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Pricing for International
Markets
Chapter 18
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
LO1
Components of pricing as competitive tools in
international marketing
LO2
How to control pricing in parallel import or gray
markets
LO3
Price escalation and how to minimize its effect
LO4
Countertrading and its place in international
marketing practices
LO5
The mechanics of price quotations
LO6
The mechanics of getting paid
18-2
International Pricing
 Setting and changing prices are key
strategic marketing decisions
 Prices both set values and communicate in international
markets
 An offering’s price must reflect the quality and value the
consumer perceives in the product
 In setting a price in international markets, different
tariffs, costs, attitudes, competition, currency
fluctuations, and methods of price quotation need to be
taken into account.
18-3
Pricing Policy
 The country in which business is being conducted,
the type of product, variations in competitive
conditions, and other strategic factors affect pricing
activity
 Active marketing in several countries compounds the
variables relating to price policy
 An explicitly thought out, defined pricing policy helps
avoid setting a price in haste
18-4
Pricing Objectives
 In general, price decisions are viewed in two ways:
• Pricing as an active instrument of accomplishing marketing
objectives, or
• Pricing as a static element in a business decision
18-5
Pricing Objectives
 The more control a company has over the final selling
price of a product, the better it is able to achieve its
marketing goals
 It is not always possible to control end prices
 Broader product lines and the larger the number of
countries involved, the more
complex the process of
controlling prices charged
to the end user
18-6
Parallel Importation or
Gray Markets
 The possibility of a parallel market occurs whenever
price differences are greater than the cost of
transportation between two markets
 On account of competition, firms may have to charge
different prices from country to country
 Parallel imports develop when importers buy
products from distributors in one country and sell
them in another to distributors who are not part of
the manufacturer’s regular distribution system
18-7
Parallel Importation or
Gray Markets
 The possibility of a parallel market occurs whenever
price differences are greater than the cost of
transportation between two markets
 For example, the ulcer drug Losec sells for only $18
in Spain but goes for $39 in Germany; and the heart
drug Plavix costs $55 in France and sells for $79 in
London
18-8
Parallel Importation or
Gray Markets
 Thus, it is possible for an intermediary to buy products
in countries where it is less expensive and divert it to
countries where the price is higher and make a profit
 Exclusive distribution, a practice often used by
companies to maintain high retail margins encourage
retailers to stock large assortments, or to maintain the
exclusive-quality image of a product, can create a
favorable condition for parallel importing
18-9
Exhibit 18.1: How Gray Market Goods
End up in U.S. Stores
18-10
Approaches to
International Pricing
 Full-Cost Pricing: no unit of a similar product is
different from any other unit in terms of cost, which
must bear its full share of the total fixed and variable
cost.
 Variable-Cost Pricing: firms regard foreign sales as
bonus sales and assume that any return over their
variable cost makes a contribution to net profit
18-11
Approaches to
International Pricing
 Skimming Pricing: This is used to reach a segment of
the market that is relatively price insensitive and
thus willing to pay a premium price for a product
 Penetration Pricing: This is used to stimulate market
growth and capture market share by deliberately
offering products at low prices
18-12
Price Escalation（价格升级）
Price escalation refers to the added costs
incurred as a result of exporting products
from one country to another
18-13
Factors in Price Escalation
 Costs of Exporting: the term relates to situations in
which ultimate prices are raised by shipping costs,
insurance, packing, tariffs, longer channels of
distribution, larger middlemen margins,
special taxes, administrative
costs, and exchange
rate fluctuations
18-14
Factors in Price Escalation
 Taxes, Tariffs, and Administrative Costs: These costs
results in higher prices, which are generally passed
on to the buyer of the product
18-15
Factors in Price Escalation
 Inflation: Inflation causes consumer prices to
escalate and the consumer is faced with rising prices
that eventually exclude many consumers from the
market
18-16
Factors in Price Escalation
 Middleman and Transportation Costs: Longer
channel length, performance of marketing functions
and higher margins may make it necessary to
increase prices
18-17
Factors in Price Escalation
 Exchange Rate Fluctuations and Varying Currency
Values: Currency values swing vis-à-vis(与……相比)
other currencies on a daily basis, which may make it
necessary to increase prices
18-18
Exhibit 18.2: Sample Causes and Effects
of Price Escalation
Notes: All figures in U.S. dollars; CIF = cost, insurance, and freight; n.a. = not applicable. The exhibit assumes that all domestic
transportation costs are absorbed by the middleman. Transportation, tariffs, and middleman margins vary from country to country,
but for the purposes of comparison, only a few of the possible variations are shown.
18-19
Exhibit 18.3: How Are Foreign Trade
Zones Used?
Source: Lewis E. Leibowitz, “An Overview of Foreign Trade Zones,” Europe, Winter-Spring 1987, p. 12; “Cheap Imports,” International Business,
March 1993, pp. 98-100; “Free-Trade Zones: Global Overview and Future Prospects,” http://www.stat-usa.gov, 2012.
