Lecture 6 Pricing Decision

2 Pricing Direction Export pricing Within National Markets Pricing

3 5 Facets of pricing 1. Fundamental pricing strategy 2. Relation of foreign price policy to domestic policy 3. Currency issues 4. Elements in price quotation 5. Transfer pricing

4 Determinants of Export Price Costs Market Conditions&Customer behaviour Competition Legal&Political issues General company policies, including financial, production, marketing activities

5 Costs Price floor  Direct cost (Labor + rawmat + shipping) = (excess capacity)  Full costs Cost floor  Between d.c/ f.c.

6 Market Conditions Determines the upper limit for prices Price ceiling

7 Competition Cost Price floor Demand Price ceiling Competition helps where actual price should be set.

8 Legal & Political Influence Restricts the company to set prices strictly on economical basis. Some countries have the right to control the prosperity of their citizens. Antidumping legislations, Tariffs, import restrictions.

9 Company Policies & Marketing Mix Influenced by past and current corporate philosophy, organizational & managerial policies.

10 Fundamental Export Pricing Strategy Full costs to be covered, not easy all the time. Direct cost (mostly derived from domestic sales) harmful. Cost and volume relationship: Experience- curve pricing (Leantiacles, 85). As volume increases, unit cost decreases. So initial price is set below unit costs to gain price advantage. Different than break even pricing strategy

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13 a.Skimming the market Largest short run profit then retire from the biz. Getting highest possible price / keep it high till small market exhausted. Then may lower.

14 b.Sliding down the demand curve  Reduces the prices faster & further; for competition.

15 c.Penetration pricing  Establishing the price sufficiently low to rapidly create a mass market.

16 d.Pre-emptive pricing  Setting the prices so low as to discourage competition. Price is close to total unit cost.

17 e.Extinction pricing  Eliminate existing competitors from international markets by large – low cost producers. China

18 Relation of Export to Domestic Prices Export <Domestics: Manufacturer’s product is less well known in foreign markets than domestic. (To secure market acceptance & initial purchase) Export >Domestic: Increased initial cost to enter a foreign market is considerable. Selling expense is higher than in domestic market due to complexities of procedure, difficulties...etc. Export=Domestic: When entering a foreign market for the first time and has not enough market research.

19 Differential Pricing Competitive conditions & other environmental factors may vary from one foreign market to other.

20 Currency Issues Exporter can choose its own currency, buyer’s currency or some “third party” currency. Be carefull about the flooting of the currency. Try to find stable currency. Also purchasing currency is a driver.

21 Price Quotation Export prices are quoted in various ways. The major system is trade terms. They determine the cost that exporter will bear.

22 The 13 INCOTERMS Origin Terms EXW - Ex-Works, named place where shipment is available to the buyer, not loaded. The seller will not contract for any transportation. International Carriage NOT Paid by Seller FCA - Free Carrier, unloaded at the seller's dock OR a named place where shipment is available to the international carrier or agent, not loaded. This term can be used for any mode of transport. FAS - Free Alongside Ship, named ocean port of shipment. Ocean shipments that are NOT containerized. FOB - Free On Board vessel, named ocean port of shipment. This term is used for ocean shipments only where it is important that the goods pass the ship's rail.

23 International Carriage Paid by the Seller CFR - Cost and Freight, Named ocean port of destination. This term is used for ocean shipments that are not containerized. CIF - Cost, Insurance and Freight, named ocean port of destination. This term is used for ocean shipments that are not containerized. CPT - Carriage Paid To, named place or port of destination. This term is used for air or ocean containerized and roll-on roll-off shipments. CIP - Carriage and Insurance Paid To, named place or port of destination. This term is used for air or ocean containerized and roll-on roll-off shipments

24 Arrival At Stated Destination DAF - Delivered At Frontier, named place of destination, by land, not unloaded. This term is used for any mode of transportation but must be delivered by land. DES - Delivered Ex-Ship, named port of destination, not unloaded. This term is used for ocean shipments only. DEQ - Delivered Ex-Quay, named port of destination, unloaded, not cleared. This term is used for ocean shipments only. DDU - Delivered Duty Unpaid, named place of destination, not unloaded, not cleared. This term is used for any mode of transportation. DDP - Delivered Duty Paid, named place of destination, not unloaded, cleared. This term is used for any mode of transportation.

25 Selecting Trade Terms Shipment will be made on domestic or foreign carrier Availability of insurance coverange (Iraq) Availability of information on cost (Nig) Exporter’s need for cash (FOB / EXW) Inporters comparisor for several suppliers Currency contevertibity problems. (FOB buyer pays in his currency) Goverment Requirements (FOB for import licence to use local forms)

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28 Transfer Pricing Products sold to foreign subsidiaries or partnership. Wolly owned Competitive price list Costs Legal restrictions Partially owned Contracts / share % Volume / tax& tariffs