Chapter 15: Pricing Decisions and Terms of Doing Business

15.1 Introduction
Pricing is a crucial element of the marketing mix, directly impacting revenue and profitability.
Unlike other elements, pricing can be adjusted quickly without significant costs. However,
constant price changes should be avoided, as they may not be the best solution to business
challenges.

15.2 International vs. Domestic Pricing Strategies

Domestic pricing is often a straightforward process of covering costs and adding a profit margin.
In contrast, international pricing is more complex due to factors like exchange rate fluctuations,
inflation, and alternative payment methods. Pricing decisions also need to balance centralized
control and local market influences.

15.3 Factors Influencing International Pricing Decisions

1.​ Firm-Level Factors
○​ A company’s philosophy, policies, and market strategies impact pricing decisions.
○​ Japanese firms often focus on long-term market share over short-term profits.
○​ A product’s country of origin can influence consumers' willingness to pay
premium prices.
○​ Foreign market entry mode affects pricing control.
2.​ Product Factors
○​ Unique features, substitutes, and product adaptation costs influence pricing.
○​ Distribution costs add to price escalation, increasing the final price for
consumers.
○​ Strategies to counter price escalation include optimizing distribution, lowering
export prices, local production, and negotiating lower intermediary margins.
3.​ Environmental Factors
○​ Government regulations, tariffs, and import controls affect pricing.
○​ Exchange rate fluctuations impact profitability.
4.​ Market Factors
○​ Purchasing power, competition, and market structure (e.g., monopoly, oligopoly)
determine pricing strategies.
○​ Price sensitivity is lower when products are distinctive, difficult to compare, or
represent a small portion of customer expenses.
15.4 International Pricing Strategies
1.​ Skimming
○​ Charges a high price initially to maximize short-term profits from premium market
segments.
○​ Works well with unique, high-quality products that justify a high price.
○​ Risks: small market share, high costs for marketing and service, and potential for
grey market imports.
2.​ Market Pricing
○​ Prices are based on competitors' rates in the target market.
○​ Requires knowledge of product costs and market conditions.
○​ Uses a "retrograde calculation" to determine whether the pricing can be
profitable.
3.​ Penetration Pricing
○​ Sets low prices to enter the market, attract customers, and gain market share.
○​ Relies on cost reductions through economies of scale.
○​ Risks: competitors may also lower prices, and extremely low prices may damage
perceived quality.
4.​ Price Changes
○​ Adjustments may be necessary due to new product launches, market conditions,
or currency fluctuations.
○​ A price decrease requires a significant increase in sales volume to maintain
profitability.
○​ Timing of price changes can impact customer perception (e.g., delaying price
increases can enhance brand loyalty).
5.​ Experience Curve Pricing
○​ Prices decrease over time due to increased competition and reduced
differentiation.
○​ The experience curve (from BCG) shows that unit costs drop by about 30%
with each doubling of cumulative production.
○​ Initially, profits rise as prices decline slower than costs.
○​ Eventually, price wars may begin, leading to a shake-out where inefficient
producers exit.
6.​ Product Line Pricing
○​ Pricing different products in a line to signal value differences (e.g., economy,
standard, premium).
○​ Some products may be priced lower to attract customers (loss leaders).
 ○​ Buy-in/Follow-on Strategy: Selling a core product cheaply but charging more
for follow-ons (e.g., razors and blades, cameras and film).
○​ Price Bundling: Offering multiple products at a single price (e.g., software +
hardware).
7.​ Product-Service Bundle Pricing
○​ Product Pull-Through Strategy: Services are priced to enhance product sales.
○​ Service-Oriented Growth Strategy: Services are priced for profitability rather
than product support.
○​ Pricing varies based on scale (volume discounts) vs. skill (value-based
pricing).
→ International Pricing Strategies:
●​ Price Standardization: Setting a fixed global price.
○​ Ensures consistency but ignores local conditions.
○​ Suitable for multinational customers who demand uniform pricing.
●​ Price Differentiation: Adapting pricing based on local market conditions.
○​ Maximizes local profitability but risks parallel importing (grey markets).

