1 Pricing for International Markets Broad-based pricing policies Price escalation & control 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 CIF (Cost, Insurance, Freight): price includes all costs to a named place of debarkation/landing. C&F (Cost & Freight): price includes the costs of goods and transportation to the named place of debarkation. The buyer picks up cost of insurance. FAS (Free Alongside): price includes cost of goods and charges for delivery to the shipping vessel. The buyer is responsible for the cost of loading onto the vessel, transportation, and insurance. FOB (Free on Board): price includes costs of delivery to a named inland point of origin, vessel or port. EX (e.g., EX, Factory): price includes only the goods; buyer pays for all shipping/transportation from factory. Terms of Sale

4 Exporting-related costs that add to price escalation Taxes Tariffs Administrative Costs Inflation Exchange Rate Fluctuations Varying Currency Values

5 Example: 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.

6 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

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 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. (200, Jan-Feb). Mary Kay in China: More than makeup. The China Business Review,

9 Countertrades Barter - direct exchange of goods (no cash) Compensation Deals - 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

10 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