INTERNATIONAL BUSINESSDr 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 product’s 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 firm’s

costs increase or decrease? Is demand in the international market elastic or inelastic?

Are the firm’s prices likely to be viewed by the host-country government as reasonable or exploitative?

Do the foreign country’s 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 pricingAn 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 SaleThe 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 TermsEXW (Ex Works)- price of product only; nothing else being includedFAS (Free Alongside Ship)- EXW + local transportation in seller's countryFOB (Free on Board)- FAS + loading onto the vesselCFR (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 3

B. Inland haulage 10500 10,500 0.4877

C. FOB 75084 3.4877

D. FREIGHT AND HANDLING

51000 51,000 2.3690

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 NIL NIL

I. SELLING & DISTRIBUTION EXPENSES

II. LANDED COST = G+H+I

26159.00

152318.00

1.2151

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

W’S MARKUP(50%)

83774.90 3.89134

W’S PRICE 251324.70 11.6740

RETAILERS MARKUP(10%)

25132.47 0.1167

MRP 276457.17 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