© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pricing in International Business

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. REVIEW: Price Dynamics Price Generates revenue Competitive tool in dealing with rivals and substitutes Positions the product in the market Pricing decisions cannot be made in isolation from the other functions of the firm

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. REVIEW: Price Dynamics The alternatives strategies for first-time pricing are: Skimming: Achieve the highest possible contribution in a short time period Market pricing: final customer price is determined based on competitive prices Penetration pricing: Offer products at a low price to generate volume sales and achieve high market share

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. REVIEW: 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 internal situation In multiple-product pricing, items are priced indicating: An economy version Standard version A top-of-the-line version

© 2013 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: Importance of price in customer decision making Strength of perceived price-quality relationships Potential reactions to marketing-mix manipulation by marketers

© 2013 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 Standard worldwide price: Based on average unit costs of fixed, variable, and export-related costs Dual pricing: Differentiates between domestic and export prices Market-differentiated pricing: Calls for pricing exports according to the dynamic conditions of the marketplace

© 2013 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 exist along with the normal costs Include: Cost of modifying the product for foreign markets Operational costs of export operation Cost incurred in entering the foreign markets

© 2013 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 Price escalation: A combined effect of clear- cut and hidden costs Results in an increase in export prices over and above the domestic prices Value-added tax (VAT): Used within the European Union, included in the calculations

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. NOT ON EXAM- Selected Trade Terms

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. NOT ON EXAM- Selected Trade Terms

© 2013 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 risk and allows for immediate use of the money Most favorable term to the exporter Letter of credit: An instrument issued by a bank at the request of a buyer

© 2013 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 Consignment selling: Allows the importer to defer payment until goods are actually sold Most favorable term to the importer

© 2013 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 Commercial defaults result from: Deterioration of conditions in the buyer’s market Fluctuations in demand Unanticipated competition Technological changes Political risk: Completely beyond the control of either the buyer or the seller

© 2013 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 Factors that complicate the assessment of a foreign private buyer: Credit reports may not be reliable Financial reports may have been prepared according to a different format Statements are in local currency

© 2013 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 Exchange rate movements may harm or benefit one or the other of the parties. Foreign market exchange: allows a company to know how much it will eventually receive in payment. Option: right to buy or sell foreign currency at a prespecified price on or up to a prespecified date. Currency Futures market: an obligation to buy in the future at a prespecified price.

© 2013 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 futures market: Conceptually similar to forward market Minimum transaction sizes are smaller on the futures market ($100,000 instead of a million)

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exporter Strategies Under Varying Currency Conditions

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pricing within Individual Markets It is determined by: 1. Corporate objectives: Financial and marketing-related 2. Costs: Used as a basis for price determination Include procurement, manufacturing, logistics, and marketing costs 3. Customer behavior and market conditions: Demand sets a price ceiling

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pricing within Individual Markets 4. Market structure: Competition helps set the price within the parameters of cost and demand 5. Environmental constraints Governments influence pricing Setting maximum prices stops inflation and an accelerating wage–price spiral Consumers want it To fight price controls, multinational corporations can demonstrate that they are getting an unacceptable return on investment

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Countertrade Goods are exchanged directly for other goods of approximately equal value. Conditions that support countertrade are: Lack of money Lack of value of money Lack of acceptability of money as an exchange medium Greater ease of transaction by using goods

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Countertrade Countertrade transactions are beneficial World debt crises and exchange rate volatility have made ordinary trade financing very risky Use of countertrade Permits the covert reduction of prices Allows firms and governments to circumvent price and exchange controls

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Countertrade Excellent mechanism to gain entry into new markets Provides stability for long-term sales Under certain conditions, it ensures the quality of an international transaction