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

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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.

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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

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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

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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

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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

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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

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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

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Exhibit 18.1: How Gray Market Goods
End up in U.S. Stores

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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

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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

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Price Escalation

Price escalation refers to the added costs

incurred as a result of exporting products
from one country to another

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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

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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

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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

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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

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Factors in Price Escalation
 Exchange Rate Fluctuations and Varying Currency
Values: Currency values swing vis-à-vis other
currencies on a daily basis, which may make it
necessary to increase prices

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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.

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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.

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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

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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

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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

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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

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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

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Countertrade as a Pricing Tool

Countertrade is a pricing tool that every

international marketer must be ready to employ

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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

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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

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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

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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?

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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

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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 price fixing for foreign markets
but condemn it for the domestic market, for instance.

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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

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Diamond Cartel

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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 or
selling monopoly

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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

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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

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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.

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