International marketing management lesson 08

122 International Marketing Management LESSON PRICING STRATEGIES CONTENTS 8.0 Aims and Objectives 8.1 Introduction 8.2 Price and Non-Price Factors 8.2.1 Price Factors 8.2.2 Non-Price Factors 8.3 Methods of Pricing 8.3.1 Cost-Oriented Export Pricing Method 8.3.2 Competitive Pricing 8.3.3 Market Price 8.4 International Price Quotations 8.5 Base of Export Price Quotations 8.6 International Pricing Strategy 8.6.1 Factors Affecting Pricing 8.6.2 Price Strategies 8.7 Dumping 8.8 Price Distortion 8.9 Counter-Trade 8.9.1 Types of Counter-Trade 8.10 Let us Sum up 8.11 Lesson End Activity 8.12 Keywords 8.13 Questions for Discussion 8.14 Suggested Readings 8.0 AIMS AND OBJECTIVES After studying this lesson you will be able to: Understand methods of pricing a product which is required to be exported in the international market Distinguish between export pricing and domestic pricing Explain international pricing strategy from time to time by using sourcing as a strategic tool in pricing a product Discuss the difference between price distortions and counter trade 8.1 INTRODUCTION Pricing is a very critical decision in international marketing management because it is a major factor influencing a firm’s total revenue from exports and its profitability There is no thumb rule or any scientific or mathematical/statistical formula that can be applied in pricing a product correctly There is no doubt that as is the case in the domestic market, the interaction of market forces like demand and supply affect the price at which the product can be sold in the international market Besides, several other factors — economic, social, political, marketing conditions and product attributes — influence decision-making in international marketing In any given marketing, three basic factors determine the limits of pricing decisions of a firm These are product cost, the purchasing power of the consumers and demand and supply force The cost of the product serves as the floor price below which an exporter shall not agree, in most cases, to sell the product The purchasing power of the consumer fixes the upper limit of the price, which the firm can charge In reality, the prices are rarely fixed by these two factors in the market; they are fixed by the demand and supply forces in the market at a given time The international marketers task is compounded by the fact that not only does he have to consider the above three factors but he has also to take account of other government prices like taxes, tariffs, dumping regulations, price ceiling, foreign exchange regulation and rate of inflation in different foreign markets It is, therefore, necessary to adopt differentiated pricing in different foreign markets 8.2 PRICE AND NON-PRICE FACTORS In international market, prices are fixed taking into consideration a combination of various conditions and factors which put pressure on the pricing of a product These factors may be termed as price factors and non-price factors 8.2.1 Price Factors Pricing is like a tripod, the three factors being costs, demand and competition It is no more possible to say that one or the other of these factors determines price than it is to assess that one leg (factor) rather than either of the other two supports a tripod The significance of these factors in pricing is discussed below: Role of Costs: It is a popular fallacy to believe that price depends upon cost The price cannot be fixed below cost for long Cost determines the floor price below which an exporter may not agree to sell the goods But this principle does not always hold good An increase in cost may justify the increase in prices yet it may not be possible to so because of marketing conditions, i.e., demand and supply 123 Pricing Strategies 124 International Marketing Management On the other hand, it may also be possible that any increase in demand may lead to increase in price without an increase in costs The cost price relationship is important as it does not support the claim that costs determine price In some cases, the prevalent price may determine the costs that may be increased from time to time The manufacturer exporter cuts the costs according to the prices current in the market The product is tailored according to the needs of the target consumers and their capacity to pay for it It explains why declining costs often result in better quality at the same price and raising costs lead to deterioration in quality Another factor that evidences that costs not determine price is that costs of each producer differ substantially because of different internal and external factors but prices of their product are close to one another If cost is the determining factor, the price must also vary substantially Demand: Demand is another leg of the tripod It is a factor that determines prices in international markets As regards demand in international market, it is also affected by a number of other factors which are different from those operating in the domestic market Customs and taste of foreign customers may vary widely What is required is that the product must be adapted to the needs of foreign customers If the product is adapted accordingly, higher price may be fixed for the product as compared to competitors Thus demand of a product depends upon how the product has been adapted by the suppliers Elasticity of demand is another factor which affects pricing If the demand of the product is elastic, a reduction in price may increase the sales volume On the other hand, higher price may be fixed if the demand is inelastic and the supply is limited Competition: Competition in the targeted foreign market is an important factor in the international market The competition increases elasticity of demand Competition in foreign market may be so severe that the exporters have no other option except to follow the market leader Competition may be either brand type or functional type Brand type refers to competition among brands of a product or service which aims at satisfying the other needs As against this, functional competition refers to the type of competition where the manufacturer tries to differentiate the function of the product from its competitors This he may either by altering this packaging or by adding attributes to the products Both types of competitions put pressure on the companies, pricing decisions Sometimes, company determines a price of the product with a specific objective of discouraging competition from entering a given foreign market 8.2.2 Non-Price Factors Whenever an exporter fixes the price for his goods the importer does not necessarily consider the price of the product alone There are many other non-price factors that are considered by the importer Which play an important role in creating demand in foreign countries The non-price factors are confidence, brand image, frequency of purchase, association of price and quality, comprehensive