UNIT 3 International Marketing 1

8/2/2019 UNIT 3 International Marketing 1

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UNIT3

SYLLABUS

Pricing Policy in International Markets Factors determining price Export costing methods Elements of cost Factors influencing pricing policy Information required for export pricing Export pricing strategies Break even pricing Impart of contract conditions on export price offers

INCOTERMS Export assistances, Incentives Government of Indias Initiatives Impact of Export Incentives on Export Pricing


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Meaning of Price

Price is the value of utility of goods & service expressed in terms of money. It is the

important factors that determine the success of an international marketer. International

market is highly competitive & therefore, the marketer should take into consideration allthe factor such as quality, cost, competition, demand, etc. before arriving at the final

price.

Pricing is the most important factor in promoting exports & facing international trade

competition. It is important for the marketer to keep prices competitive considering all

associated costs & benefits. However, there is no fixed formula for successful pricing. It

differs from marketer to marketer depending upon whether the marketer is a merchant

exporter or a manufacturer exporter or an exporter through a canalizing agency.

International market being buyers market, the price quoted by the marketer should be

reasonable & final.

Factors Affecting Export Pricing

Costs Competition Objectives of Firm Demand Product Consumers Image of Firm Channels Product Life Cycle Economic Conditions Product Line, etc. Govt. Control, etc.

FACTORS AFFECTING EXPORT PRICING

INTERNAL FACTORS EXTERNAL FACTORS


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INTERNAL FACTORSi. Costs: A firm while fixing prices should consider the costs for producing the

product. In case of several products, costs constitute a large part of the price.

The firm must plan to recover both the variable costs & the fixed costs.

However, a firm selling bulk of its suppliers in the home market & a Part of

production in the overseas market, then all the fixed costs may be recovered

from the home market & only variable costs may be charged for the overseas

markets.

ii. Objectives of the Firm: The marketer must consider the objectives of thefirm, while fixing prices. Price of products is directly related to objectives of

the firm. For instance, if the objective of a firm is to increase return oninvestment, then it may charge a higher price, & if the objective is to capture

a large market share, then it may charge a lower price.

iii. Product: The product plays an important role in fixing price. If a product isof superior quality, then a firm may either adopt premium strategy or high

value strategy, In premium pricing, the firm would charge high price for

high quality, & in the case ofhigh value pricing, the firm would charge

moderate price for high quality. There are also firms that super valuestrategy, where a high quality product is sold at low price, as in the case of

Parle G, & other brands by Parle Biscuits.

Apart from products quality, the marketer needs to consider the products

features, the nature of the product - whether perishable or durable. The

frequency of products purchase must also be considered whether it is a

regular purchase item (FMCGFast Moving Consumer Goods), or whether

it is purchased less frequently. In the case of FMCG goods like soaps,toothpaste, food items, etc. The price may be on the lower side, due to

volume driven business. An in the case of consumer durables, the price may

be a little higher, as it involves value driven business.


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iv. Image of the Firm: The firms enjoying a good image in the market maycharge a higher price, as compared to those firms which do not enjoy

reputation in the market. This is because; consumers have trust & confidence

in the firms enjoying name & reputation in the market. For instance, firm

like P&G, & HLL, can command a higher price for their brands, as theyenjoy goodwill in the market.

v. Brand Image: the image of a brand can affect its price. Those brands whichcommand a good image in the market, would fetch higher process, for

instances, in India, the Titan brand of watches enjoys a good image, & as

such, it can command higher price as compared to other Indian brand of

watches.

vi. Promotional Activities: Pricing is related to promotional activities. If afirm undertakes heavy advertising & sales promotion, then price planning

must ensure that these promotional costs will be recovered, at least in the

long term. It is often observed that highly advertised or promoted brands

command high price as compared to lowly promoted brands.

vii. Product Life Cycle: The stage of a products life cycle affects pricing. Forinstance, when a firm introduces a product in a competitive market, then it

may charge a lower price to attract the customers. During the growth stage, a

firm may increase the price, especially in a low competition market.

viii. Product Line: Pricing can be affected by the pricing of various products inthe product line. For instance, when other products in the product line are

priced higher, then the firm may charge a higher price aproducts variant at

low price to fight competition in the market, even though the other products

in the product line are of higher price.

ix. Credit policy: The credit policy of the firm may affect pricing. Those firmsthat offer liberal credit to the dealers & buyers may charge a higher price, as

compared to those firms that adopt strict credit control policy. In other

words, longer the credit period, the higher may be the price, & vice- versa.