15.5 Implications of the Internet for Pricing Across Borders

1.​ Global Online Retail Growth
○​ By 2013, 35% of the world's population had internet access, and by 2015, global
online retail sales were projected to reach $940 billion.
○​ Prices for pure online sellers are generally more consistent than those of
dual-channel retailers.
2.​ Reduction of Asymmetric Information & Customer Loyalty
○​ Online search engines and demand aggregation sites reduce price asymmetry
and increase buyers' influence over pricing.
○​ While online shopping allows easy price comparison, consumers are not always
price-sensitive.
○​ Factors like customer support, delivery, and ease of ordering impact purchasing
decisions.
○​ Example: Despite higher prices, Amazon retains loyal customers due to its
reputation and service.
3.​ Dual-Channel Pricing (Click-and-Mortar Model)
○​ A hybrid approach, combining physical stores and online channels, is the most
effective business model.
 ○​ Physical stores offer personalized service, while online stores provide
convenience.
○​ Pricing challenges in dual-channel strategies include channel conflict and
cannibalization, which can be managed through:
■​ Offering different products in different channels.
■​ Keeping prices consistent across channels.
■​ Using price discrimination strategies (e.g., banks offering better rates for
online transactions).
4.​ Dynamic & Time-Based Pricing
○​ The internet enables real-time price adjustments based on demand and customer
behavior.
○​ Example: Airlines frequently adjust ticket prices multiple times per day.
5.​ Online Pricing Mechanisms
○​ Fixed pricing: A set price with no negotiation.
○​ Negotiated pricing: Buyers and sellers negotiate, including co-buying strategies
for discounts.
○​ Auction pricing:
■​ Traditional auctions: Buyers bid for a product.
■​ Reverse auctions: Buyers set a price, and sellers decide whether to
accept (e.g., Priceline’s "Name Your Price").
○​ Many businesses combine these models to maximize flexibility and
competitiveness.

15.6 Terms of Sale and Delivery

●​ Price Quotations: Specify the product, price, delivery location, shipment time, and
payment terms, outlining buyer and seller responsibilities.
●​ Incoterms: Standardized international trade terms by the ICC, clarifying obligations and
risk transfers in transactions.
●​ Incoterms 2010: Defines 11 terms, replacing some from the 2000 version. Key terms
include:
○​ EXW (Ex-Works): Seller’s responsibility ends at their location; the buyer handles
transport.
○​ FAS (Free Alongside Ship): Seller delivers to the port but not onto the vessel;
buyer covers loading costs.
○​ FOB (Free on Board): Seller’s responsibility ends once goods are on board the
ship.
 ○​ CFR (Cost and Freight): Seller covers transport but not insurance.
○​ CIF (Cost, Insurance, and Freight): Similar to CFR, but the seller also provides
insurance.
○​ DAT (Delivered at Terminal): Seller arranges transport and unloads at a named
terminal; buyer handles import duties.
○​ DDP (Delivered Duty Paid): Seller covers all costs, including transport, duties,
and inland delivery.
●​ Buyer and Seller Preferences:
○​ Sellers favor EXW (minimum liability).
○​ Buyers prefer DDP (seller bears all costs) or CIF (responsibility starts when
goods reach the buyer’s country).

15.7 Terms of Payment

●​ Factors Affecting Payment Terms: Industry practices, competitor terms, and relative
bargaining power of parties.
●​ Payment Methods: Arranged by level of risk and favorability to exporters.
1.​ Cash in Advance: Exporter receives payment before shipment (low risk for
seller, high risk for buyer).
2.​ Letter of Credit (L/C): A bank guarantees payment upon presentation of
required documents.
■​ Revocable L/C: Can be canceled anytime (rare).
■​ Irrevocable but Unconfirmed L/C: Guaranteed by the issuing bank, but
no confirmation from another bank.
■​ Confirmed Irrevocable L/C: Another bank guarantees payment,
reducing exporter risk.
3.​ Documents Against Payment (Sight Draft): Buyer pays before receiving
shipping documents.
4.​ Documents Against Acceptance (Time Draft): Buyer accepts payment
obligation for a future date.