18-20
Approaches to Lessening
Price Escalation
 Lowering Cost of Goods: Firms can lower costs by
eliminating costly features in products or by
manufacturing products in countries where labor
costs are cheaper
 Lowering Tariffs: Firms can lower prices by
categorizing products in classifications where the
tariffs are lower
18-21
Approaches to Lessening
Price Escalation
 Lowering Distribution Costs: Firms can design
channels that are shorter, have fewer middlemen,
and by reducing or eliminating middleman markup
 Using Foreign Trade Zones: Firms can manufacture
products in free trade zones where the incentive
offered is the elimination of local taxes, which keep
prices down
18-22
Definitions of Dumping
 World Trade Organization (WTO) rules allow for the
imposition of a duty when goods are dumped
 A countervailing duty or minimum access volume
(MAV), which restricts the amount a country will
import, may be imposed on foreign goods benefiting
from subsidies whether in production, export, or
transportation
18-23
Definitions of Dumping
 One approach classifies international shipments as
dumped if the products are sold below their cost of
production
 The other approach characterizes dumping as selling
goods in a foreign market below the price of the
same goods in the home market
18-24
Leasing as a Pricing Tool
 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, because less risk is involved for
the users
 Leasing helps guarantee better maintenance and service
on overseas equipment
 Equipment leased and in use helps sell other companies
in that country
 Lease revenue tends to be more stable over a period of
time than direct sales would be
18-25
Countertrade as a Pricing Tool
Countertrade is a pricing tool that every
international marketer must be ready to employ
18-26
Four Distinct Transactions in
Countertrading
1. Barter: is the direct exchange of goods between
two parties in a transaction
2. Compensation deals: is the payment in goods and
in cash
18-27
Four Distinct Transactions in
Countertrading
3. Counter-purchase or off-set trade: the seller agrees
to sell a product at a set price to a buyer and
receives payment in cash and may also buy goods
from the buyer for the total monetary amount
involved in the first contract or for a set percentage
of that amount, which will be marketed by the seller
in its home market
4. Buy-back: This type of agreement is made the seller
agrees to accept as partial payment a certain portion
of the output that are produced from the plant or
machinery that are sold to the buyer
18-28
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
 To Force Reinvestment of Proceeds
18-29
Proactive Countertrade Strategy
Answering the following questions is suggested
before entering into a countertrade agreement:
 Is there a ready market for the goods bartered?
 Is the quality of the goods offered consistent and
acceptable?
 Is an expert needed to handle the negotiations?
 Is the contract price sufficient to cover the cost of
barter and net the desired revenue?
18-30
Price Quotations
 In quoting the price of goods for international sale, a
contract may include specific elements affecting the
price, such as credit, sales terms, and transportation
 Price quotations must also specify the currency to be
used, credit terms, and the type of documentation
required
 A quantity definition might be necessary because
different countries use different units of
measurement
18-31
Administered Pricing
 Administered pricing is an attempt to establish prices for
an entire market
 Such prices may be arranged through the cooperation of
competitors; through national, state, or local
governments; or by international agreement.
 The legality of administered pricing arrangements of
various kinds differs from country to country and from
time to time.
 A country may condone(宽恕) price fixing for foreign
markets but condemn it for the domestic market, for
instance.
18-32
Cartels
 A cartel exists when various companies producing
similar products or services work together to control
markets for the types of goods and services they
produce
18-33
Diamond Cartel
18-34
Government-Influenced Pricing
 Companies doing business in foreign countries
encounter a number of different types of
government price setting
 To control prices, governments may establish
margins, set prices and floors or ceilings, restrict
price changes, compete in the market, grant
subsidies, and act as a purchasing monopsony(买方
垄断) or selling monopoly
18-35
Getting Paid: Foreign Commercial
Payments
 Export letters of credit opened in favor of the seller
by the buyer handle most American exports
 Another important form of international commercial
payment is bills of exchange drawn by sellers on
foreign buyers
 Cash places unpopular burdens on the customer and
typically is used when credit is doubtful, when
exchange restrictions within the country of
destination are such that the return of funds from
abroad may be delayed for an unreasonable period,
cash in advance is used
18-36
Getting Paid: Foreign Commercial
Payments
 Sales on open accounts are not generally made in
foreign trade except to customers of long standing
with excellent credit reputations or to a subsidiary or
branch of the exporter
 Inconvertible currencies and cash-short customers
can kill an international sale if the seller cannot offer
long-term financing. Unless the company has large
cash reserves to finance its customers, a deal may be
lost. Forfaiting is a financing technique for such a
situation
18-37
Forfaiting business operation process
in the L/C
18-38
Exhibit 18.4:
A Letter of
Credit
Transaction
Source: Based on “A Basic
Guide to Exporting.” U.S.
Department of Commerce,
International Trade
Administration,
Washington, D.C.
18-39