INTERNATIONAL

PRICING
STRATEGY
Learning 1. Examine the various pricing options and the
Outcomes complications involved in setting prices in foreign
markets.
At the end of
the chapter 2. Identify the major determinants of export prices
you should be and pricing methods.
able to…
3. Describe the steps involved when setting prices
for products sold abroad.
International Pricing Strategy

Pricing Standardization vs Adaptation Policy

Determinants of Export Prices and Pricing Methods
Pricing Approaches
Currency Devaluation and Revaluation
Setting Export Prices to Sell Competitively
 Price is what customers pay to get the product or
service. While other marketing elements are known
as cost-centered elements, the pricing function is
considered revenuecentered.
Pricing Standardization
vs
Adaptation Policy
 The firm can standardize its pricing decisions by charging
the same price for a product in every foreign market in
which it operates.

 This is a difficult strategy to maintain because of

differences in local taxes, export taxes, distribution
channels, marketing costs, and freight and insurance
rates.
 The advantage of this strategy is that it is very flexible
and allows the firm to modify its prices according to
changes in the market and competitive conditions.
Determinants of Export Prices and
Pricing Methods
Basic factors that influence the setting of an export price are as follows:

1. Environmental Factors
Basic factors that influence the setting of an export price are as follows:

2. Market Factors
Basic factors that influence the setting of an export price are as follows:

3. Company Internal Factors

Pricing Approaches
 There are many pricing approaches that a firm could
use, ranging from cost-plus pricing to penetration
pricing.

 Actual pricing methods are usually cost, market, or

competition oriented approaches.
Cost-Plus Pricing
 The traditional method of price calculation is the “cost-
plus” approach.

 In this method, the cost structure determines the firm’s

pricing structure and its profitability.
 In international pricing, the same cost factors apply as
in the domestic market; but the price calculation will
include the components of the domestic price plus the
additional costs that are specific to export transactions.
 There are basically two ways of calculating this aspect:
the historical accounting cost method and the estimated
future cost method.
 There are additional costs when going abroad,
including transportation, special packaging, freight
and insurance costs, storage costs, local taxes,
intermediary costs, etc. All these sets of factors add up
and lead to price escalation.
Price Escalation
We can identify three main constituents of costs associated with
exporting:

1. Order getting costs

2. Order handling costs (direct to export)

3. Order handling costs (export overhead)

Retrograde Pricing
 Retrograde pricing is
obtained by working
backward from an
established or accepted range
of marketing prices and
simultaneously working
forward from the cost side.
Competitive Pricing

 Whilst costs are important, they should be looked at

alongside the prices of competitive products in the
target markets.
This involves four steps:
i. Estimation of demand schedules.
ii. Estimation of incremental and full manufacturing
and marketing costs to achieve projected sales
volumes.
iii. Selection of price which offers the highest
contribution.
iv. Inclusion of other elements of the marketing mix.
Market Pricing
 For certain products, firms can
charge “what the market can
bear.” If the supplier is one of a
few, despite all the problems
associated with price fixing,
the market may be able to bear
a high price.
Transfer Pricing
 This refers to a multinational firm’s pricing of goods and
services between its headquarters and subsidiaries.
 It is used to transfer funds from one market to another, to
reduce a firm’s tax liabilities, and to circumvent exchange
control regulations.
 Transfer pricing is more appropriate to those organizations
with decentralized profit centers.
 The benefits of transfer pricing for international firms include:

• Lowering duty costs by shipping goods into high-tariff

countries at minimal transfer prices, so that the base duty level
is low.
• Reducing income taxes in high-tax countries by overpricing
goods transferred to units in such countries; profits are
eliminated and shifted to low-tax countries.
• Facilitating dividend repatriation, when this is curtailed by
government policy.
Across national boundaries the system gets complicated by taxes,
joint ventures, attitudes of governments, and so on. There are four
basic approaches to transfer pricing.

1. Transfer at cost
2. Transfer at direct cost plus overheads and margin
3. Transfer at a price derived from end market prices
4. Transfer at “arm’s length”
Dumping Price
 In economics, “dumping” is a kind of predatory pricing,
especially in the context of international trade.

 It occurs when manufacturers export a product to

another country at a price either below the price charged
in its home market or below its cost of production.
 The purpose of this act is sometimes to increase
market share in a foreign market or to drive out
competition.

 Dumping is considered illegal in many countries.

Countertrade
 Countertrade is when a company sells a product in
another country and receives some form of
compensation other than money.
 Various forms of countertrade exist, including
barter, compensation deals, counter-purchase,
product buy-backs, and offsets.
 Countertrade is used in order to gain access to new or
difficult markets; to overcome exchange-rate controls
or lack of hard currency; to overcome low country
creditworthiness; to increase sales volume; and to
generate long-term customer goodwill.
Due to the shortcomings of countertrade, it is important for international
marketers to evaluate the countertrade offer by considering several
questions:
 Is this the only way the order can be secured?
 Can the received goods be sold?
 How can we maximize the cash portion?
 Does the invoiced price incorporate extra transaction costs?
Are there import barriers to the received goods?
 Could there be currency exchange problems if we repatriate
the earnings from sales in a third country?
Currency Devaluation
and Revaluation
 Devaluation is a reduction in value of one currency vis-à-vis other
currencies, while revaluation is an increase in currency value.

 Devaluation makes exports cheaper and imports more expensive,

which in turn increases aggregate demand.

