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7/31/2019 Int. Pricing Factors 2
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Significance of pricing in international Markets. To Examine various pricing approaches in
International Markets.
The terms of Payment.
The terms of Delivery. The Concept of Dumping in international
Markets.
To describe transfer pricing in international
Markets. To explain the concept of International
Marketing.
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Pricing is especially important ininternational marketing strategy decisions,due to its effect on product positioning,market segmentation, demandmanagement, and market share dynamics.
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Exporters determine export prices on ex-works price leveland add a certain percentage of profit and other expensesdepending upon the terms of delivery.
LIMITATIONS
The price quoted by the exporter on the basis of costcalculations maybe too low vis--vis competitors, thusallowing importers to earn huge margins.
Price quoted may be high making goods incompetitivefollowed with rejection.
It takes no account of demand and there is no way ofdetermining if potential customers will purchase theproduct at the calculated price.
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The most common pricing approach used by exporters in initial stags of their
internationalization, includes adding a mark-up on the total cost to
determine price.
BENEFITS
It is widely used by exporters in the initial phases of international
marketing.
It ensures fast recovery of investments.
It is useful for firms that are primarily dependent on international markets
and register very low or negligible sales in domestic markets. It eases operation and implementation of marketing strategies.
BOTTLENECKS
It often overlooks the prevailing price structure in international markets
that may either make the product uncompetitive or prevent the firm fromchar in hi her rices
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Marginal cost is the cost of producing one more unit. It sets the lower limit to which a firmcan reduce its price without affecting its overall profitability.
REASONS FOR ADOPTING
Where foreign markets are used to dispose of surplus production, marginal cost pricing
provides an alternate market outlet.
Products from developing countries seldom compete on the basis of brand image or unique
value; marginal cost pricing is used as a tool to penetrate international markets.
Marginal cost pricing provides some advantage that the firm would forego if it does not
export at the marginal-cost-based price.
LIMITATIONS
In case the firm is selling most of its output in international markets, it cannot use marginal
cost pricing as the fixed cost also to be recovered.
Pricing based on marginal cost may be charged, as dumping in overseas markets is liable to
action and subject to investigations.
Such pricing tends to trigger a price war in the overseas market and leads to price
undercutting among suppliers.
Little information may lead to low price quotations.
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Exporters in developing countries are generally sellers of marginalproducts with small market shares not enough to influence the marketprices, thus they are generally price followers rather than setters.Their pricing decisions involve assessment of prevailing prices in
international markets and a top down calculations as follows : Establish the current market price for comparative and/or substitutive
products in the target markets.
Establish all the elements of the market price, such as VAT , margins forthe trade and the importer ,import duties ,freight and insurance costs,etc.
Make a topdown calculation, deducting all the elements of theexpected market price of the product(s) in order to arrive at the ex-works ,ex-factory, or ex-warehouse price.
Assess if this can be met.
If not, re- calculate the cost price by finding ways to decrease costs inthe factory or organization or to decrease the marketing budget , whichalso burdens export-market price.
Estimate total sales over a three-year period, add total plannedexpenses, including those of the export
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Make a bottom-up calculation per productitem, dividing the supporting budgets overthe total number of items to be sold.
Set the final market price.
Test the price(through market research)
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Production plant locations
National Market Size
Distribution system used Competitors and tracking costs
Economic climate
Currency fluctuations and exchange rates
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Selecting a country with
1. Low labor cost
2. Lower taxes
3. Low exchange ratesdetermine the extent to which acompany can control costs and price their productscompetitively.
Company can use its potential volume of sales toestimate the price at which they will need to markettheir product .
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> Due to discrepancies in the value of differentcurrency, similar products in different countriesmay be priced differently.
> Companies often have to adjust prices due tofluctuations in exchange rates.
> Bill foreign customers in domestic currency.
>Price ceilings as well as price floors on certain
products affects the pricing of product.>Regulations placed on the prices of similar
products may affect potential demand and thusprice
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The distribution network by which they areselling their products overseas. E.g.- if acompany is selling a product throughfranchise licenses, they will likely price theirproducts differently than if they were sellingthem wholesale to local distributors, astheir profit structure would be different.
