Expand product line and add more costly features Shift sourcing and manufacturing to domestic market Exploit export opportunities in all markets Conduct conventional cash-for- goods trade Use full-costing approach, but use marginal-cost pricing to penetrate new/competitive markets When Domestic Currency is WEAK... Engage in nonprice competition by improving quality, delivery, and after- sale service Improve productivity and engage in vigorous cost reduction Shift sourcing and manufacturing overseas Give priority to exports to relatively strong-currency countries Deal in countertrade with weak- currency countries Trim profit margins and use marginal- cost pricing When Domestic Currency is STRONG... SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing," Business Horizons, May-June 1988, figure 2, p. 58.

18- 4 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Export Strategies Under Varying Currency Conditions Speed repatriation of foreign-earned income and collections Minimize expenditures in local, host country currency Buy needed services (advertising, insurance, transportation, etc.) in domestic market Minimize local borrowing Bill foreign customers in domestic currency Keep the foreign-earned income in host country, slow collections Maximize expenditures in local, host country currency Buy needed services abroad and pay for them in local currencies Borrow money needed for expansion in local market Bill foreign customers in their own currency When Domestic Currency is WEAK... When Domestic Currency is STRONG... SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing," Business Horizons, May-June 1988, figure 2, p. 58.

18- 5 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Sample Causes and Effects of Price Escalation Manufacturing net$ 5.00$ 5.00$ 5.00$ 5.00 Transport, c.i.f.n.a Tariff (20 percent c.i.f. value)n.a Importer paysn.a.n.a Importer margin when1.83 sold to wholesaler+0.73 * (25 percent) on costn.a.n.a Wholesaler pays landed cost * Wholesaler margin (33 1 / 3 percent on cost) =4.28 Retailer pays * Retail margin (50 percent on cost) =8.50 Retail price ForeignForeignForeign Example 1:Example 2:Example 3: Assuming theImporter andSame as 2 but same channels withsame marginswith 10 percent Domestic wholesaler import-and channelscumulative Example ing directlyturnover tax Notes:a.All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable. b.The exhibit assumes that all domestic transportation costs are absorbed by the middleman. c.Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown. * Turnover Tax

18- 6 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Price Escalation The Lower Prices are at Home Aspirin$ 0.99$ 1.23$ 7.08$ 6.53$ 1.78 Cup of coffee Movie Compact disk Levi 501 jeans Ray-Ban sunglasses Sony Walkman Nike Air Jordans Gucci men's loafers Nikon camera , New YorkLondonParisTokyoMexico City SOURCE: "Tourists and Bargains Galore," Fortune, June 13, 1994, p. 12.

18- 7 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Cosmetics and Haircare Products Imported into South Africa Effect of Import Duties on Costs Product Category: Destination: Duties: Additional Taxes: Result: Cosmetics and Haircare Products Containing Alcohol. South Africa Importer pays duties, Specific Excise Taxes, and Import Surcharges based on F.O.B. value of product. Ad Valorem Excise Tax assessed on F.O.B. value, plus 15 percent of F.O.B value, plus Import Duty and Value- added Tax based on F.O.B Value, Plus 14% of that value, plus the total of all non-rebated customs 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.

18- 8 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Cosmetics and Haircare Products Imported into South Africa Calculations: Duties:Import Duty=40.0% Ad Valorem Excise Tax= 37.5% Import Surcharge=40.0% VAT=14.0% Calculations:Import Duties =$0.40 (40% of F.O.B. Ad Valorem Excise Tax=0.58 (See Calculations below) Import Surcharge= 0.40 (40% of F.O.B.) (A) Total Duties= $ 1.38 Calculations:F.O.B. Value= $ Percent of F.O.B.= 0.15 Import Duty= 0.40 (B) Subtotal Ad Valorem Value=$ 1.55 (C) AD Valorem Tax 37.5% of (B)=0.58 SOURCE: South Africa's Customs Tariff (USDA Near East) August 1993.

18- 9 © The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Cosmetics and Haircare Products Imported into South Africa The VAT Tax is calculated as follows: Calculations:F.O.B.=$ % of F.O.B.= 0.14 Total duties (A) above= 1.38 (D) Subtotal VAT value $ 2.52 (E) VAT = 14% of (D) $ The final cost to the South African importer for these cosmetics is the F.O.B. value, plus all duties, plus the VAT which equals $ Calculations: F.O.B.=$ 1.00 Total Duties (A)= 1.38 VAT (E)= 0.35 Final cost to importer= $ 2.73 SOURCE: South Africa's Customs Tariff (USDOC Near East) August 1993.

© The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Lessening Price Escalation Lower Cost of Goods  Lower Manufacturing Costs  Eliminate Functional Features  Lower Quality Lower Tariffs  Tariff Reclassification  Product Modification  Partial Assembly  Repack aging Lower Distribution Costs  Shorten Channels of Distribution  Lower Shipping Costs Foreign Trade Zones

© The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Lessening in International Markets Leasing opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash. Leasing can ease the problems of selling new, experimental equipment, since less risk is involved for users. Leasing helps guarantee better maintenance and service on overseas equipment. Equipment leased and in use helps to sell other companies in that country. Lease revenue tends to be more stable over a period of time than direct sales would be.

© The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Countertrades Barter Compensation Deals Counterpurchase or Offset Trade Product Buy-Back Agreement

© The McGraw-Hill Companies, Inc., 1999 Irwin/McGraw-Hill Why Purchasers Impose Countertrade Obligations To Preserve Hard Currency To Improve Balance of Trade To Gain Access to New Markets To Upgrade Manufacturing Capabilities To Maintain Prices of Export Goods