knowledge of the product, before and after sales service, continuity of supply, prompt deliveries, settlement of claims, supply of complete range of products and terms of credit Confidence: Most of the importers of developed countries not have much confidence in the quality of products manufactured by developing countries irrespective of the fact that the quality of their product may by much better Indians and exporters of other developing countries have to ensure that their products are priced lower than other competitors For example, Indians have to sell their storage batteries 10 per cent lower in Saudi Arabia than US and European Union batteries though the quality is comparable Sometimes Indian exporters in carpets sell their goods at much lower price than even the break-even point because of hard competition from other countries like Pakistan, Nepal, China and Turkey Fixing lower prices is inevitable to make our products acceptable in foreign markets Brand Image: If products are well differentiated and they have built up a brand image in the mind of foreign customers, the manufacturer of such products may charge higher prices for his products Brand names like Bata, Tata, GKW, Dunlop, Lucas, Phillips, BPL, LG, Sony, Samsung, Maruti, etc., have already earned good brand name and are able to sell their products at higher prices Frequency of Purchase: Frequency of purchase in some cases decides the price If customers purchase the goods very often, as is the case with non-durable consumer items, they very often think of the price Where the item is a durable consumer good, products having snob value or gift items, price is not a major consideration People are willing to pay a higher price if the particular product appeals to them Thus, durable consumer items or gift items may be sold at a much higher price Association of Price and Quality: There appears to be a close association between the price and quality of the product It is most commonly understood that lowest priced goods not carry adequate value The higher priced goods carry a much greater conviction about quality than the low priced goods particularly in periods of inflationary price rise A reduction in price may lead to reduction in demand because it has an adverse reaction on the consumers Comprehensive Knowledge of the Product: In case of an industrial product, the importer has good knowledge of the quality of brands available in the world market Therefore, apart from the quality, he considers other factors like technical soundness of the product, steady availability at reasonable price and comprehensive after sale service offered by the manufacturer Price is not the indicator of the quality alone but it is a composite of all other related factors Before and After Sale Service: In case of valuable industrial and engineering products, both before and after sale service count much more than lower price Before sale service in the case of engineering goods, industrial goods and scientific technical equipment cover (i) advising the importer about the relative suitability of competing products, and (ii) demonstrating the use of his product After sale service in the case of sale of engineering goods and durable consumer goods include (i) rectification of genuine technical fault in the product, (ii) educating the user on the proper use of the product and providing proper training for its use and maintenance, (iii) free service during the warranty period, and (iv) ensuring supply of spare parts and components after the warranty period Continuity of Supply: Regular supply of original product and its ancillary products assumes great importance in foreign trade If regular supply of the original and ancillary products is not arranged/maintained, the country has all the chances to lose in the international market Development of substitutes for a number of products exported by developing countries is also due to the failure of these countries to maintain regular supplies An uninterrupted supply of the products may assure better price Prompt Delivery: Prompt deliveries may attract foreign buyers to pay higher prices for the products This is a point which most developing countries fail to understand Delayed deliveries affected India’s exports to Sri Lanka, Myanmar, Arab and European countries While foreign importers like deliveries within three months 125 Pricing Strategies 126 International Marketing Management from the date of the order, Indian exporters invariably fail to deliver the goods even before six months Studies made in recent years about Generalised System of Preferences (GSP) reveal that the reliability of product quality and delivery appear to be more important factors than the price Hence, developing countries must adhere to the time schedule In that case, the price factor will take care of itself automatically Settlement of Claims: In foreign trade, the exporter and importer are not close to each other In most cases they even not know each other The importer, therefore, will not hesitate to pay a somewhat higher price if there is an arrangement between them for prompt acceptance and settlement of claims if it is found correct during the course of enquiry 10 Supply of Complete Range of Products: In certain cases the price of the product depends upon the fact that the producer (exporter) is in a position to supply complete range of products and in large quantities required by the importer Here also, Indian exporters and exporters of other developing countries have failed to come up to the expectations of the developed countries Generally, in developing countries, the exporters could not supply the goods in huge quantities because of lack of resources The reason being the small-scale sector is encouraged more in developing countries hence they are unable to produce complete range of the product For example, cycle manufacturers in India not produce a complete range of cycle components 11 Terms of Credit: In case of export of capital goods, i.e., machinery and equipment, availability of finance and terms of credit are very often the determining factor In this respect, developed countries dominate They supply goods on credit while exporters from developing countries including India are not able to so because of their limited resources However, in India, the Export Import Bank (EXIM) offers such credit to importers and the Export Credit Guarantee Corporation (ECGC) also offers guarantee cover for the credit given to the importers 8.3 METHODS OF PRICING The export price structure, like the domestic price structure, begins on the factory floor But there is no similarity in the cost included in the two structures The pricing of the product for domestic and export purposes is calculated in a different manner The export price structure is the basis of all exports price quotations, discounts and commissions There are various methods of calculating the price in the