CHAPTER 6

INTERNATIONAL PRICING

VU THN
[email protected]
 CONTENTS
01 Fundamental export pricing objectives and strategies

02 Determinants of an export price

03 Relation of export to domestic price policies

04 Exchange rate changes & currency issues

05 The price quotation

06 Transfer pricing & Countertrade

 “Luxury goods makers need to balance
image and desirability with affordability
and their own strategic goals.”
—Government of Canada, 2017
 INTRODUCTION
• Operate in multiple pricing environments
• Complex task, numerous markets
• Not determined is isolation
• Affects ability to be profitable
• A marketing tool
• Other related issues such as terms of sale, counter-trade, dumping,
transfer pricing etc.
• Digital impact
• Transparency
“As digital eroded geographic borders, we consumers
• Dynamic pricing have become more used to seeing the way products are
priced elsewhere.”
(Smith, 2018)
 TRENDS
• Increased transparency on a global basis
• Multinationals as ‘corporate citizens’
• Pricing pressure from retailers
• Consumers ability to shop around
• Increasing level of value pricing
• Focus on transfer pricing (inter-company)
• Brexit effect? Russia-Ukraine War?
1.2 FUNDAMENTAL EXPORT PRICING OBJECTIVES & STRATEGIES

Skimming the market

• getting the highest possible price out of a product’s
distinctiveness
• a high price is set until the small market at that price is
exhausted.
• the price may then be lowered to tap a second successive
market or income level
1.2 FUNDAMENTAL EXPORT PRICING OBJECTIVES & STRATEGIES

Penetration pricing
- establishing a price sufficiently low to rapidly create a mass
market
- emphasis is placed on value rather than cost in setting the
price
1.2 FUNDAMENTAL EXPORT PRICING OBJECTIVES & STRATEGIES

Sliding down the demand curve

- a variation of the skimming strategy

- company reduces prices faster and further than it would be
forced to do in view of potential competition
1.2 FUNDAMENTAL EXPORT PRICING OBJECTIVES & STRATEGIES

Extinction pricing (Ðịnh giá hủy diệt)

- to eliminate existing competitors from international markets

- it may be adopted by large, low-cost producers as a conscious
means of driving weaker, marginal producers out of the
industry
1.2 FUNDAMENTAL EXPORT PRICING OBJECTIVES & STRATEGIES

Preemptive pricing (Định giá ngăn chặn)

- setting prices so low as to discourage competition

- price will be close to total unit costs

Preemptive and extinction pricing strategies are both

closely associated with ‘dumping’ in international markets.
 2. DETERMINANTS OF AN EXPORT PRICE
• costs
• market conditions and customer behavior (demand/ value)
• competition
• legal and political issues
• general company policies (financial matters, production, organization
structure); and on marketing activities (products planning and
development, the product mix, marketing channels, sales promotion,
advertising, & selling)
 2.1 COSTS
• In the short run: direct costs (labor, raw materials, & shipping)
• In the long run: full costs for all products
• Price lining offering different products or services at various price
points to meet different customers’ need.
• Dynamic pricing charge vary from one market to another, depending
on the market conditions, differences in costs, and variations in the
way consumers value the offering.
 2.1 COSTS
• Bundling – packaging a product with other goods and services – can
make it difficult for buyers to see through the costs of any single item
within the bundle
• The basic categories of cost incurred to serve domestic and export
customers are the same, for example labor, raw materials,
component parts, selling, shipping, overheads.
 2.2 MARKET CONDITIONS (DEMAND)

• The utility/ value, placed on the product by purchasers sets the price
ceiling
• establish the value of a product in an export market = establish a
demand schedule for the product
• estimate a demand schedule, the market can be stratified, which
involves estimating the number of customers who will buy at several
levels of price
2.2 MARKET CONDITIONS (DEMAND)

Factors affecting price sensitivity

Cost figures of a consumer product
 2.3 PRICING METHODS
COST-PLUS PRICING (MARKUP PRICING)