Intensity of competition in a foreign marketaffects price, which therefore makes aforeign entrant to track the competitivepricing by the other established players.
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These restrictive practices affects
international pricing and adds to the finalprice, burdening consumers.
A buyers strength to buy a product as
reflected by PPP affects international pricing fora product.
Culture perceive the value of certain products,
which in turn affects how much they are willingto pay for them. Eg- in US women's handbagsoften are seen as a status symbol. Femaleconsumers, therefore, often are willing to payhigh prices.
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Buyers from high income countries are moredemanding and knowledgeable and thebuying decision is primarily based onsuperior performance attributes whereas thebuyers from low income countries have beenseparated to make choices based on the priceof the product and services.
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These conditions include overall parentcompany objectives, the competition, the
consumer, cost, and government regulation. The prices in various regions of the world should be kept fairly
uniform.
Ethical consideration considerations in the foreign market
differ from those in the domestic market. Price segmentation becomes more significant in the foreign
market.
Government play an prominent role in pricing in almost all
countries. Price control means that an application to increaseprice must be filed with the government, together withsupporting data of cost increases
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Under this the payment is remitted by thebuyer in advance either by a draft mail orTelegraphic transfer.
Generally these payments are made on thebasis of sample receipt and its approval bythe buyer.
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The exporter and the importers agrees uponthe sales terms without documents calling forpayment.However,the exporter prepares theinvoice,and the importer can take delivery of
goods without making the payment first . In this the exporting and importing firms
settle their accounts through periodicremittances.
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Under the consignment sales, the shipmentof the goods is made to the overseesconsignee and the title of goods is retainedwith the exporter until it is finally sold.
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A documentary credit represents thecommitment of a bank to pay the sellers ofgoods a certain amount of money providedhe presents stipulated documents evidencing
the shipment of goods. The operation of letter of credit is governed
by the uniform Customs & Practices forDocumentary Credits(UCPDC) of theInternational Chamber Of Commerce.
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Exporting goods to another country at rates much lower
than those prevailing and being charged by the firm in its
home country Company uses profits to sell at much lower prices in
foreign markets
Builds market share
Suppresses profitability of competitors with open homemarkets
Dumping is legal under GATT rules unless its injurious
effect on the importing country's producers can be
established. For that anti dumping practice is introduced
The sale of an imported product at a lower price lower
than that normally charged in a domestic market
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Transfer pricing strategy refers to the pricing strategy adopted for intra-firms sales whether within the same border or outside the state border
but to the same corporate units to which this firm belongs. When multinational firms transfer product across international borders, transfer
prices are relevant in the calculation of income taxes, and are sometimes relevantin connection with other international trade and regulatory issues.
COST BASED TRANSFER PRICING STRATEGY
Firms add to the full cost, the additional costs incurred on marketing,research and development and other logistic activities in reaching theproduct to the subsidiary.
MARKET BASED TRANSFER PRICING STRATEGY
Are generally appropriate in a perfect market, where there is
homogeneous product with only one price for both sellers and buyersand no buying or selling costs.
NEGOTIATED TRANSFER PRICING
International marketing firms are also at liberty to negotiate thetransfer prices between themselves. These negotiated prices could beanywhere between the total cost prices and the market based prices.
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A grey market also known as parallel market is the
trade of a commodity through distribution channelswhich, while legal, are unofficial, unauthorized, or
unintended by the original manufacturer.
The marketing channels for grey markets involveunauthorized market intermediaries.
Unauthorized broker and border suppliers run a parallel
marketing network not authorized by the parent
company, to earn an extra buck from the prices
differentials of international products.
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Have a common price all over the world. A global standard price. Ideal for big industries as of Aircrafts, computers etc. Homogeneity of prices eliminates grey markets. Not suitable when there is competition from local manufacturers.
Different prices in different markets. The only control is setting transfer prices within corporate
system. It prevents problems of arbitrage when the disparities inlocal market prices exceed the transportation and duty costsseparating markets.
Use a regional(global) standard pricing plus a local mark-up . Base price is derives from cost plus formula. Affected by local tax laws leading to grey markets. Pricing an entire product line is a problem, mark-ups can be
different in different countries