foreign market The methods may be grouped into two–cost oriented export-pricing method and market-oriented export pricing method 8.3.1 Cost-Oriented Export Pricing Method The cost-oriented export pricing methods are based on costs incurred in the production of goods Total cost includes fixed costs and variable costs Thus, export pricing may be based on full cost (fixed and variable) or only the variable cost A reasonable profit will be added to the base cost to arrive at export pricing Thus, cost-oriented export pricing method may be (i) full cost method and (ii) variable cost or marginal cost method Full Cost Method or Cost-plus Method The most frequently used pricing method in export is cost-plus method This method is based on the full cost or total cost approach In arriving at the export price under this method, the total cost of production of the article (fixed or variable) is taken into account Over and above the fixed and variable cost incurred in the production of exportable article, all direct and indirect expenses incurred for the development of the product such as R&D expenses and other expenses necessary for the export of article such as transportation cost, freight, custom duties, risk costs, etc., are included Then a reasonable profit allowance is added to the cost and the value of all assistance received from any authority is deducted The net result is the total export price for the commodity produced Price per unit may be calculated by dividing the total price thus arrived by the number of units manufactured The various elements of cost forming the part of the total cost are direct cost, fixed cost and freight and insurance The various elements of cost forming part of the total costs are (a) direct cost which includes variable costs – direct labour, variable production overhead and variable administrative overheads (b) other costs directly related to exports These include selling costs – advertising, special packaging, commission to overseas agents, export credit insurance, bank charges, inland freight, power charges, inland insurance, port charges, export duties, warehousing, documentation and so on Total direct cost will, therefore, be (a) + (b) Fixed Cost or Common Cost: These include production overhead, administrative overheads, publicity and advertisement, travel abroad and so on less compensatory assistance, duty drawback and import replenishment benefits Freight and Insurance: This includes cost of freight and marine insurance up to the importer’s destination This is also known as cost insurance freight (cif) Evaluation: The main advantage of this approach is that the exporter realises the full cost in marketing the product in a foreign market Another advantage may be its simplicity but it may also be its main weakness because if the reorder is for a small number of units to be supplied, it will not be possible for the exporter to supply the product at the same rate due to its high cost of production per unit on account of fixed cost This approach suffers from a number of disadvantages apart from simplicity: (i) it completely ignores demand and the competitive conditions in the foreign target markets (ii) it is often based on distorted measurement of cost appraisal (iii) it is based on circular reasoning Marginal Cost Pricing Another common method of pricing in international trade is to determine the price on the variable cost or direct cost Fixed cost element in the total cost of production is totally ignored and the firm is concerned only with marginal or incremental cost of producing the goods which are sold in the foreign markets The fixed cost remains fixed up to a level of output irrespective of volume of output On the other hand variable costs vary in proportion to the volume of production Thus it is variable or direct or marginal costs that set the price after a certain level of output is achieved, i.e., the output at break-even point Evaluation: The export sales are additional sales Hence these should not be burdened with overhead costs which are ordinarily met from domestic trade This approach is favoured for the firms from developing countries who are not well known in foreign countries as compared to their competitors from developed countries Therefore, lower prices based on variable costs may help them enter foreign markets easily Low price may serve to widen and create markets In such countries price is still the decisive factor and quality is comparatively less important Marginal cost pricing is not free from limitations Developing countries may be charged of dumping their product in foreign markets because they would be selling their product below net prices and attract anti-dumping provisions, which take away their competitive 127 Pricing Strategies 128 International Marketing Management advantage The use of this approach may give rise to cut throat competition among exporting firms from developing countries resulting in loss in valuable foreign exchange to developing countries Marginal cost pricing is not advisable if the importer is regularly purchasing the product at low price and mass production technique must have been adopted so that the gap between the full and marginal cost may be refunded 8.3.2 Competitive Pricing Costs are no doubt important but competitive prices should also be considered before fixing the export price Competitive prices mean the prices that are charged by the companies for the same product or for the substitute of the product in the target market Once this price level is established, the following three main steps can determine the based price: A Relevant demand schedules (quantities to be bought) at various prices should be determined based on the planning period, B Relevant cost (total and incremental) of production and marketing costs should be estimated to achieve the target sales volume as per the demand schedules prepared, and C The prices that offer highest profit contribution, i.e., the sales revenues minus all fixed costs The final determination of base price should be made after considering all other elements of marketing mix within these elements The nature and length of channel of distribution is the most important factor affecting the final cost of production Besides, product adaptation cost should also be considered in fixing the base price The following chart gives the nature of analysis for market-oriented export pricing 8.3.3 Market Price Less – retail margin on selling price cost to the retailer Less – wholesalers mark up to his cost (cost of the wholesaler) Less – importer’s mark up to his cost (cost of the importer) Less – import duty (landed price) Less – free on board (fob) or cost of freight and insurance (cif) Having found out what the market can bear, the firm has to determine whether it can sell the product at that price profitably or not by working back from the market price as shown above This analysis gives an idea of the