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EXTERNAL FACTORSi. Competition: The marketer has to consider the degree of competition in the

market. When there is high competition, prices may be lower, & vice- versa.

The price of competing brands, as well as those of substitutes must beconsidered while fixing prices. Normally, the price must be within the range

of that of the competitors.

ii. Demand: price of goods to a great extent depends upon demand. Forinstance, an increase in demand may lead to an increase in price, even

though there may be no rise in costs. Demand may increase due to economic

conditions in the market, problems with the supplies of competitors, & so

on. It is to be noted, that increase in demand need not result in increase inprices, as now a days, socially responsible marketers pass on a part of the

benefits of large- scale production & distribution to the consumers.

iii. Consumers: The marketer should consider various consumer factors whilefixing prices, the consumer factors that must be considered include the price

sensitiveness of buyers, purchasing power, buying pattern, & so on for

instance, in developing countries like India, customers (even belonging to

the upper class) are price sensitive, & they may not buy highly priced

brands. Therefore, premium priced brands of Nike, Reebok, & Adidas did

not meet much success in India for Their high priced brands.

iv. Government Control: The government control & regulation must beconsidered while fixing prices. In case of certain products, government may

announce administered prices, & therefore, the marketer has to consider

such regulation while fixing prices. The marketers catering to foreign

markets must consider the incentives & trade barriers while fixing prices, the

taxes & duties levied by the government authorities must be considered.

v. Economic Conditions: The economic condition prevailing in the marketmust be considered while fixing prices. During the times of recession, when

consumers have less money to spend, the marketers may reduce the prices to


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influence buying decision of the consumers. However, during economic

boom, the marketers may charge a higher price.

vi. Channel Intermediaries: The marketer must consider the number ofchannel intermediaries & their expectations. The longer chain ofintermediaries would increase the price of the goods.

vii. Market Opportunities: The Marketer may consider the marketopportunities for growth. If the market promises long term growth prospects,

then the marketer may consider fixing lower prices.

EXPORTERS COSTING METHODSCost, obviously, is one of the most important considerations in export pricing.

Export prices, like domestic prices, are determined by the cost & supply conditions

& the demand & competitive conditions. The cost & supply conditions dictate the

minimum price the exporter must get while the demand & competitive conditions

determine the maximum price he can charge.

TYPES OF COSTS IN EXPORT MARKETINGThere are broadly two types of costs in export marketing, namely,(i) Production costs; (ii) Selling & delivery costs.

Production Costs

There are two types of costs in production, namely,

(i) Fixed Costs; (ii) Variable Costs.

Fixed CostsFixed costs are costs which remain fixed irrespective of the level of

production, like investment in land, building & plant & machinery. Besides these,

there may be some other types of fixed costs. For example, even if there is no

production, some people may have to be employed to look after the factory &

premises & there may be some minimum fixed expenses like electricity costs etc.


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Fixed cost is the cost which remains the same over a range of output. That is

the total fixed cost remains same whether there is no production at all or whether

there is maximum possible level of production.

TFC

AFC

PRODUCTION

Total Fixed Costs & Average Fixed Costs

Variable Costs

Variable costs are costs which vary with the variation in the level of output

& include costs of factors like labour, material etc. Although the average variable

cost per unit may remain same for different levels of output, the total variable cost

will vary with the level of production.

TVC

PRODUCTION

Total Variable Cost

In Fig. 10.3 FC represents total fixed cost & TC represents the total cost

(Fixed Cost + Variable Cost) for different levels of output. The gap between FC &

COSTS

COSTS


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TC represents the total variable cost at different production levels.

As fixed cost is cost which is already incurred, it remains there even if there is no

production. Hence, sometimes (for example when there is idle production capacity) the

price may be decided taking into account only the variable costs. This is known as

marginal cost pricing, which is detailed later in this chapter.

Selling & Delivery Costs

Besides the production costs, there are several other costs which an exporter may

incur & sometimes this is as important0 or even more important than the production

costs.

The selling & delivery costs include the cost of holding stocks, packing, transport,

documentation, pre shipment inspection, insurance & marketing costs like costs of

advertising, personal selling etc.