 An increase in aggregate demand leads to demand pull inflation,

while currency devaluation increases inflation because imports
become more expensive, which causes cost push inflation.
Setting Export Prices to
Sell Competitively
Pricing products for export requires several steps, but there are
five main ones:

1. Define Pricing Objectives

2. Analyze the Market Situation

3. Calculate Costs
Cost items in a business are traditionally divided into three
kinds:

i. Fixed costs
ii. Variable Costs
iii. Semi-variable Costs
Formulae for cost calculations, usually expressed in this form:
4. Establish Target Price Structure

5. Present Price Quotations

INTERNATIONAL
CHANNELS OF
DISTRIBUTION
Learning 1. Describe the main channels of distribution used in
Outcomes exporting a product.
2. Identify the criteria for selecting a distribution
At the end of channel in international markets.
the chapter 3. Analyze the factors that need to be considered when
you should be designing marketing channels.
able to…
4. Analyze the role of the distribution system with
respect to international marketing.
5. Explain the steps involved in distribution planning,
and the factors determining the level of distribution
channel in the foreign market.
International Channels of Distribution

Functions of Channel Distribution

Number of Channel Levels
Choice of Channels of Distribution
Areas to Investigate When Making
Decisions on Distribution Channels
International Channels of Distribution

Foreign Country Middleman

Distribution Planning
Determining International Distribution Policy
 Channels of distribution are an integral part of the
marketer’s activities, and as such are very important.

Distribution channels are viewed as conducting four

basic flows: physical flow of goods, flow of ownership
and control, flow of information, and flow of money.
Distribution has two major elements, the physical and the institutional.

Physical Distribution
-consists of activities involved in moving finished
goods from manufacturers to customers.

Institutional Distribution
- involves the choice of agents, distributors, wholesalers,
retailers, direct sales, or sales forces
 Functions of
Channel of Distribution
Channels of distribution perform the following basic functions:

i. Physical distribution
ii. Provide information between sellers and buyers
iii. Promotion
iv. Breaking bulk, creating assortments, and matching
v. Provide technical advice.
Channels of distribution perform the following basic functions:
vi. Contact buyers
vii. Negotiation
viii. Order processing, documentation and billing.
ix. Merchandizing and sales support.
x. Financing, credit, and collection
xi. Risk taking
Number of Channel Levels
Distribution channels can either be direct or indirect.
 The former has no intermediary levels and the
manufacturer sells directly to the consumer, while
the latter contains one or more intermediaries
between the manufacturer and the final consumer.
 Accordingly, three alternatives are available for international
marketers:

I. Using a direct channel.

II. Using an indirect channel.

III. Using a dual distribution system with more than one channel.
 Some objectives of the distribution channel could be:
 to increase the availability of the good or service to
potential customers
 to satisfy customer requirements by providing high levels
of service
 to ensure promotional effort
 to obtain timely and detailed market information
 to increase cost-effectiveness
 to maintain flexibility.
 Choice of
Channels of Distribution
 The choice of international channels of distribution is not
only critical but is also an important part of international
marketing strategies. This is because the alternative
international channels of distribution are many and involve
both domestic and foreign market options.

Channels tend to be longer as the number of customers to be

served increases and the price per unit decreases.
In deciding on the international distribution channel design, the following
aspects have to be considered carefully:

 Market needs and preferences.

 The cost of channel service provision including the
capital or investment cost of developing the channel and
the continuing cost of maintaining it.
 Incentives for channel members and methods of
payment.
 The size and coverage of the end market to be served.
 Product characteristics required, complexity of product,
product range, nature of product, perishability, packaging.
 Middlemen characteristics – whether they will push
products or be passive, their skills.
 Market and channel concentration and organization.
 Legal Requirements.
 Company characteristics: company size, company
objectives.
 Risks involved.
Risks involved.
Competitors’ policies.
Channel availability.
Sales volume.
Degree of control.
 Areas to Investigate
When Making Decisions on
Distribution Channel
 What are the different channels of the product in question?

 How many intermediaries should be used at each stage in a

distribution channel?

 What are the specific tasks and responsibilities to be taken

over by each of the intermediaries involved?
 What are the terms and conditions under which
different intermediaries do business, in these areas:
establishing prices, credit and payment terms,
discount rebates, sales and merchandise services,
guarantees and warranties, and repair and
maintenance?
Distribution Alternatives
A marketer’s options range from assuming the entire distribution
activity to depending on intermediaries for distribution of the
product.

In contrast to domestic marketing, internal marketers must take

into account a number of domestic and foreign market
intermediaries.
Home-country or Domestic middlemen
-are located in the producing firm’s country, providing
marketing channel services from a domestic base.
Export Jobbers

Export Merchants Trading Companies

Foreign-country middlemen
-are based in the foreign country, including
manufacturers’ representatives, foreign distributors, foreign-
country brokers, dealers, import jobbers, wholesalers and
retailers, trading networks, and voluntary chains.
Distribution Planning
 Distribution planning is one of the strategic
marketing functions that enables the company to
integrate its distribution actions into the
marketing plan.
 The steps in distribution planning include:

• Determination of marketing objectives.

• Evaluation of changing conditions from country to country.
• Determination of strategy in each country.
• Determination of the role of the distribution channel
amongst the general marketing mix elements.
 The steps in distribution planning include:

• Determination of distribution policy for each country in

terms of level of distribution to be used (direct or indirect),
types of outlets (full price, service outlets), and number of
outlets (intensive, selective, exclusive).

• Determination of performance standards for all

organization in the distribution chain.
 The steps in distribution planning include:

• Establishment of means of measuring performance.

• Comparison of actual and expected performance

standards.
Determining International
Distribution Policy
Determining the international distribution policy is
a strategic marketing activity which is done on the
basis of the overall marketing objectives.
It entails selecting the level of distribution in which to sell, which means
evaluating these elements:

 Economics of distribution.
 Size of the potential market and the likely sales revenue
and profit volume that can be obtained.
 Intensity of promotional efforts that will be contributed by
the independent actors, as compared to the firm’s own
facilities.
 Political and social factors.