© 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. – –A competitive tool for dealing with rivals and substitutes. – –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 - –Market pricing – –Penetration 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 changes occur when: – – – 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 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.

© 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. –

© 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 – Marginal cost method -

© 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. –

© 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: Price escalation –A combined effect of clear-cut and hidden costs. –

© 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:

© 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 - –F-terms - –C-terms - –D-terms -

© 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 alongside ship (FAS) – –Cost and freight (CFR); cost, insurance, and freight (CIF) – –Delivered duty paid (DDP) –

© 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. – –Practices in the industry. – –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. –

© 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 – –The bank promises to pay money on presentation of specified documents like the bill of lading, consular invoice, and description of the 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. 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 – –Buyer must obtain shipping documents before obtaining possession of the goods involved in the transaction. Documentary collection – –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 - Discounting - Open account - Consignment selling –

© 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 – –Results from deterioration of conditions in the buyer’s market, fluctuations in demand, unanticipated competition, or technological changes. Political risk –

© 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. – –Financial reports may have been prepared according to a different format. – –Statements are in local currency. –

© 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. – 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. –

© 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 - Currency futures 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 – –Absorption - –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 - Adjustment strategies beyond price manipulation for managing foreign exchange risks: – – –

© 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.

© 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. – –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 – –The importer uses bills of exchange or promissory notes to pay the exporter at the time of shipment. –

© 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: 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. –

© 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. –

© 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: – –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 against political and commercial risks over which the exporter does not have control. – –Broadening of potential markets by minimizing exporter risks. – –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 Overseas Private Investment Corporation (OPIC) – –The U.S. Department of Agriculture’s Commodity Credit Corporation (CCC) –

© 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. Revisit competitive prices to ascertain that the price reflects market conditions accurately.

© 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. 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 – –Unintentional dumping -

© 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 - –Countervailing duties - 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.