upper limit of what the firm can charge The cost analysis discussed earlier gives the lower limit of what a firm can charge The price of a product in the foreign market may then be fixed between these two limits As the firm gains experience, it would be able to set the price that gives the highest profitability However, in many cases, it happens that the market realisation is very low In such circumstances the exporter may compare his fob realisation (under market-oriented export pricing) with direct cost or full cost as calculated under cost-oriented export pricing He can then determine whether he can export goods or not Whatever be the price determined by the firm for its product it must consider the price and non-price factors before taking a final decision Check Your Progress 1 Define marginal cost pricing Elaborate price factors 8.4 INTERNATIONAL PRICE QUOTATIONS An “export offer” or “quotation” is the basis of any export transaction Whenever an exporter writes a formal letter to an importer with an offer of his export goods, the importer, if replies in affirmative, needs to have any one of the following methods for an export quotation or order Proforma Invoice: An exporter prepares this after he receives an order from an importer It is a standardised proforma, which is applicable throughout the world It is similar to a document known as “Commercial Invoice” It indicates the price as well as other charges as per terms of contract incurred in shipment This is an exact duplicate of the invoice, which will be sent to the importer just before the export of goods A point to remember here is that proforma invoice is required by the importer to obtain the import license or allotment of foreign exchange It should, therefore, be very accurate It also contains the terms of payment, i.e., LC/DP/DA, etc Besides this, it contains the mode of shipment and the price based on fob/wef Global Price List: The offer may be made in response to a public global tender floated by a buyer Such offers should be comprehensive covering all the conditions of the tender and listing out the price together with other charges such as freight, insurance, etc., and should also include escalation clause Price List: An offer may also be in the form of a printed price list where the goods have a standard export price The other terms and conditions to which the prices are subjected may be either included in the price list or stated specifically in the accompanied letter Letter Indicating the Price: An offer can be given in the form of a letter indicating the price, terms of payment and the delivery of goods Whatever may be the mode of offer, it should be written in a simple and easily understandable style Care should be taken to ensure that there is no scope for any different interpretation or for any misunderstanding It should clearly state the price and other terms and conditions to which the price is subjected 8.5 BASE OF EXPORT PRICE QUOTATIONS INCOTERMS have given some uniform export terms for delivery which are used all over the world They indicate: (a) The charge and expense, which must be paid by the seller (b) Place of delivery of goods (c) The point of time where the goods and their transit risks are transferred 129 Pricing Strategies 130 International Marketing Management The export price quotations can be made with reference to the above terms The common terms in use are: Ex-works: Under the ex-works quotation, the exporter pays packaging costs and the delivery takes place at the works or a warehouse of the exporter All other expenses thereafter and transit risks are borne by the importer Ex-works price quotations are rarely used in international transactions However, for products which are heavy and for which shipping freight and transport charges cannot be estimated in advance, ex-works quotations are usually accepted (FAS) Free Alongside Ship Price: Under FAS quotations, the exporter pays all charges upto putting the goods alongside the ship, while putting them on the ship is a buyer’s expense Where shipping companies accept goods “on stream” and where goods have to be moved on barges to the side of a vessel, the FAS quotation should include barge’s charges as well The goods and the transit risks are transferred when the ship is able to load (FOB) Free on Board Price: This is one of the most common terms used in export pricing FOB means that the exporter has the obligation to put the goods on board the ship The exporter pays port trust charges and other charges necessary for completing documentation and loading the goods on a ship Delivery of goods takes place as soon as the goods have been loaded on the ship and the goods and transit risks are transferred when the goods go on the ship’s rail For Indian exporters, FOB price is significant because all assistance provided by the Government of India to exporters is related to FOB price of a contract (C&F) Cost & Freight Price: Under this price, all responsibilities and expenses are to be incurred as in FOB pricing, the exporter has to pay the ocean freight CIF (Cost Insurance and Freight) Price: Under this price, all the costs as in C&F plus the insurance are paid by the exporter but included in the price In C&F and CIF, the delivery takes place when the Bill of Lading is handed over and the goods and transit risks are transferred when the goods go over the ship’s rail The importers in most of the cases insist on the C&F or CIF prices The exporters will have to prepare their price quotations on such lines The implications of such insistences are two-fold (i) the exporter will have to arrange for shipping space and (ii) he will have to bear all transit costs and risks till the goods are handed over at the port of destination Thus any change in the transportation cost subsequently will have to be borne by the exporter Ex-Ship Price: It includes all the costs till the goods are reached at the importer’s port in the price quotations The property in goods and all risks are transferred as soon as the goods are offloaded at the importer’s port Franco Price: In its broadest sense, Franco price includes all costs up to the godown or warehouse of the importer The exporter pays for the importer’s godowns in that foreign country In other words all the expenses and all risks will be transferred when the delivery is made to the buyer at his godown or the warehouse Thus any of these prices may be the base price as per the terms of contract between the importer and the exporter The price thus quoted will also decide the point where the risks and property in goods will be transferred 8.6 INTERNATIONAL PRICING STRATEGY Pricing strategy is an important part of fixing the international price The price has to be competitive and based on the quality of a product Different pricing strategies are adopted in different foreign countries because of certain environmental factors like political, economic, socio-cultural, legal