INTERNATIONAL PRICING DECISIONS Chapter 18 PRICING FOR INTERNATIONAL MARKETS

1. INTERNATIONAL PRICING DECISIONS Chapter 18PRICING FOR INTERNATIONAL MARKETS

2. PRICING IN INTERNATIONAL MARKET • Domestic vs. International Pricing • Pricing Policy • Objective of international pricing • Role of parallel imports (among subsidiaries and others) • Approaches to International Pricing • Full vs. variable cost • Skimming vs. penetration strategy

3. PRICE ESCALATION • Price escalation refers to the variation/increase in price across countries or over time. Reasons include… • Cost of exporting • Taxes, tariffs and administrative costs • Inflation/deflation • Exchange rate fluctuations • Varying currency values • Middlemen and transportation costs See Exhibit 18.2 Sample Causes and Effects of Price Escalation

4. SAMPLE CAUSES AND EFFECTS OF PRICE ESCALATION Foreign Foreign Foreign Example 1: Example 2: Example 3: Assuming the Importer and Same as 2 but same channels with same margins with 10 percent Domestic wholesaler import- and channels cumulative Example ing directly turnover tax Manufacturing net $ 5.00 $ 5.00 $ 5.00 $ 5.00 Transport, c.i.f. n.a. 6.10 6.10 6.10 Tariff (20 percent c.i.f. value) n.a. 1.22 1.22 1.22 Importer pays n.a. n.a. 7.32 7.32 Importer margin when 1.83 sold to wholesaler +0.73 * (25 percent) on cost n.a. n.a. 1.83 2.56 Wholesaler pays landed cost 5.00 7.32 9.15 +9.88 3.29 +0.99 * Wholesaler margin (331/3 percent on cost) 1.67 2.44 3.05 =4.28 Retailer pays 6.67 9.76 12.20 14.16 7.08 +1.42 * Retail margin (50 percent on cost) 3.34 4.88 6.10 =8.50 Retail price 10.01 14.64 18.30 22.66 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

5. Price Escalation The Lower Prices are at Home New York London Paris Tokyo Mexico City Aspirin $ 0.99 $ 1.23 $ 7.07 $ 6.53 $ 1.78 Movie 7.50 10.50 7.89 17.29 4.55 Levi 501 jeans 39.99 74.92 75.40 79.73 54.54 Ray-Ban sunglasses 45.00 88.50 81.23 134.49 89.39 Sony Walkman 59.95 74.98 86.00 211.34 110.00 Nike Air Jordan 125.00 134.99 157.71 172.91 154.24 Nikon camera 629.95 840.00 691.00 768.49 1,054.42 Los Angeles Madrid Stockholm Berlin Rome Mariah Carey CD 16.22 16.09 17.82 15.31 20.67 Windows 98 117.99 123.94 179.79 211.20 264.46 Diapers 13.52 5.03 5.42 6.86 10.55 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. 38.

6. REDUCING PRICE ESCALATION • Lowering cost of goods • Using efficient method of manufacturing • Off-shore manufacturing • Global sourcing • Lowering product quality • Lowering tariffs (using customs classification) • Lowering distribution costs • Using Foreign Trade Zones • Dumping • Taking a lower profit

7. IS COUNTERTRADE AN ALTERNATIVE? • Counter trade refers to barters or buy-back arrangements. Reasons include… • 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 • To Force Reinvestment of Proceeds

8. TRANSFER PRICING • Definition: pricing within company, also known as intracompany pricing • Transfer pricing helps multinationals in managing their • Competitiveness • Tariff and tax liabilities • Profits and cash flows • Foreign exchange risks • Government restrictions • Challenges to (and criticisms of) Transfer Pricing

9. EXPORT-IMPORT PROCESS AND GETTING PAID • Documentation involved • Commercial Invoice • Letter of Credit • Bill of Lading • Shippers Export Declaration (country of origin, insurance, terms of sale, product classification) • Getting paid • Letter of Credit • Cash in Advance • Open Accounts • Forfaiting

10. EXPORTS STRATEGIES UNDER VARYING CURRENCY CONDITIONS When Domestic Currency is WEAK... When Domestic Currency is STRONG... 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 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 SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,“ Business Horizons, May-June 1988, figure 2, p. 58.

11. EXPORTS STRATEGIES UNDER VARYING CURRENCY CONDITIONS When Domestic Currency is WEAK... When Domestic Currency is STRONG... 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 SOURCE: S. Tamur Cavusgil, "Unraveling the Mystique of Export Pricing,"Business Horizons, May-June 1988, figure 2, p. 58. Irwin/McGraw-Hill

12. DISCUSSION QUESTIONS Explain how pricing differs in international and domestic marketing. Why price escalation takes place? Explain how we can reduce price escalation. What is Transfer Pricing? How does it affect the competitiveness of multinational companies? Define countertrade and explain why we engage in countertrade. Discuss the documentation involved and the payment procedures in export-import process. Explain how export strategy of firm can vary due to strong/weak currency conditions.