15.8 Export Financing

Exporters need financing for working capital and to accommodate deferred payments by
importers. The main sources of export finance include commercial banks, government
programs, export credit insurance, factoring, forfeiting, bonding, leasing, and counter-trade.
●​ Commercial Banks: Overdraft facilities help exporters fund purchasing, manufacturing,
shipping, and credit. Banks are more likely to grant overdrafts if the exporter has export
credit insurance.
●​ Export Credit Insurance: Protects against political risks (e.g., currency
non-convertibility) and commercial risks (e.g., buyer non-payment). It enables exporters
to offer flexible credit terms and secure financing.
●​ Factoring: Selling export debts for immediate cash, transferring collection risks to
specialized firms. Factors charge service fees (0.75–2.5%) and usually do not purchase
debts exceeding 120 days.
●​ Forfeiting: Medium-term (1–7 years) finance for capital goods exports, allowing
immediate cash while the buyer pays in installments.
●​ Bonding: A guarantee issued by a third party (bank/insurance) to ensure exporter
compliance, indemnifying buyers if obligations are not met.
●​ Leasing: Exporters can facilitate cross-border leases or obtain local leasing facilities for
capital equipment sales, ensuring prompt payment.
●​ Counter-Trade: Involves reciprocal purchasing obligations, often due to foreign
exchange shortages. Types include:
○​ Barter: Direct exchange of goods without money.
○​ Compensation Deals: Part-payment in cash, with the remainder in goods
purchased by the exporter.
○​ Buy-Back Agreements: Long-term (5–10 years) contracts where the exporter
finances the sale of equipment and purchases the buyer’s production output.
Chapter 18: Pricing for International Markets

1.​ Global Perspective: The Price War

The price competition between Procter & Gamble (P&G) and Kimberly-Clark in Brazil's diaper
market illustrates how pricing strategies shape international markets. P&G introduced Pampers
Uni, a cheaper diaper, making disposables affordable for middle-class Brazilians.
Kimberly-Clark countered with Huggies and later partnered with local brands to increase its
market share. The intense competition led to price cuts, new product variations, and
increased consumer demand.
2. Pricing Policy
2.1. Pricing Objectives
Companies use pricing to achieve different objectives:
●​ Profit Maximization: Setting prices for maximum returns.
●​ Market Share Growth: Using lower prices to expand market reach.
●​ Competitive Positioning: Adjusting prices to compete with rivals.
2.2. Parallel Imports
●​ Parallel imports (gray markets) occur when price differences across countries lead to
unauthorized reselling.
●​ Example: Apple’s iPhone in China was available in gray markets before its official
release.
●​ Solutions include distribution control and legal enforcement.

3. Approaches to International Pricing

3.1. Full-Cost vs. Variable-Cost Pricing
●​ Full-Cost Pricing: Prices include both fixed and variable costs, ensuring profitability on
every unit sold.
●​ Variable-Cost Pricing: Focuses only on covering variable costs, allowing competitive
pricing for international expansion.
3.2. Skimming vs. Penetration Pricing
●​ Skimming Pricing: Setting high prices to target premium customers before competitors
enter the market.
●​ Penetration Pricing: Using low prices to gain market share and attract price-sensitive
consumers.

4. Price Escalation
Causes of Price Escalation
●​ Costs of Exporting: Shipping, insurance, and administrative fees increase product
prices abroad.
●​ Taxes, Tariffs, and Administrative Costs: Import duties raise final product costs.
●​ Inflation and Deflation: Currency fluctuations affect consumer purchasing power.
●​ Exchange Rate Fluctuations: Sudden shifts in currency values impact pricing stability.
●​ Varying Currency Values: A weak currency makes exports more affordable, while a
strong currency reduces competitiveness.
●​ Middleman and Transportation Costs: Additional layers in the distribution chain
increase product prices.