•Price = COGS + COGS x a%

•Advantages:
• Easy and fast calculation
• Costs arising during sales are included in the profit percentage
•Disadvantages:
• Inflexible, unsuitable for products whose prices change according to the
change in the supply and demand of the market
•Apply for products that are slow to change prices or must be sold within a day
after production
 2.3 PRICING METHODS
BREAK-EVEN ANALYSIS AND TARGET PROFIT PRICING
Target price = units cost + target profit/ expected consumption quantity
Break-even volume formula:

"#
BEV= $ % &#
BEV: break-even volume
FC: fixed cost
P: price
VC: variables cost
 2.3 PRICING METHODS
BREAK-EVEN ANALYSIS AND TARGET PROFIT PRICING
 2.3 PRICING METHODS
PERCEPTION-BASED PRICING

•Price = COGS + buyer’s perception

•If the customer is interested in the product, the seller may charge a high price
•If the customer isn’t interested in the product, the seller should charge the original
price
•High quality products are expensive
 2.3 PRICING METHODS
COMPETITION-BASED PRICING

• Competition-based pricing involves setting prices based on competitors’

strategies, costs, prices, and market offerings.
• Fast Moving Consumer Goods (FMCG) often apply this pricing methods, for
example, bottled water
 2.4 COMPETITION

- price above, at the same level as, or below competition?

- Barriers to provide ‘shelter’ from competition include having a
product distinctiveness , a brand prominence with high brand equity ,
and a well-established channel of distribution both between
countries and within a country that can provide greater dealer
strength
 2.5 LEGAL/POLITICAL INFLUENCE
- Legal and political factors act primarily to restrict the freedom of a
company to set prices strictly on the basis of economic
considerations.
- antidumping legislation
- handle rebates, discounts, allowances, and even price escalation or
guarantee against price decline clauses in contracts
- tariff levels
- government intervenes in currency markets
 3.1 EXPORT PRICES LOWER THAN DOMESTIC
• the manufacturer’s product is probably less well known in foreign
markets than domestic ➝ to secure market acceptance and initial
purchase
• the lure of increased sales volume in order to assist in absorbing
manufacturing and overhead costs
• domestic customers are nationalistic and will pay a higher price for a
domestic product
⥤ may be considered to be dumping
 3.2 EXPORT PRICES HIGHER THAN DOMESTIC
• initial cost of equipping an organization to enter the export field
• the complexities of procedure, difficulties in language, differing
commercial customs, and varying legal needs and tastes of customers
in export markets
• extra investment and added expense in preparation of special
documents and forms in packing, preparation, and alteration of the
products
• added risk in doing business abroad due to unsettled economic and
3.3 EXPORT PRICES ON A PAR WITH DOMESTIC PRICES
• fix export prices
• antidumping regulations
• easily alter when the manufacturer gains experience and acquires a
more comprehensive knowledge of export markets
• easy to implement but may not be suitable if the domestic price is low
because of unusual circumstances, such as intense competition
 3.4 DIFFERENTIAL PRICING
1) Differential elasticities of demand
• a profit incentive for the exporter to set a higher price in one
market than another
• high price elasticity suggests low prices
• price inelasticity suggests high prices
2) Effective separation of market
• transportation costs/ reexporting costs are higher than the price
differential
• products sold in a low-price market may find their way into a high-
“Luxury brands that shy away from sensitive price adjustments
for fear of diluting their brand image took a leap of faith by
implementing price alignment strategies across key markets.”
(Euromonitor, 2016)
“ …beyond following a pricing strategy
tailored to the characteristics of each
market, Inditex is attentive to what
consumers are willing to pay based on
their income.”
 4.1 CHANGES IN EXCHANGE RATES

• often change significantly in the short run, and more greatly in the
long run
• exchange controls to maintain the rate (require exporters to turn all
foreign currencies into the national bank, and all importers to
purchase foreign exchange from that bank)
 4.2 CURRENCY ISSUES