and so on 8.6.1 Factors affecting Pricing There are three main factors which affect the export price strategy to be adopted by the exporter in the foreign markets, viz., the characteristics of the product and the nature of its demand, the philosophy of its management and the market characteristics The pricing strategy is a short-term tool to make fit the prices in the changing competitive situations in the short run with its pricing policy decisions Characteristics of the Product and the Nature of its Demand: It is a major factor in fixing the price of the product at a particular time In other words, improvement in quality of the product and product adaptation according to the changing competitive conditions in the foreign market should be taken as a continuous process Elasticity of demand is another factor which influences the price If the demand of a product is inelastic, price reduction will not help to increase the revenue In such a case, higher prices may be fixed taking in view the competitive position in the market If, on the other hand, the product is highly elastic, the sales revenue can be appreciably increased by slightly reducing the price Thus, pricing strategy, i.e., whether to fix higher price or lower price as compared to the competitor’s prices very much depends upon the elasticity of demand and the competitive position Philosophy of the Management: The philosophy or the objective of the management in exporting goods is another important factor of pricing strategy As we know, the main objective of the management of the every concern is to maximise profits — this is an adverse relationship between price and demand The management can earn more profit at increased revenue by reducing the price if the demand is more elastic On the other hand, if the objective of the management is to export a committed value of merchandise, the price may be even lower than the marginal cost In cases where a new product is introduced in a competitive market, the management may sell it even below cost In order to bar new entrants in the market, discounts may be increased or prices may be reduced Thus, the strategy of pricing would depend upon the philosophy of the management Market Characteristics: Market characteristics such as number of competitors and degree of competition, supply position, quality of the product, substitutes available in the market, etc., determine the pricing strategy of the firm These market characteristics vary from country to country 8.6.2 Price Strategies The export price quotations may not be the same for all markets Prices may differ from market to market due to various reasons, viz., political influence, buying capacity, financial and import facilities, total market turnover and other pricing and non-pricing factors, etc., in order to make the local price of the product competitive Profitability will also be affected to a great extent and may be different in different markets However, there is nothing wrong in making a higher margin in small export markets and lower ones in others provided there is an overall profit in export business Thus, different strategies may be used in different markets In some markets prices may be higher, in some others the product may be sold at cost price or in many others, it may be sold at less than the cost price Normally, the following pricing strategies are used in the export market: Market Penetration Strategy: Under this strategy, exporters offer a very low introductory price to speed up their sales and, therefore, to widen their market 131 Pricing Strategies 132 International Marketing Management base It aims at capturing the products in the market especially if the quality of the product is proved with its wide acceptance Probe Pricing Strategy: Fixing low price for its product may have an adverse effect on the image of the firm and of the product It may raise doubts in the minds of the buyers about the quality of the product if it is lower than the price of competitors or if it is reduced subsequently When no information is available on the extent of the competition or the likely preferences of the buyers, sufficiently higher prices may be quoted on the first few offers No business is really expected to grow except feedback information Hence, the prices may be adjusted accordingly Follow the Leader Pricing Strategy: In a competitive world market or where adequate market information is not available, it may be useful to follow the leader, in the market After comparing its product with that of the leader, the exporter may then fix the price of its product In such cases, the price of the product is lower than the leader’s product However, this price has no rational or scientific base Skimming Pricing Strategy: Under this strategy, a very high introductory price is fixed to skim the cream of the demand at the very outset This policy is generally introduced when there is no competition in the market Such prices continue to be high till competitors enter the foreign market As soon as competitors enter the market, the exporter reduces the price Differential Trade Margins Strategy: Variation in trade margins may be adopted by the exporter as a pricing strategy in foreign market This strategy allows various types of discounts on the list price Quantity discounts encourage to procure huge orders It may be based on the value or on the quantity purchased or on the size of the package purchase Special discounts may be allowed while introducing the product These are given on all the purchases Seasonal discount aims at shifting the storing function in the channels This approach is “buy sooner or more” Cash discount attracts prompt payment It ensures “quick pay-back” Trade discount is a reduction in list price given to channel members in anticipation of a job they are going to perform Standard Export Pricing Strategy: In some cases, exporter quotes the standard price or list price that is one price for all But still there should be some margin for negotiations as in many markets, especially in underdeveloped countries, bargaining over prices is a part of life In such cases, fixed prices may serve as a starting point for negotiation Hence, it is desirable to keep a certain margin for negotiations This strategy is generally adopted in the export of capital goods i.e plant and machinery Cheaper Price for Original Equipment and Higher Price for Spare Parts: In certain cases it might be useful to quote lower prices for the original equipment and charge higher prices for spares and replacement parts to be exported later as and when required This strategy is useful where only the supplier of the original equipment can supply standard spare parts This strategy could be used for tractors, telephone equipment, defense armaments, railway equipment and so on Thus, different pricing strategies may be adopted in different markets taking into account the level of competition, the