5. Sample Effects of Price Escalation

●​ A product priced at $10 domestically may cost $22.66 abroad due to added costs like
tariffs and middleman markups.
●​ Example: Pacemakers cost $2,100 in the U.S. but exceed $4,000 in Japan due to
distribution expenses.

6. Approaches to Reducing Price Escalation

6.1. Lowering Cost of Goods
●​ Manufacturing in low-cost countries (e.g., China, Mexico).
●​ Simplifying product features to reduce production costs.
●​ Example: Microwave production costs were lower in Korea than in the U.S. due to
cheaper labor.
6.2. Lowering Tariffs
●​ Reclassifying products into lower-tax categories.
●​ Example: Toy manufacturers argued that Marvel action figures were "toys" rather
than "dolls" to avoid higher tariffs.
6.3. Lowering Distribution Costs
●​ Reducing middlemen in the supply chain to minimize markups.
●​ Using Foreign Trade Zones (FTZs) to defer or eliminate import duties.
6.4. Dumping
●​ Definition: Selling a product in a foreign market at a price lower than its domestic cost.
●​ Risks: May lead to anti-dumping tariffs and trade restrictions.

7. Leasing in International Markets

●​ Leasing makes expensive products more accessible to consumers and businesses.
 ●​ Example: Industrial equipment and technology are often leased to foreign buyers rather
than sold outright.

8. Countertrade as a Pricing Tool

●​ Definition: Exchanging goods/services instead of money.
●​ Common in markets with currency restrictions.
●​ Forms of Countertrade:
○​ Barter – Direct exchange of goods.
○​ Buyback – Exporters repurchase their goods after a certain period.
○​ Offset Trade – Agreements where exporters invest in the importing country.
8.1. Problems of Countertrading
●​ Complex negotiations and valuation challenges make countertrading difficult.
●​ Limited resale options for bartered goods.

8.2. The Internet and Countertrading

●​ E-commerce has changed international transactions, reducing the need for
countertrade in some markets.
●​ Online payment platforms provide faster and more secure global transactions.

9. Price Quotations and Payment in Foreign Transactions

Mechanics of Price Quotations
●​ Price quotations must consider:
○​ Base price
○​ Taxes
○​ Shipping and insurance costs
○​ Exchange rate fluctuations
10. Administered Pricing
●​ Definition: When governments, cartels, or organizations control prices instead of
letting the market determine them.
●​ Types of Administered Pricing:
○​ Government Price Controls – Setting max/min prices (e.g., drug price caps in
Europe).
○​ Cartels – Groups that coordinate pricing (e.g., OPEC oil pricing).
○​ International Agreements – Trade pacts that influence pricing.
 ○​ Company Pricing Policies – Global brands setting uniform prices across
markets.
Example: Pharmaceutical Industry
●​ Italy, Spain, and Greece regulate drug prices, causing parallel imports.
●​ Pharmaceutical firms restrict supply to prevent price discrepancies across
markets.
11. Getting Paid: Foreign Commercial Transactions
11.1. Letters of Credit
●​ A bank guarantees payment on behalf of the buyer.
●​ Reduces risks for both parties in international trade.
11.2. Bills of Exchange
●​ A formal written order for payment at a future date.
●​ Often used in long-term international contracts.
11.3. Cash in Advance
●​ Buyer pays before receiving goods, ensuring no risk for the seller.
●​ Used in high-risk transactions or new business relationships.
11.4. Open Accounts
●​ Seller ships goods and allows payment later.
●​ Common in long-term partnerships between exporters and distributors.
11.5. Forfaiting
●​ Definition: Selling accounts receivable (unpaid invoices) to a third party (forfaiter) for
cash.
●​ Used in high-value transactions like machinery and industrial equipment sales.
●​ Benefits:
○​ Eliminates risk of non-payment.
○​ Provides immediate cash flow.