Chapter 18 Flashcards
What are the variables that impact price?
Tariffs
costs
attitudes
competition
currency fluctuations
methods of price quotation
methods of payment
bitcoin and blockchain protocol
Culture’s impact on pricing
In cultures with high power distance, consumers are less price sensitive and rely more on price as a signal of quality
What are the two ways of looking at pricing objectives?
either as an active instrument to complete objectives in the market
or, as a static business element, Views exports as passive contribution to sales volume, and probably only exports excess inventory
Parallel imports / gray markets
firms charge different prices per country
- products sold to developing countries at lower price
- product exported illegally between company and its own subsidiary branches
in the end, a company competes with its own branches
ex: N95 masks
Explain a case of parallel imports:
Pharmaceutical companies face this problem in Italy, Greece, and Spain because of price caps imposed on prescription drugs in those countries. For example, the ulcer drug Losec sells for only $18 in Spain but goes for $39 in Germany
What is exclusive distribution?
Company restricts which retailers can carry product
What is variable-cost pricing?
Pricing concerned only with the marginal or incremental cost of producing goods to be sold in overseas markets
regards foreign sales as bonus sales
Often accused of dumping
Full-cost pricing?
no unit of a similar product is different from any other unit in terms of cost and, and each that each unit must bear its full share of the total fixed and variable cost
essentially, you sell for full price
What are cost and market considerations?
Cannot sell goods below cost of production or above what the market will accept
What is strategic pricing?
- Segmentation from country to country or market to market
- ensuring competitive pricing in the marketplace
- price for stability of operations
- cultural differences in perceptions of pricing
Skimming pricing?
A company uses skimming when the objective is to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for the value received
Used for markets with two income levels: wealthy and poor
May be used for public policy reasons, ex: high prices of alcohol to discourage consumption
Penetration pricing
Deliberately offering products at low prices
competitive maneuver to capture market share fast
What impacts costs of exporting?
shipping and packings costs
insurance
financing costs
tariffs, taxes administrative cost
Exchange rate
How does taxes, tarrifs and admins costs lead to cost escalation?
It costs to obtain export licences, import licenses and other documents
also, physical arrangement for transport costs
Tariffs also protect domestic markets and discriminate foreign goods
Inflation and escalation
Inflation causes higher cost of production and replacement, and companies are forced to increase their price - loss of customers
Prise escalation and deflation
In deflation, generals costs are low in market and supply chains are pressured to lower costs to make sales
Company must raise brand value to win consumer trust
Exchange rate fluctuations
World trade contracts are difficult to write due to the fluctuations, and payment specifications are challenging.
All major currencies are floating freely relative to one another.
Currency devaluation
Governments can intervene to stabilize currency, Mexico knocked off three 0 of their peso in the mid 1990s in response to the decreasing currency value.
Hyperinflation
Zimbabwe, Venezuela
McDonald’s response to the inflation
Offered 30% due to the profit it made of the yen against the US$
Was good for brand image
How does channel diversity impact cost of exporting?
The length of channels used affects the end price of the product in a foreign market, the more intermediaries and middlemen used the higher the price
And the costs of intermediaries vary, so international marketers must rely on experience and research
Explain the Spiral Effect of price escalation
High prices leads to lower sales
Lower sales leads to less turnover for intermediaries
Interm. then insist on higher margins to defray costs
higher pay to interm. leads to company having to increase prices
The price increase knocks low-income consumers out of the market, and the spiral starts again
What are the different approaches to reduce price escalation?
Lowering costs of goods
Lowering tariffs
Lowering distribution goods
Dumping
How to lower costs of goods
One can start manufacturing in a third world country with low labour costs, or eliminate costly product features
How does lowering tariffs work to reduce price escalation?
Make the product fit into a different tariff classification with a lower rate
How does lowering distribution costs help reduce price escalations?
Shorten the channels to keep price in control, so fewer intermediaries
What is dumping?
Selling at price well below the cost of production or selling in foreign market below the price of the same good in the home market
*highly criticized by the WTO
Leasing in international markets
Eases risk of selling new products (or equipment)
More stable revenue than direct sales
Opens door to large segment of market
What is leasing?
Used by industrial exporters. The concept of equipment leasing has become increasingly important as a means of selling capital equipment in overseas markets.
Terms of the leases usually run one to five years, with payments made monthly or annually; included in the rental fee are servicing, repairs, and spare parts
What are the disadvantages of leasing?
Risk of inflation: easy to spiraling inflation
Currency devaluation
Expropriation
Political risks
What is countertrade?
A reciprocal form of international trade in which goods or services are exchanged for other goods or services rather than for hard currency
Pricing tool that international marketers use, also known as a barter
What is the problem with countertrading?
Determining the value and potential demand of goods offered as payment is very challenging
Parties must know the value of both sides of the deal, or the result will be poor for both
What is a barter house?
They specialize in trading goods acquired through countertrading agreements
The internet and countertrading
The internet is an important venue for countertrading
Several barter houses have auction sites
What are necessary components when quoting prices?
Clear description of who is responsible for transportation of goods, including who pays and from which point
Specification of currency to be used, credit terms, and the type of documentation required
Definition of quantity and quality
Administering prices
an attempt to control and establish a price for an entire market
prices may be arranged through the competitors, goal is to reduce impact of price competition
Ex: price of chicken and tuition at Ivy league unis
Cartles
Many companies produce similar products work together to control markets
Usually not long lasting, internal issues and greed destroy the cartels
Difficult from legal viewpoint, laws vary from country to country and is difficult to enforce
Government influenced pricing
Government can:
- establish margins
- set price floors and ceilings
- Compete in the market
-Grant subsidies
- Selling monopoly
Ex: Chinese government controls pricing of gas
Example of cartel
Diamond industry, De Beers
What are the basic arrangements of foreign commercial payments?
- Letter of credit
- Bills of exchange
- Cash in advance
- Open accounts
- Forfaiting
Letters of Credit
The best protection for seller, the buyer’s credit risk shifts to the bank issuing the letter
Buyer cannot alter agreement without permission
Bills of exchange (dollar drafts)
Seller assume all risk until actual dollars are received
Best for the seller
Cash in advance (getting paid)
Not widely used, big burden for the customer
Used when:
- Credit is doubtful
- Exchange restrictions within the country delay the process
Partial payment is advance used when the character of merchandise is such that an incomplete contract would result in a heavy loss
Open accounts (getting paid)
Generally used in foreign trade only with:
- long standing customers with good credit record
- Subsidiary or branch of the exporter
Forfaiting (getting paid)
Occurs when seller cannot offer long-term financing for a cash-short customer
Risky