marketing characteristics and the philosophy of the management Profitability anyhow cannot be ignored completely in the long run However, exports may be continued in the short run even below the marginal cost 8.7 DUMPING Dumping is an important international pricing strategy issue GATT’s 1979 Anti-dumping Code defined dumping as the sale of an imported product at a price lower than that normally charged in a domestic market or country of origin In addition, many countries have their own policies and procedures for protecting national companies from dumping The US Antidumping Act of 1921, which is enforced by the US Treasury, did not define dumping specifically but instead referred to unfair competition However, Congress has defined dumping as an unfair trade practice that results in “injury, destruction, or prevention of the establishment of American industry” Under this definition, dumping occurs when imports sold in the US market are priced either at levels that represent less than the cost of production plus an per cent profit margin or at levels below those prevailing in the producing country The first and clearer principle of dumping is prohibiting of dumping The general anti dumping provisions are found in Article VI of GATT A second practice “prohibited under the GATT” is the payment of unfair subsidies, bounties or grants The principle opposes attempts by governments to distort the world market by specifically subsidising exports As more governments assist the industry to promote economic growth, the issue of what an unfair subsidy is has become considerably more complex More governments use subsidies in a variety of forms, such as grants, tax forgiveness or deferral, or low-interest loans, in order to encourage businesses to train workers, locate in depressed areas of the country, develop needed products, or restructure industries When those subsidies are aimed at export-generating businesses, there is the risk that the lowered cost of producing products for export will distort world markets In the Tokyo Round, the United States led an effort to create a GATT subsidies code The Subsidies Code, adopted as part of the Tokyo Round and enacted into US law, takes aim at export subsidies, as opposed to those designed to achieve domestic objectives If an importer is found to have received unfair subsidies, the Department of Commerce will assess a counter-vailing duty to offset the amount of the subsidy Box 8.1: Article VI Anti-dumping and Countervailing Duties The contracting parties recognize that dumping, by which products of one country are introduced into the commerce of another country at less than the normal value of the products, is to be condemned if it causes or threatens material injury to an established industry in the territory of a contracting party or materially retards the establishment of a domestic industry For the purposes of this Article, a product is to be considered as being introduced into the commerce of an importing country at less than its normal value, if the price of the product exported from one country to another: (a) is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country or (b) in the absence of such domestic price, is less than: (i) the highest comparable price for the like product for export to any third country in the ordinary course of trade, or (ii) the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit Due allowance shall be made in each case for differences in conditions and terms of sale, for differences in taxation, and for other differences affecting price comparability Dumping is a form of price discrimination It is the practice of charging different prices for the same product in similar markets As a result, imported goods are sold at prices so slow as to be detrimental to local producers of the same kind of merchandise Boeing & 133 Pricing Strategies 134 International Marketing Management McDonnell Douglas, for example, accused Airbus of receiving $ billion in subsidies from the government consortium, enabling the company to price each airplane at $ 15-20 million less than the true cost Dumping also applies to services Japanese banks in California were accused of dumping money in the US market by pricing their loans at an interest rate lower than what US banks charged 8.8 PRICE DISTORTION Dumping laws are not the only cause of price variations The power of market forces in setting prices can be moderated by the government’s price policy Few governments allow the market to set prices completely on its own accord When a government is actively involved in buying and selling local and foreign goods, price deviations usually and readily follow Because of the political influence of agriculture in Japan, Japanese rice farmers were able to price their rice at several times more than US prices resulting in Japanese consumers paying double or triple the world price Automobile prices differ from country to country A medium-sized car in Singapore can cost four times as much as a comparable car in Nairobi or in India On most occasions a government sets the price artificially high in order to discourage the domestic consumption of imported goods Generally, however, government policy is to keep prices artificially low in the case of necessities that are essentially for public welfare A government’s licensing policy and patent enforcement can affect market prices indirectly as well Inflation is the only primary cause of price controls It affects public welfare and encourages workers to demand higher wages In addition, inflation increases the pressure of currency’s devaluation, which will affect prices of virtually all products and services When a situation of price distortion exists, a company must devise a strategy to deal with it In 1985, Argentina was experiencing an inflation rate of 1000 per cent Merchants knew that price controls were inevitable and they increased prices rapidly and drastically in order to circumvent the restrictions were price controls implemented Another method of dealing with price controls involves the creation of a new product that is not subject to old or existing prices A new brand name or a new package may or may not be adequate for this purpose Check Your Progress What is cost-oriented export pricing method? What is performa invoice? What you understand by Free on Board (FOB) price? 