INTERNATIONAL

BUSINESS
Dr SOMA ARORA
Pricing Strategies:
Basic Decisions

Boundaries for Market Price

Product costs establish the price floor
Prices for comparable substitute
products create the price ceiling
Price Ceiling
Optimum Price
Price Floor

Pricing Strategies
Market Skimming
Charging a premium price
May occur at the introduction stage of
product life cycle

Penetration Pricing
Charging a low price in order to
penetrate market quickly
Appropriate to saturate market prior to
imitation by competitors

Considerations for Setting

Price

Does the price reflect the products quality?

Is the price competitive given local market
conditions?
Should firm pursue market penetration,
market skimming, or some other pricing
objective?
What types of discounts or allowances
should be offered to international
customers?

Considerations for Setting

Price

Should prices differ with market segment?

What pricing options are available if the
firms costs increase or decrease? Is
demand in the international market elastic
or inelastic?
Are the firms prices likely to be viewed by
the host-country government as reasonable
or exploitative?
Do the foreign countrys dumping laws pose
a problem?

Cost-based Pricing
Cost-based pricing is based on an analysis of
internal and external costs.

Full absorption cost method

Rigid cost-plus pricing
Flexible cost-plus pricing

Full absorption cost method

The full absorption cost method defines
per-unit product cost as the sum of all past
or current direct and indirect
manufacturing and overhead costs.
When goods cross national borders, there
are costs and expenses such as
transportation, duties, and insurance.
By adding the desired profit margin to the
cost-plus figure, managers arrive at a final
selling price.

Rigid cost-plus pricing

Rigid cost-plus pricing sets prices without
regard to any considerations. They make
no adjustments to reflect market
conditions outside the home country.
The advantage of rigid cost-based pricing
is its simplicity.
The disadvantage is that this approach
ignores demand and competitive
conditions in target markets, setting prices
too high or too low.

Flexible cost-plus pricing

An alternative method, flexible cost-plus
pricing, ensures that prices are
competitive in a particular market
environment. Experienced exporters and
global marketers use this approach.
A rigid cost-plus approach can result in
severe price escalation, with the result
that exports cost too much.
Flexible cost plus incorporates the
estimated future cost method to establish
the future cost.

Terms of Sale
The following activities take place when goods cross
international boundaries:
Obtain export license if required
Obtain currency permit
Pack & Transport goods to place of departure
Prepare a land bill of lading
Prepare customs or consular invoices
Arrange for ocean freight and preparation
Obtain marine insurance and certificate of the policy

Terms of Sale (cont.)

Incoterms
Ex-works seller places goods at the
disposal of the buyer at the time specified
in the contract; buyer takes delivery at the
premises of the seller and bears all risks
and expenses from that point on.
Delivery duty paid seller agrees to deliver
the goods to the buyer at the place he or
she names in the country of import with all
costs, including duties, paid.

Trade Terms
EXW (Ex Works)
- price of product only; nothing else being included
FAS (Free Alongside Ship)
- EXW + local transportation in seller's country
FOB (Free on Board)
- FAS + loading onto the vessel
CFR (Cost & Freight)
- FOB + international transportation

Trade Terms

CIF (Cost, Insurance, and Freight)

CFR + insurance
DEQ (Delivered Ex Quay)
CIF + unloading
DDP (Delivered Duty Paid)
DEQ + local transportation in buyer's
country

PRICING
Initially we adopt a cost plus approach
to arrive at the various quantities.
The calculations are done taking the
base as 1 unit(i.e, a 500 gram bottle
of honey or an FCL (i.e, 21,528 bottles
of 500 grams) wherever appropriate.

TOTAL

FCL(RS.)

PER UNIT (RS.)

A. EXWORKS

64584

B. Inland
haulage

10500

C. FOB

75084

D. FREIGHT AND
HANDLING

51000

E. C&F

126084.00

5.8567

F.
INSURANCE(0.1
% FOB)

75.084

0.00348

G. CIF

126159.00

5.8601

H.DUTIES AND
SURCHARGES

NIL

I.

SELLING &
DISTRIBUTIO
N EXPENSES
II. LANDED
COST =
G+H+I

3
10,500

0.4877
3.4877

51,000

NIL

2.3690

NIL

26159.00

1.2151

152318.00

7.0752

J.DISTRIBUTORS
MARGIN(10%
LC )

15231.80

0.7075

K. II+J

167549.80

7.7827

L.
WHOLESALERS
COST(J+K)

167549.80

7.7827

WS
MARKUP(50%)
WS PRICE
RETAILERS
MARKUP(10%)
MRP

83774.90

3.89134

251324.70

11.6740

25132.47

276457.17

0.1167

11.79/RS. UNIT

BUSINESS SITUATIONS
REQUIRING MARGINAL
COST OF EXPORTS
Price is the principal determinant of
the offer.
Initial product acceptance is being
sought.
Price competition is intense.
Price responsiveness of demand is
high(elasticity).

OPERATING CONDITIONS
FOR ME
Firm has reached breakeven point on
the basis of domestic sales.
Overheads are substantial.
Export incentives are available.
Domestic market is not enough to
have full capacity utilisation.

Limitations
Ref to Dumping
Trigger price wars
Unrealistic price quotations

Environmental Influences on
Pricing Decisions
Currency Fluctuations
Inflationary Environment
Government Controls, Subsidies,
Regulations
Competitive Behavior
Sourcing

Pricing Policy Alternatives

Extension
Adaptation
Geocentric

Extension Pricing
Ethnocentric
Per-unit price of an item is the same
no matter where in the world the
buyer is located
Importer must absorb freight and
import duties
Fails to respond to each national
market

Adaptation Pricing
Polycentric
Permits affiliate managers or
independent distributors to establish
price as they feel is most desirable in
their circumstances
Sensitive to market conditions but
creates potential for gray marketing

Geocentric Pricing
Intermediate course of action
Recognizes that several factors are
relevant to pricing decision
Local costs
Income levels
Competition
Local marketing strategy