Chapter 18. Pricing for International Markets. Pricing for International Markets. I. Price Escalation - firms must often adjust their prices upwards in international markets.
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Pricing for International Markets
I. Price Escalation - firms must often adjust their prices upwards in international markets.
Reasons: Costs related to transportation, insurance, tariffs, taxes, storage, documentation, packing and middleman margins.
A. Ways to Reduce Price Escalation
1) Marketing action
2) Government action
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. 1.10 1.10 1.10
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
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
The Lower Prices are at Home
New York London Paris Tokyo Mexico City
Aspirin $ 0.99 $ 1.23 $ 7.08 $ 6.53 $ 1.78
Cup of coffee 1.25 1.50 2.10 2.80 0.91
Movie 7.50 10.50 7.89 17.29 4.55
Compact disk 12.99 14.99 23.16 22.09 13.91
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 Jordans 125.00 134.99 157.71 172.91 154.24
Gucci men's loafers 275.00 292.50 271.99 605.19 157.27
Nikon camera 629.95 840.00 691.00 768.49 1,054.42
SOURCE: "Tourists and Bargains Galore," Fortune, June 13, 1994, p. 12.
II. Pricing and the Product Life Cycle
3) Market pricing
III. Export Pricing Strategy
1) Standard worldwide prices
2) Dual pricing
3) Market differentiated pricing
IV. Counter-trade: A Sale that encompasses more than an exchange of goods and services for money.
A) Reasons for counter-trade
D) Reasons for growth
V. Terms of Payment
1) Cash in advance
2) Open accounts
3) Letters of credit
• 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.
VII. Dumping: Selling goods overseas at a price lower than in the exporter’s home country or below cost.
A) Predatory vs. unintentional dumping
B) Anti-dumping duties
C) Countervailing duties
VIII. Gray Marketing - occurs when products are diverted from authorized channels in international markets and are sold at a lower price than is authorized by the manufacturer.
IX. Reasons for Increase in Gray Markets
1) More global products
2) Fluctuating exchange rates
3) Pricing policies
4) Excess supply
5) “Free rider” opportunities
X. Dealing with Gray Markets
1) Legal action
2) Adapt products to local markets
3) Change pricing policies