8.9 COUNTER-TRADE Counter-trade constitutes an estimated 5-30 per cent of total world trade Counter-trade greatly proliferated in the 1980s The single most important contributory factor is LDCs decreasing ability to finance their import needs through bank loans Regarding Russia, its officials have estimated that 90 per cent or more of the transactions have to with “critical imports” involving reciprocal trade exchanges Counter-trade in Russia may proliferate because with the Russian banking system in disarray, it is difficult to arrange traditional export financing such as Letter of Credit Counter-trade is one of the oldest forms of trade in the government mandate to pay for goods and services with something other than cash It is a practice that requires a seller as a condition of sale to commit contractually to reciprocate and undertake certain business initiatives that compensate and benefit the buyer In short, a good-for-goods deal is counter-trade Unlike monetary trade, suppliers are required to take customers’ products for their use or for their resale In most cases, there are multiple deals that are separate yet related and a contract links these separate transactions Counter-trade may involve several products and such products may move at different points in time while involving several countries Monetary payment may or may not be part of the deal There are three primary reasons for counter-trade (i) it provides a trade financing alternative to those countries that have international debt and liquidity problems (ii) countertrade relationship may provide LDCs and MNCs with access to new markets and (iii) it fits well conceptually with the resurgence of bilateral trade agreements between governments Advantages of counter-trade cluster around three subjects (i) market access (ii) foreign exchange and (iii) pricing 8.9.1 Types of Counter-trade There are several types of counter-trades including barter, counterpurchase, compensation trade, switch trading, offsets and clearing agreements Barter is the simplest of many types of counter-trades It is a one time direct and simultaneous exchange of products of equal value (one product for another) By removing money as a medium of exchange, barter makes it possible for cash tied countries to buy and sell Although price must be considered in any counter-trade, price is only implicit and best in the case of barter For example, Dutch exchanged Chinese coal for the construction of its seaport and Polish coal was exchanged for concerts given by Swedish band in Poland In these cases, the agreement dealt with how much tonnes of coal were to be given by China or Poland rather than the actual monetary value of the construction project or concerts It is estimated that about half of US corporations engage in some form of barter primarily with the local markets of the United States Counterpurchase occurs when there are two contracts or a set of parallel cash sale agreements, each paid in cash Unlike barter, which is a single transaction with an exchange price only implied, counterpurchase involves two separate transactions—each with its own cash value A supplier sells a facility or product at a set price and orders unrelated or nonresultant products to offset the cost to the initial buyer Thus, the buyer pays with hard currency whereas supplier agrees to buy certain products within a specified period Therefore, money does not need to change hands In fact, the practice allows the original buyer to earn back the currency GE won a contract worth $ 300 million to build aircraft engines for Sweden’s JAS fighters for cash only after agreeing to buy Swedish industrial products over a period of time in the same 135 Pricing Strategies 136 International Marketing Management amount through a counterpurchase deal Iraq persuaded New Zealand Meat Board to sell $ 200 million worth of lamb for a purchase of the same value of crude oil Brazil exports vehicles, steel and farm products to oil producing countries from whom it buys oil in turn A compensation trade requires a company to provide machinery, factories or technology and to buy products made from this machinery over an agreed on period Unlike counterpurchase, which involves two unrelated products, the two contracts in a compensation trade are highly related Under a separate agreement to the sale of plant or equipment, a supplier agrees to buy part of the plant’s output for a number of years For example, a Japanese company sold sewing machines to China and received payment in the form of 300 thousand pairs of pajamas Switch trading involves a triangular rather than bilateral trade agreement When goods, all or part, from the buying country are not easily useable or saleable, it may be necessary to bring in a third party to dispose of the merchandise The third party pays hard currency for unwanted merchandise at a considerable discount A hypothetical example could involve Italy having a credit of $ million for Austria’s hams, which Italy cannot use A third party company may decide to sell Italy some desired merchandise worth $ million for a claim on the Austrian hams The price differential or margin is accepted as being necessary to cover the costs of doing business this way The company can then sell the required hams to Switzerland for Swiss Francs that are easily convertible to dollars In an offset, a foreign supplier or manufacturer is required to assemble the product locally and purchase local components as an exchange for the right to sell its products locally In effect, the supplier has to manufacture at a location that may not be optimal from an economic point of view Offsets are often found in purchases of aircraft and military equipment Clearing agreement is clearing account barter with no currency transaction required With a line of credit being established in the central banks of two countries, the trade in this case is continuous and the exchange of products between two governments is designed to achieve an agreed on value or volume of trade tabulated or calculated in non-convertible “clearing account units” For example, the former Soviet Union’s rationing of hard currency limited imports and payment of copiers Rank Xerox decided to circumvent the problem by making copiers in India for sale to the Soviets under the country’s “clearing agreement” with India The contract set forth goods, ratio of exchange and time length for completion Any imbalances after the end of the year were settled by credit into the next year, acceptance of unwanted goods, payment of penalty, or hard currency payment Although nonconvertible in theory, clearing units in practice can be sold at a discount to trading specialists who use them to buy saleable products 8.10 LET US SUM UP Pricing is like a tripod, the three factors being costs, demand and competition Price cannot be fixed below cost for long Cost determines the floor price below which an exporter may not agree to sell the goods The cost-price relationship is important, as it does not support the claim that costs determine price The manufacturer exporter cuts the costs according to the prices current in the market If cost is the determining factor, price must also vary substantially If the product is adapted accordingly, a higher price may be fixed for the product as compared to competitors Elasticity of demand is another factor, which affects pricing Whenever an exporter, for his goods, has fixed price the importer does not consider the price of the product Fixing lower