Selling & Delivery costs may also be divided into fixed & variable costs. For

example, salesmans salary is fixed cost, while his commission & travelling & incidental

expenses are variable costs.

Variable costs are also known as direct costs (or primary costs) because they vary

directly with the variations in the level of production.

Cost which cannot be directly appointed to any product, like costs of plant

maintenance, lighting etc. are called indirect costs.


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IMPORTANCE OF PRICING IN INTERNATIONAL MARKET

An Exporter intends to achieve the following objectives through his pricingstrategy:

a)Helps to Achieve Objectives: Every organization has some fundamentalobjectives, such as sales maximization, profit maximization & so on. Pricing helps

organizations in achieving these objectives by suitably modifying their pricing

strategy.

b)Increases Profitability: Pricing decisions directly affect the sales revenue &thereby overall profitability. For example, low pricing helps market penetration but

reduces revenue. On other hand, skimming pricing generates more revenue, ifdemand conditions are favorable.

c)Helps to Penetrate the Market: When there is an intense competition in themarket, low pricing helps to penetrate in the market by driving away competitors.

Low pricing attracts consumer & thereby helps in increasing market share for the

product.

Reflects The Quality of Product

Helps to Face Competition

Helps to Develop Brand Loyalty

Helps to Increase Market share

Helps to skim the cream

Helps to Penetrate the Market

Increase Profitability

Helps to Acheive Objective


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d)Helps to Skim the Cream: Where there exists a considerable consumer surplus,the same can be skimmed by introducing innovative features in the product or

altogether new products in the market. Thus, a suitable price research can generate

additional revenue for the exporter in the international market.

e)Helps to increase Market Share: Exporters can increase market share for theirproducts by charging competitive price in the international markets. Low price is

one of the important considerations that affect the buying decision of the

consumers.

f) Helps to Develop Brand Loyalty: Goods, which are sold at right & reasonableprice, help to develop brand loyalty in this long run. Consumers continue to buy

such products even if new entrants, selling goods at lower price, enter the market.

g)Helps to Face Competition: Exporters face competition from three angles- sellersfrom his own country, from other countries & domestic suppliers in importingcountry. Thus, exporters should fix up such a price, which should be reasonable &

as far as possible, final & non- negotiable.

h)Reflects the Quality of Product: Generally, consumers correlate quality ofproduct with its price. Low priced products reflect low quality & vice versa.

Hence, exporters should avoid charging a very low price. At the same time, very

high prices are also to be avoided.


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ELEMENTS OF COSTS IN PRICING GOODS

FOR

INTERNATIONAL MARKETSr.No. Particulars

1. Cost of production -

2. Producers profit (50% of cost) -

(a) Ex- Factory cost

-

3.

Expenditure in exporters country: Packing & Marking Loading charges at the factory Transportation charge to dock,

railway station or airport

Handling charges & fees atport/ railway station/airport

Documentation charge Export duty, if any

-

-

-

-

-

-

-

(b) FOB Price -

4. Sea or Air Freight Charges -

(c) C & F Price -

5. Cost of Insurance -

(d) CIF Price -

6. Expenditure in importers country(at the port):

Unloading charges atdestination

Import duties & taxes Fee paid to clearing agent

-

-

- -

7. Expenditure in importers country

(ex-port):

Transportation charges toimporters warehouse

-

8. Importers margin -

9. Margin of market intermediaries in

the importing country-

(f) Price to final consumer


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EXPORT PRICING STRATEGIES

Pricing strategy may be defined as the strategy adopted by exporters with respect to

the pricing of goods while making them to the ultimate consumer. An exporter may

charge a uniform price in different markets of the world or he may practise pricediscrimination taking into consideration the situation prevailing in different markets.

Various pricing strategies used in the international market are:

a)Skimming Pricing Strategy: A pricing strategy in which exporter charges a veryhigh price initially in order to recover the cost incurred on initial promotional

expenditure, research & development, etc. is known as skimming pricing strategy.

