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Pricing for International Markets

Dr. Anuj Sharma anuj.sharma@bimtech.ac.in BIMTECH

Pricing Policy & Pricing Objectives

Pricing as a STATIC ELEMENT in a business decision

Pricing as an

ACTIVE INSTRUMENT of accomplishing marketing objectives

2.

Approaches to International Pricing


Full-cost pricing

Variable-cost pricing

May be more competitive on foreign markets May be subject to charges of dumping

Prices often set as total cost + profit margin

3.

Approaches to International Pricing

Full-cost
Variable-cost PRICING

Skimming Market Penetration

PRICING
Skimming Market Penetration Low price High price

4.

Price Escalation
A price-related phenomenon caused by the summation of all cost factors in the distribution channel including:

Costs of exporting
Taxes, tariffs, and administrative costs Inflation
o In countries with rapid inflation or exchange variation, the selling price must be related to the cost of goods sold and the cost of replacing the items

Exchange rate fluctuations


Middleman and transportation costs
o o
5.

Channel diversity Underdeveloped marketing and distribution channel infrastructures

Tactics for countering price escalation

Lowering cost of goods Lowering tariffs Lowering distribution costs Establishing local production of the product Pressurizing channel members to accept lower profit margins Using foreign trade zones to lessen price escalation

6.

Countertrade as a Pricing Tool


Different forms (1/3):
Barter:

Direct exchange of goods between two parties in a transaction


Ex: Malaysia bought 20 diesel-electric locomotives from GE against palm oil.

Goods

A
Goods

Compensation deals

Involves payment in goods and cash

Goods

A
Goods + Cash

7.

Countertrade as a Pricing Tool


Different forms (2/3):
Counterpurchase or offset trade
1st contract: product sold at a set price and paid in cash,
Goods

A
Cash

contingent to 2nd contract: seller to buy goods from the buyer for the same
amount (or a %age of that amount)
Cash

A
8.

B
Goods

Countertrade as a Pricing Tool


Different forms (3/3):
Product buyback agreement
When the sale involves goods & services that produce other goods & services. Two options:
the seller accepts as payment a certain portion of the output, or Goods

Manufactured products the seller receives full price and buys back a certain portion of the output. Goods Cash

A
Cash
9.

Manufactured products

Transfer Pricing
Prices charged for intracompany movement of goods and services Benefits
Lowering duty costs Reducing income taxes in high-tax countries Facilitating dividend repatriation when dividend repatriation is curtailed by government policy

Three basic approaches


Transfer at cost (rarely used) Transfer at arms length: same prices as quoted to independent customers Transfer at cost plus: local manufacturing cost plus a standard markup
10.

Grey Marketing (Parallel Importing)


Importing and selling of products through market distribution channels that are not authorized by the manufacturer
Low-price market
Official prices

High-price market
Major problem for pharmaceutical companies

Official prices

Factory

Factory
20.60

Distributor
13.20

Wholesaler
16.00

Sells at 23.00 Margin 9.80 Instead of 2.80

22.60

Wholesaler
26.60

Retailer
22.00
11.

Saves 3.60

Retailer
44.00

Consumer

Consumer

INCOTERMS

Incoterms
First published by the International Chamber of Commerce (ICC) in 1936 & since updated in 1953, 1967, 1976, 1980, 1990, 2000 and then the current revision in 2010

Purpose
To clarify how functions, costs and risks are split

between the buyer and the seller in connection with delivery of goods as required in sales contract
Each term clearly specifies the responsibilities of

the seller and the buyer


Delivery, risks and costs are the critical points

The Language
The English text is the original and official version of

Incoterms 2000, which have been endorsed by the United Nations Commission on International Trade Law (UNCITRAL).
Authorized translations into 31 languages are available

from ICC national committees.