prices is inevitable to make our products acceptable in foreign markets Frequency of purchase in some cases decides the price Higher-priced goods carry a much greater conviction about quality than low-priced goods particularly in periods of inflationary price rise An uninterrupted supply of the product may assure better price Prompt deliveries may attract foreign buyers to pay higher prices for the products The export price structure, like the domestic price structure, begins on the factory floor and is the basis of all export price quotations, discount and commissions There are various methods of calculating the price in the foreign market The methods may be grouped into two – cost-oriented export pricing method and market-oriented export pricing method The cost-oriented export pricing methods are based on costs incurred in the production of goods Total cost includes fixed costs and variable costs Thus, export pricing may be based on full cost (fixed and variable) or only the variable cost The most frequently used pricing method in export is cost-plus method The common method of pricing in international trade is to determine the price on the variable cost or direct cost Low price may serve to widen and create markets Marginal cost pricing is not free from limitations Costs are no doubt important but competitive prices should also be considered before fixing the export price Competitive prices mean the prices that are charged by the companies for the same product or for the substitute of the product in the target market Besides, product adaptation cost should also be considered in fixing the base price Whatever be the price determined by the firm for its product, it must consider the price and non-price factors before taking a final decision An offer may also be in the form of printed price list where the goods have a standard export price Pricing strategy is an important part of fixing the international price Elasticity of demand is another factor, which influences the price Export price quotations may not be the same for all markets Prices may differ from market to market due to various reasons, viz., political influence, buying capacity, financial and import facilities, total market turnover and other pricing and non-pricing factors, etc., in order to make the local price of the product competitive In some markets, prices may be set higher, in some others goods may be sold at the cost price and in many others, they may be sold at less than the cost price Fixing low price for its product may have an adverse effect on the image of the firm and of the product As soon as competitors enter the market, the exporter reduces the price In some cases, exporter quotes the standard price or list price that is one price for all Dumping is a form of price discrimination It is the practice of charging different prices for the same product in similar markets Each involves charging lower prices abroad than at home The cost of production is unsuitable for determining the fair price for the product The power of market forces in setting prices can be moderated by the government’s price policy 8.11 LESSON END ACTIVITY “The export price quotations may not be the same for all markets Prices may differ from market to market Thus, different strategies may be used in different markets.” Discuss 137 Pricing Strategies 138 International Marketing Management 8.12 KEYWORDS Price: It is the exchange value of goods and services in terms of money Cost Plus Method: The price is set to cover costs and predetermined percentage of profit Marginal Cost Pricing: Under marginal cost pricing, fixed costs are ignored and prices are determined on the basis of marginal cost Market Penetration Strategy: Under this strategy, exporter offer a very low introductory price to penetrate deeper into the international market Price Skimming: Under this strategy, a very high introductory price fixed to skim the cream of the demand at the very outset Dumping: Selling goods in a country at a price below the cost of production or, in some circumstances, selling goods in a foreign country at price lower than those charged for the same goods in the home country Counter Trade: A means of exchange by which one government attempts to limit the outflow of hard currency from the country by providing payment in the form of other goods 8.13 QUESTIONS FOR DISCUSSION Explain how exchange rate and inflation effect the way you price your product What is dumping? When does it become illegal? What can a seller to circumvent anti-dumping regulations? Explain the terms counter-trade, counter purchase, buy-back, offset, clearing agreement and switch trading Check Your Progress: Model Answers CYP 1 Marginal cost pricing is another common method of pricing in international trade to determine the price on the variable cost or direct cost Fixed cost element in the total cost of production is totally ignored and the firm is concerned only with marginal or incremental cost of producing the goods, which are sold in the foreign markets Pricing is like a tripod, the three factors being costs, demand, and competition CYP Cost-Oriented Export Pricing: The cost-oriented export pricing methods are based on costs incurred in the production of goods Total cost includes fixed costs and variable costs Thus, export pricing may be based on full cost (fixed and variable) or only the variable cost A reasonable profit will be added to the base cost to arrive at export pricing Thus, cost-oriented export pricing method may be (i) full cost method and (ii) variable cost or marginal cost method Performa Invoice: An exporter prepares this after he receives an order from an importer It is a standardised proforma, which is applicable throughout the world It is similar to a document known as “Commercial Invoice” It indicates the price as well as other charges as per terms of contract incurred in shipment Free on Board (FOB): This is one of the most common terms used in export pricing FOB means that the exporter has the obligation to put the goods on board the ship 8.14 SUGGESTED READINGS PKVasudeva, International Marketing, Excel Books, New Delhi, 2006 Shyam Shukla, International Business, Excel Books, New Delhi, 2008 Philip R Catero, International Marketing Keegan, Global Marketing Management 139 Pricing Strategies ... PKVasudeva, International Marketing, Excel Books, New Delhi, 2006 Shyam Shukla, International Business, Excel Books, New Delhi, 2 008 Philip R Catero, International Marketing Keegan, Global Marketing Management. .. prices yet it may not be possible to so because of marketing conditions, i.e., demand and supply 123 Pricing Strategies 124 International Marketing Management On the other hand, it may also be possible... sold in the international market Besides, several other factors — economic, social, political, marketing conditions and product attributes — influence decision-making in international marketing