• exporter may specify what currency should be used in a particular

transaction
• importer may require its own currency
• or third party’ currency
 5. THE PRICE QUOTATION
1) Ex (point of origin) the seller’s 3) Free alongside (FAS) the seller must
responsibility & costs end at this point provide for delivery of the goods free
in his home country alongside, but not on board, the
2) Free on board (FOB) a transportation transportation carrier (usually an
carrier at some named point. The ocean vessel) at the port of shipment
seller’s responsibility & cost end in and export
most cases when the goods are loaded time and cost of loading are not
on the appropriate carrier and a clean included
bill of lading has been issued.
 5. THE PRICE QUOTATION
4) Cost and freight (C&F) delivery costs 6) Ex dock one step beyond CIF and
are extended beyond the country of requires the seller to be responsible
export, the seller’s responsible for for the cost of the goods and all
providing and paying for transportation other costs necessary to place the
to the overseas port of discharge goods on the dock at the named
5) Cost, insurance, and freight (CIF). overseas port, with the appropriate
This trade term is identical to C&F import duty paid.
except that the seller must also
provide the necessary insurance.
 5.1 SELECTION OF TRADE TERMS
• Whether shipment will be made on domestic or foreign carriers.
• Availability of insurance coverage.
• Availability of information on costs. Exporter’s need for cash (reason
against C&F and CFR/CPT).
• Needs of importers to have quotes from several suppliers that can be
readily compared (reason for CIF and CIP).
• Currency convertibility problems.
• Requirements of the government of the importing nation.
 6.1 TRANSFER PRICING
(or “intra-corporate pricing”)

“The transfer of intangible

property may have a material
“The price at which “Shifting profits across effect on domestic taxes. While
goods are transferred borders: ‘Transfer
estimating trademark royalty
between parent and pricing’ is the biggest tax rates for intercompany transfer
subsidiaries or avoidance.” (The pricing is fraught with difficulty,
between subsidiary Guardian, 2009) it can be helpful to adopt a
companies.” systematic approach”
(World Trademark Review, 2017)
6.1.1 STAKEHOLDERS IN TRANSFER PRICING

LOCAL
PARENT COUNTRY
MANAGER
COMPANY

TRANSFER HOST
PRICING GOVERNMENT

DOMESTIC JV PARTNER
GOVERNMENT

“The Italian authorities have been the latest to introduce transfer pricing regulations.”
(Mazars, 2011)
 6.2 COUNTERTRADE

• Reciprocal trading
• Umbrella term covering a variety of exchanges of goods for
goods/cash
• Forced sourcing, often used by developing countries
• Price setting and financing tied together
• Internet as a venue for countertrade activities
 6.2.1 FORMS OF COUNTERTRADE
● Barter – goods for goods

● Counter-purchase – reciprocal buying

over period of time, majority of
The Malaysian government purchased
purchase price paid in cash 20 diesel electric locomotives from
General Electric against the supply of
● Offset – at government level about 200,000 metric tons of palm oil
over a period of 30 months. (Citeman)
● Buyback – buying output of capital
equipment exported

● Switch-trading – involving 3rd party

6.2.2 WHY IMPORTERS USE COUNTERTRADE

They lack foreign exchange

They want multinational partners to sell their goods

overseas

Technology or know-how transfer

Hope to increase domestic employment and therefore

economic development
 6.2.3 BENEFITS TO EXPORTER

• Access to otherwise restricted • Gain a competitive edge

market e.g. blocked funds for • Build good customer
trade debt relationship
• Combats devaluation in foreign • Access to raw materials
currency

“Counter-trade is a creative
marketing tool.”
(West, 2000)
 SUMMARY

• Complex pricing decisions in international markets

• Often controlled at local level
• Pricing more difficult to standardise
• Transfer pricing important for multi-national/global companies, but
increasing regulation
• Countertrade may be an issue when dealing with developing
countries
 ?
Explain why export prices should or should not be established using the
same methods and according to the same criteria as prices set in the
domestic market.