Incoterms 2010
Incoterms 2010 consists of only 11 Incoterms, a reduction from

the 13 Incoterms 2000. The Incoterms 2010 are organized into two categories:
Incoterms for any Mode or Modes of Transport:

EXW - Ex Works FCA - Free Carrier CPT - Carriage Paid To CIP - Carriage and Insurance Paid DAT - Delivered At Terminal (new) DAP - Delivered At Place (new) DDP - Delivered Duty Paid

Incoterms 2010
Incoterms for Sea and Inland Waterway Transport Only:

FAS - Free Alongside Ship FOB - Free On Board CFR - Cost and Freight CIF - Cost, Insurance and Freight

Comparison of Incoterms 2000 and 2010


Incoterms 2000 There were 13 terms Divided into four groups

Incoterms 2010 There are 11 terms Divided into two groups

i.e. E, F, C and D

i.e. for any Modes of Transport and for Sea and Inland Waterway Transport Only

Incoterms DAF, DES,

Two new Incoterms, DAT

DEQ and DDU have been deleted.

and DAP have been added

Incoterms 2000 Four Distinct Groups


Group E Where the goods are made available to the buyer at the sellers premises, i.e. - Ex-works Group F Where seller must deliver goods to a carrier appointed by the buyer, i.e. - FCA, FAS, FOB Group C Where the seller must contract for carriage of goods without assuming risk of loss of, or damage to the goods or additional costs due to events occurring after shipment, i.e. CFR, CIF, CPT, CIP

Group D where the seller has to bear all costs and risks required to bring the goods to the place of destination, i.e. DAF, DES, DEQ, DDU, DDP

Incoterms 2010
EXW Ex Works (named place)- Any mode of transport. The seller must place the goods at the disposal of the buyer at the sellers premises or another named place not cleared for export & not loaded on any collecting vehicle. FCA Free Carrier (named place) The seller's obligation is to hand over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place. If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into his charge. When the seller's assistance is required in making the contract with the carrier the seller may act at the buyers risk and expense.

Incoterms 2010
CPT - Carriage Paid To (named place of destination). Any mode of transport. The seller delivers the goods to the nominated carrier and must also pay the cost of carriage necessary to bring the goods to the named destination. This term requires the seller to clear the goods for export The buyer bears all additional costs and risks after the goods have been delivered to the nominated carrier. CIP - Carriage and Insurance Paid (named place of destination). Any mode of transport. The obligations are the same as under CPT with the addition that the seller must procure insurance against the buyer's risk of loss of, or damage to the goods during carriage.

Incoterms 2010
Delivered At Terminal (DAT) - Used for all transport modes Seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. "Terminal" includes quay, warehouse, container yard or road, rail or air terminal. Both parties should agree the terminal and if possible a point within the terminal at which point the risks will transfer from the seller to the buyer of the goods. Delivered at Place (DAP) - Used for all transport modes Seller delivers the goods when they are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. Parties are advised to specify as clearly as possible the point within the agreed place of destination, because risks transfer at this point from seller to buyer.

Incoterms 2010
DDP - Delivered Duty Paid (named place of destination).

Any mode of transport. The seller is responsible for delivering the goods to the named place in the country of importation, including all costs and risks in bringing the goods to import destination. This includes duties, taxes and customs formalities. This term may be used irrespective of the mode of transport

Incoterms 2010
FAS Free Alongside Ship (named port of shipment).

Maritime and inland waterway transport only. The seller must place the goods, cleared for export, alongside the vessel at the named port of shipment.
FOB Free on Board (named port of shipment).

Maritime and inland waterway transport only. The seller delivers the goods, cleared for export, when they pass the ships rail at the named port of shipment.

Incoterms 2010
CFR Cost and Freight (named port of destination).

Maritime and inland waterway transport only. The seller delivers the goods when they pass ships rail in the port of shipment & must pay the costs & freight necessary to bring the goods to the named port of destination. The buyer bears all additional costs and risks after the goods have been delivered (over the ships rail at the port of shipment)
CIF Cost Insurance & Freight (named port of shipment.

Maritime & Inland water way transport only. The obligations are the same as CFR with the addition that the seller must procure insurance against the buyers risk of loss of, or damage to the goods during carriage.