Lecture 6 Pricing Decision. 2 Pricing Direction Export pricing Within National Markets Pricing.

Lecture 6

Pricing Decision

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Pricing Direction

Export pricing Within National Markets Pricing

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5 Facets of pricing

1. Fundamental pricing strategy

2. Relation of foreign price policy to domestic policy

3. Currency issues

4. Elements in price quotation

5. Transfer pricing

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Determinants of Export Price

Costs Market Conditions&Customer

behaviour Competition Legal&Political issues General company policies, including

financial, production, marketing activities

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Costs

Price floor Direct cost (Labor + rawmat + shipping) =

(excess capacity) Full costs

Cost floor Between d.c/ f.c.

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Market Conditions

Determines the upper limit for prices Price ceiling

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Competition

Cost Price floor

Demand Price ceiling

Competition helps where actual price should be set.

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Legal & Political Influence

Restricts the company to set prices strictly on economical basis. Some countries have the right to control the prosperity of their citizens.

Antidumping legislations, Tariffs, import restrictions.

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Company Policies & Marketing Mix

Influenced by past and current corporate philosophy, organizational & managerial policies.

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Fundamental Export Pricing Strategy

Full costs to be covered, not easy all the time. Direct cost (mostly derived from domestic sales) harmful.

Cost and volume relationship: Experience-curve pricing (Leantiacles, 85).

As volume increases, unit cost decreases. So initial price is set below unit costs to gain

price advantage. Different than break even pricing strategy

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a.Skimming the market

Largest short run profit then retire from the biz.

Getting highest possible price / keep it high till small market exhausted. Then may lower.

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b.Sliding down the demand curve

Reduces the prices faster & further; for competition.

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c.Penetration pricing

Establishing the price sufficiently low to rapidly create a mass market.

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d.Pre-emptive pricing

Setting the prices so low as to discourage competition. Price is close to total unit cost.

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e.Extinction pricing

Eliminate existing competitors from international markets by large – low cost producers. China

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Relation of Export to Domestic Prices

Export <Domestics: Manufacturer’s product is less well known in foreign markets than domestic. (To secure market acceptance & initial purchase)

Export >Domestic: Increased initial cost to enter a foreign market is considerable. Selling expense is higher than in domestic market due to complexities of procedure, difficulties...etc.

Export=Domestic: When entering a foreign market for the first time and has not enough market research.

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Differential Pricing

Competitive conditions & other environmental factors may vary from one foreign market to other.

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Currency Issues

Exporter can choose its own currency, buyer’s currency or some “third party” currency. Be carefull about the flooting of the currency. Try to find stable currency. Also purchasing currency is a driver.

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Price Quotation

Export prices are quoted in various ways. The major system is trade terms. They determine the cost that exporter will bear.

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The 13 INCOTERMS

Origin Terms

EXW - Ex-Works, named place where shipment is available to the buyer, not loaded.The seller will not contract for any transportation.

International Carriage NOT Paid by Seller

FCA - Free Carrier, unloaded at the seller's dock OR a named place where shipment is available to the international carrier or agent, not loaded.This term can be used for any mode of transport.

FAS - Free Alongside Ship, named ocean port of shipment.Ocean shipments that are NOT containerized.

FOB - Free On Board vessel, named ocean port of shipment.This term is used for ocean shipments only where it is important that the goods pass the ship's rail.

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International Carriage Paid by the Seller

CFR - Cost and Freight, Named ocean port of destination.This term is used for ocean shipments that are not containerized.

CIF - Cost, Insurance and Freight, named ocean port of destination.This term is used for ocean shipments that are not containerized.

CPT - Carriage Paid To, named place or port of destination.This term is used for air or ocean containerized and roll-on roll-off shipments.

CIP - Carriage and Insurance Paid To, named place or port of destination.This term is used for air or ocean containerized and roll-on roll-off shipments

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Arrival At Stated Destination

DAF - Delivered At Frontier, named place of destination, by land, not unloaded.This term is used for any mode of transportation but must be delivered by land.

DES - Delivered Ex-Ship, named port of destination, not unloaded.This term is used for ocean shipments only.

DEQ - Delivered Ex-Quay, named port of destination, unloaded, not cleared.This term is used for ocean shipments only.

DDU - Delivered Duty Unpaid, named place of destination, not unloaded, not cleared.This term is used for any mode of transportation.

DDP - Delivered Duty Paid, named place of destination, not unloaded, cleared.This term is used for any mode of transportation.

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Selecting Trade Terms

Shipment will be made on domestic or foreign carrier

Availability of insurance coverange (Iraq) Availability of information on cost (Nig) Exporter’s need for cash (FOB / EXW) Inporters comparisor for several suppliers Currency contevertibity problems. (FOB

buyer pays in his currency) Goverment Requirements (FOB for import

licence to use local forms)

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Transfer Pricing

Products sold to foreign subsidiaries or partnership.

Wolly owned Competitive price list

Costs

Legal restrictions Partially owned Contracts / share %

Volume / tax& tariffs