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

2 Broad-based Pricing Policies Cost-based Full Cost - price covers FC+VC (airplanes) Variable 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 Foreign countries attracted to U.S. goods because they cost less When U.S. Dollar is WEAK... Foreign countries avoid U.S. goods because they cost more. When U.S. Dollar is STRONG... Strategies: Stress price benefits Shift manufacturing to U.S. market Exploit all export opportunities Conduct conventional currency based trades Use full-costing approach Buy needed services (advertising, insurance, transportation, etc.) in U.S. Bill foreign customers in U.S. currency Strategies: Engage in nonprice competition: improved quality, delivery, support Shift manufacturing overseas Prioritize exports to strong-currency countries Deal in countertrade with weak- currency countries Trim profit margins and use marginal- cost pricing Buy needed services abroad and pay for them in local currencies Bill foreign customers in their own currency

4 Seller assumes no shipping or transportation costs: EX (e.g. factory or warehouse): price covers goods only. Seller assumes costs of shipping to a water port : FAS (Free Alongside): price includes goods, port charges & delivery to shipping vessel. Buyer assumes costs of loading onto the vessel & other costs. FOB (Free on Board): price includes costs of goods, delivery, port charges and loading onto the vessel. Seller assumes costs of shipping to destination port: C&F (Cost & Freight): to the named place of debarkation. The buyer picks up cost of insurance. CIF (Cost, Insurance, Freight): price includes all costs to a named place of debarkation/landing. Terms of Sale

5 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

6 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.

7 Pricing in Honduras Demand for consumer goods is price elastic Price is important to import receptivity U.S. exporters should carefully analyze both cost and market-based pricing approaches Price escalation inflates retail price due to taxes on C.I.F. value, import duties, transportation costs, and distributor margins sales tax recently increased from 7% to 12% Source: Country Commercial Guide: Honduras (1999)

8 Reducing Price Escalation Lower Cost of Goods  Lower Manufacturing Costs  Eliminate Non-essential Features  Lower Quality Lower Tariffs  Tariff Reclassification  Product Modification  Partial Assembly  Repackaging Lower Distribution Costs  Shorten Channels of Distribution  Lower Shipping Costs Foreign Trade Zones

9 Mary Kay: People’s 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. (2000, Jan-Feb). Mary Kay in China: More than makeup. The China Business Review,

10 Countertrades Barter - direct exchange of goods (no cash) Compensation - payments made in both goods and cash Counterpurchase (Offset Trade) - seller receives cash for purchase, and agrees to buy a different product back from the buyer in the amount of the original sale (or some % of original sale). Product Buy-Back - cash sale of plant, equipment or technology, with agreement to buy back products manufactured by the equipment

11 Why Foreign 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

12 External Price Controls Cartels - e.g., shipping cartel, OPEC Foreign Government Controls - e.g., Malaysian government is sole buyer of imported rice; Canada Wheat Board controls price Canadian Farmers get for their wheat

13 Cash in Advance Letter of Credit Bill of Exchange Open Accounts Risk to Exporter/Seller Least Highest Cost to Importer/Buyer Highest Least Arrange for Payment