After exploiting the rich market, the exporter can gradually reduce the price in

order to increase his market share.

b)Penetration Pricing Strategy: A pricing strategy in which an exporter charges avery low price initially in order to get hold of the market & drive away competitors

is known as penetration pricing strategy. Sometimes, such strategy is referred to as

dumping. This strategy is suitable for the items of mass consumption.

c)Transfer Pricing: Transfer pricing refers to the pricing of goods transferred fromone subsidiary to another or to the parent company. Due to this, profits of one

subsidiary are transferred to another subsidiary or to the parent company. Transfer

pricing decisions are affected by factors such as differences in tax & tariff rates,

foreign exchange restriction & import restrictions.d)Marginal Cost Pricing: Marginal cost is the cost of producing one extra unit of a

product. Under this approach, an exporter simply considers variable costs or direct

costs while arriving at the price to be charged in the international market & fixed

costs are fully recovered from the domestic market. This approach can be used

when unused production capacities are available.

e)Market-Oriented Pricing: This is a very flexible method of arriving at a price asit takes into consideration the changing market conditions. The price charged may

be higher when demand conditions are favorable & vice versa. This method is

sometimes referred to as what the traffic will bear method. This is a very flexible

& realistic method of pricing.

f) Competitors Pricing: Under this method, pricing strategy of dominantcompetitors is taken into consideration while arriving at the pricing decisions. A

price leader is the firm, which initiates the price trends in the market. However, if


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the competitors pricing policy is faulty, the followers will also land up with wrong

pricing.

INCOTERMS 2000 or EXPORT PRICE QUOTATIONS

In order to have uniform export terms for delivery of goods & payment, there are

several trade terms that are used at the international level. These terms are codified by

the International Chamber of Commerce (ICC) under the title INCOTERMS.

They closely correspond to the UN Convention on Contracts for International Sale of

Goods.

The INCOTERMS were first introduced in 1936. These terms were known as

INCOTERMS 1936.Amendments & additions were later made in 1953, 1967,1980, 1990 & 2000 in order to bring these terms in line with current International

Trade Practices. These terms have been categorized in to 4 groups:

Group EDepartures:

(a) EXW Ex-works (..named place): Ex- works price is rarely used in the

international market. Under this quotation, the exporter delivers goods to the importer

at his factory premises & all risks & expenses thereafter are borne by the importer. It

is the lowest price that can be charged by an exporter in the international market.

INCOTERMS

Group E

Departures

Group F

Main Carriage

Unpaid

Group C

Main Carriage

Paid

Group D

Arrival


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Group FMain Carriage Unpaid:

(a) FCA- Free Carrier (.named place): The seller hands over the goods, cleared

for export, into the custody of the first carrier (named by the buyer) at the named

place. This term is suitable for all modes of transport, including carriage by air, rail,road, & containerized/multimodal transport.

(b) FASFree Alongside Ship (.named loading port): Under this quotation, the

exporter undertakes to deliver goods at the port of shipment. All expenditure

thereafter is borne by the importer. As per the modified INCOTERMS 2000, the

exporter is required to clear goods at the port of shipment. This quotation is used only

for maritime transport.

(c) FOB - FREE on Board (.named loading port): This is the most frequently

used price quotation in maritime transport. Under this quotation, the exporter

undertakes to pay all expenditure till the loading of goods on board the ship, including

documentation charges. The exporter is also required to clear goods at the port of

shipment.

Group CMain Carriage Paid:

(a) CFRCost & Freight (.named destination port):

Again this quotation is used only in maritime transport. Under this quotation, the

exporter undertakes to pay all expenditure including transportation of goods till the

port of destination. The importer is required to pay for marine insurance, unloading

of goods & expenditure thereafter.

(b) CIFCost Insurance & Freight ( named destination port): CIF quotation is

used only in maritime transport. Under CIF quotation, the obligation of the exporter

remains the same as the CFR quotation with only addition that he is also required to

procure & pay for insurance of goods.

(c)CPTCarriage Paid To(.. named place of destination): CPTquotation is the

general/containerized/multimodal equivalent of CFR. Under this quotation, the seller

undertakes to pay for carriage to the named point of destination. However, the risk

passes to the buyer as soon as the goods are handed over to the first carrier.


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(d) CIPCarriage & Insurance Paid To ( named place of destination): CIP is

the containerized transport/multimodal equivalent to CIF. Under this quotation, the

seller undertakes to pay for carriage & insurance to the named destination point, but

risk passes when the goods are handed over to the first carrier.

Group DArrival:

(a) DAFDelivered At Frontier ( named place): This term can be used when

the goods are transported by rail & road. The seller pays for transportation to thenamed place of delivery at the frontier. The buyer arranges for customs clearance &

plays for transportation from the frontier to his factory. The passing of risk occurs at

the frontier.

