Pricing for International Markets Chapter 18

International Pricing Approach Full Cost vs. Variable Cost Skimming vs. Penetration Irwin/McGraw-Hill 18-2

Costs of Exporting Taxes Tariffs Administrative Costs Inflation Exchange Rate Fluctuations Varying Currency Values Middlemen and Transportation Cost 18-3 Irwin/McGraw-Hill

Export Strategies Under Varying Currency Conditions Stress, price benefits Expand product line and add more costly features Shift sourcing and manufacturing to domestic market Exploit export opportunities in all markets Conduct conventional cash-for- goods trade Use full-costing approach, but use marginal-cost pricing to penetrate new/competitive markets When Domestic Currency is WEAK... Engage in nonprice competition by improving quality, delivery, and after- sale service Improve productivity and engage in vigorous cost reduction Shift sourcing and manufacturing overseas Give priority to exports to relatively strong-currency countries Deal in countertrade with weak- currency countries Trim profit margins and use marginal- cost pricing When Domestic Currency is STRONG... SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing," Business Horizons, May-June 1988, figure 2, p Irwin/McGraw-Hill

Export Strategies Under Varying Currency Conditions Speed repatriation of foreign-earned income and collections Minimize expenditures in local, host country currency Buy needed services (advertising, insurance, transportation, etc.) in domestic market Minimize local borrowing Bill foreign customers in domestic currency Keep the foreign-earned income in host country, slow collections Maximize expenditures in local, host country currency Buy needed services abroad and pay for them in local currencies Borrow money needed for expansion in local market Bill foreign customers in their own currency When Domestic Currency is WEAK... When Domestic Currency is STRONG... SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing," Business Horizons, May-June 1988, figure 2, p Irwin/McGraw-Hill

Sample Causes and Effects of Price Escalation Manufacturing net$ 5.00$ 5.00$ 5.00$ 5.00 Transport, c.i.f.n.a Tariff (20 percent c.i.f. value)n.a Importer paysn.a.n.a Importer margin when1.83 sold to wholesaler+0.73 * (25 percent) on costn.a.n.a Wholesaler pays landed cost * Wholesaler margin (33 1 / 3 percent on cost) =4.28 Retailer pays * Retail margin (50 percent on cost) =8.50 Retail price ForeignForeignForeign Example 1:Example 2:Example 3: Assuming theImporter andSame as 2 but same channels withsame marginswith 10 percent Domestic wholesaler import-and channelscumulative Example ing directlyturnover tax Notes:a.All figures in U.S. dollars; c.i.f = cost, insurance, and freight; n.a. = not applicable. b.The exhibit assumes that all domestic transportation costs are absorbed by the middleman. c.Transportation, tariffs, and middleman margins vary from country to country, but for purposes of comparison, only a few of the possible variations are shown. * Turnover Tax 18-6 Irwin/McGraw-Hill

Price Escalation The Lower Prices are at Home Aspirin$ 0.99$ 1.23$ 7.07$ 6.53$ 1.78 Movie Levi 501 jeans Ray-Ban sunglasses Sony Walkman Nike Air Jordans Nikon camera , New YorkLondonParisTokyoMexico City SOURCE: Norihiki Shirouzu, “Luxury Prices for U.S. Goods No Longer Pass Muster in Japan,” Wall Street Journal, February 8, 1996, p. B1; and Elizabeth Fleick, “The Cost of Europe: Buyer Beware, Europeans Are Getting Mad as Hell about Prices,” Time International, December 13, 1999, p Irwin/McGraw-Hill Los AngelesMadridStockholmBerlinRome Mariah Carey CD Windows Diapers

Approaches to Lessening Price Escalation Lower Cost of Goods  Lower Manufacturing Costs  Eliminate Functional Features  Lower Quality Lower Tariffs  Tariff Reclassification  Product Modification  Partial Assembly  Repack aging Lower Distribution Costs  Shorten Channels of Distribution  Lower Shipping Costs Foreign Trade Zones 18-8 Irwin/McGraw-Hill

18-9 Benefits of A Foreign Trade Zone (FTC) Tariffs may be lower because duties are typically assessed at a lower rate for unassembled versus assembled goods. If labor costs are lower in the importing country, substantial savings may be realized in the final product costs. Ocean transportation rates are affected by weight and volume; thus, unassembled goods may qualify for lower freight rates. If local content, such as packaging or component parts, can be used in the final assembly, there may be further reduction of tariffs.

Lessening in International Markets Leasing opens the door to a large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash. Leasing can ease the problems of selling new, experimental equipment, since less risk is involved for users. Leasing helps guarantee better maintenance and service on overseas equipment. Equipment leased and in use helps to sell other companies in that country. Lease revenue tends to be more stable over a period of time than direct sales would be Irwin/McGraw-Hill

Why 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 Irwin/McGraw-Hill To Force Reinvestment of Proceeds

Countertrades Irwin/McGraw-Hill  Types ▷ Barter ▷ Compensation Deals ▷ Counterpurchase or Offset Trade ▷ Buy-Back  Problems  The Internet as A Venue  Proactives Reactive Strategies

Irwin/McGraw-Hill Benefits of Intracompany or Transfer Pricing  Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low.  Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries. Such profit shifting may also be used for “dressing up” financial statements by increasing reported profits in countries where borrowing and other financing are undertaken.  Facilitating dividend repatriation when dividend repatriation is curtailed by government policy. Invisible income may be taken out in the form of high prices for products or components shipped to units in that country