(b) DES Delivered Ex Ship ( named port):Under this quotation, the exporter

not only agree to bear cost but also risk & title up to the arrival of the vessel at the

named port. The importer pays for unloading & other duties & taxes. It is generally

used in shipping bulk commodities, viz.., coal, grain & where the exporter either ownsor has chartered his own vessel.

(c) DEQ Delivered Ex Quay (named port): Under this quotation, the

exporter undertakes to make goods available to the importer at the port of destination

& also bears the cost of discharging them from quay. As per the modified


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INCOTERMS 2000, the exporter clears the goods for import & pays for all

formalities, duties & taxes.

(d) DDUDelivered Duty Unpaid (. Named destination place): Under this price

quotation, the exporter delivers the goods to the importer to the named place ofdestination in the contract of sales. The importer is responsible for the costs & risks

for unloading, duty & any subsequent delivery beyond the place of destination.

(e) DDPDelivery Duty Paid ( named destination place): Under this quotation,

the seller pays for all transportation costs & bears all risk until the goods have been

delivered & pays the duty. It is also used interchangeably with the terms Free

Domicile. It is the most comprehensive price quotation for buyer.


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FOB QUOTATION vs. CIF QUOTATION:

FOB Price Quotation CIF Price Quotation

1. MeaningFOB means Free on Board. Under this

quotation, the exporter undertakes to pay allexpenditure till the loading of goods on the

board of the ship.

CIF means Cost, Insurance & Freight. Under

this quotation, an exporter undertakes to payall the expenditure till the goods reach the

port of destination including insurance of

goods.

2. Exporters ObligationThe exporters is under fewer obligations

since his responsibility ends as soon as he

delivers the goods on board of ship.

The exporter is under more obligations, as

he is required to arrange for marine

transportation in addition to payment of

freight & insurance.

3. Importers Obligations

The Importer is under more obligation, as heis required to arrange for marine

transportation in addition to payment of

freight & insurance.

The importer is under fewer obligationssince he receives the delivery of goods at the

port of destination

4. UsageFOB quotation is used more frequently in

the international market as it conforms to

international norms.

CIF quotation is not very popular because it

unnecessarily increases the burden of the

exporter.

5. ValueFOB price is much lower than CIF price

since it does not include freight & insurance.

CIF price is higher than FOB price as it

includes freight & insurance in addition toFOB price.

6. Arrangement of Shipping SpaceThe importer books the required space in the

ship, as the responsibility of exporter ends as

he delivers goods on board the ship.

The exporter books the required space in the

ship, as he I responsible for the delivery of

goods at the port of destination.

7. RisksThe exporter bears all the risk till loading of

goods & thereafter the risk passes to the

importer.

The exporter bears all the risk till the port of

destination & thereafter the risk passes to the

importer.

8. Calculation of Export IncentivesExport incentives are calculated as a

percentage of the FOB value of goods

exported.

CIF price is required to be converted into

FOB price for the calculation of incentives.


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SKIMMING PRICE vs. PENETRATION PRICING

SKIMMING PRICING STRATEGY PENETRATION PRICING STRATEGY

1. Meaning

A pricing strategy in which exporter chargesa very high price initially in order to recover

the cost incurred on high promotional

expenditure & research & development is

known as skimming pricing strategy.

A pricing strategy in which an exportercharges a very low price initially in order to

get hold of the market & drive away

competitors is known as penetration pricing

strategy.

2. Objectives

To earn high profit. To recover the cost of R&D To recover promotional expenditure.

To capture the market. To reap benefits of economies of

scale.

To sell slow moving items.3. Market ShareThe exporter fails to capture a greater market

share due to exorbitant price.

The exporter can capture a greater market

share due to low price.

4. Promotional ExpenditureHeavy advertising & sales promotions are

required to promote costly products.

Advertising & promotion costs are

comparatively lower due to low price.

5. Suitability

Fashionable items Innovative Products.

Monopolistic items.

Items of mass consumption. Items having many substitutes.

Perishable items.6. Effect on CompetitionIt encourages competition due to high profit

encourage competitors to enter the market,

which may wipe out profits earned initially.

7. Tenure of Strategy

8. Economies of Scale

9. Type of Customer


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UNIT 3 International Marketing 1

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