CHAPTER SIX

PRICING IN INTERNATIONAL MARKETING

Simply, price is the amount of money and/or other items with utility needed to acquire a product.

Utility is an attribute that has the potential to satisfy wants. Price is significant to the economy, to

an individual firm and in the consumer's mind.

6.1. Pricing Objectives

In general, price decisions are viewed two ways: pricing as an active instrument of accomplishing

marketing objectives, or pricing as a static element in a business decision. If prices are viewed as

an active instrument, the company sets prices (rather than following market prices) to achieve

specific objectives, whether targeted returns on profit, targeted sales volumes, or some other

specific goals. The company that follows the second approach, pricing as a static element,

probably exports only excess inventory, places a low priority on foreign business, and views its

export sales as passive contributions to sales volume.

The objectives of pricing strategies include: gaining market share, achieving financial

performance, (re)positioning the product, stimulating demand, and/or influencing competition.

6.2. Determination of International Price

A number of variables influence the level of export prices. Some of these are internal to the firm;

others are factors that are external to the firm. A major internal variable is the cost that is to be

included in the export price. The typical costs associated with exports include market research,

credit checks, business travel, product modification, special packaging, consultants, freight

forwarders, and commissions (Anonymous, 1993). An additional cost is the chosen system of

distribution. The long distribution channels in many countries are often responsible for price

escalation. The use of manufacturers’ representatives offers greater price control to the exporter.

Another internal variable is the degree of product differentiation, that is, the extent of a product’s

perceived uniqueness or continuance of service. Generally, the higher the product differentiation a

firm enjoys, the more independent it can be in its price-setting activities.

The external forces that influence export pricing include the following:

♣ Supply and demand

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The pricing decisions for exports are subject to the influence of the supply of raw materials, parts,

and other inputs. In a competitive economy, any increase in demand is followed by a higher price,

and the higher price should, in turn, moderate demand. It is often stated that exports of

manufactured goods exhibit the same price characteristic as primary products, their prices varying

with the state of world demand and supply (Silberston, 1970). The classical supply and- demand

approach—whereby price acts as an allocating device in the economy and supply equals demand

at an equilibrium price—is largely based on certain assumptions: perfect buyer information,

substitutability of competing goods, and marginal cost pricing. The classical assumption that

reducing prices increases demand ignores the interpretation of price changes by buyers. Studies

have shown that consumers perceive price as an indicator of quality and may interpret lower

product prices as a sign of poor quality (Piercy, 1982). If a product has a prestigious image, price

can be increased without necessarily reducing demand.

♣ Location and environment of the foreign market

Climatic conditions often require product modification in different markets, and this is reflected

in the price of the export product. Goods that deteriorate in high-humidity conditions require

special, more expensive packaging. For example, engines that are to be exported to countries in

the tropics require extra cooling capacity.

♣ Economic policies such as exchange rates, price controls, and tariffs also influence export

pricing

Exchange rate depreciation (a drop in the value of a currency) improves price competitiveness,

thus leading to increased export volumes and market shares.

♣ Government regulations in the home country

Different regulations in the home country have a bearing on export pricing. For example, U.S.

government action to reduce the impact of its antitrust laws on competition abroad has enhanced

the price competitiveness of American companies.

6.3. Delivery Terms and Price Quotations

6.3.1. Delivery Terms /Terms of Sale

A number of terms covering the condition of the delivery are commonly used in international

trade. The internationally accepted terms of trade are known as INCOTERMS

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(INTERNATIONAL COMMERCIAL TRADE TERMS). Every commercial transaction is

based on a contract of sale, and the trade terms used in that contract have the important function

of naming the exact point at which the ownership of merchandise is transferred from the seller to

the buyer. 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.

The export price quotations can be made with reference to the above terms. The common terms in

use are:

Group E Departure EXW Ex-Works

Group F Main carriage unpaid FCA Free Carrier
FAS Free Alongside Ship
FOB Free On Board
Group C Main carriage paid CFR Cost and Freight
CIF Cost, Insurance and Freight
CPT Carriage Paid To
CIP Carriage and Insurance Paid To
Group D Arrival DAF Delivered At Frontier
DES Delivered Ex-Ship
DEQ Delivered Ex-Quay
DDU Delivered Duty Unpaid
DDP Delivered Duty Paid
At one extreme, the EXW term imposes the minimum responsibility on the seller and a
corresponding maximum liability on the buyer (the seller’s delivery obligations are ended when
he/she makes the goods available to the buyer at his/her premises). At the other extreme the D
terms impose the maximum obligation on the seller with a corresponding diminution of
responsibility on the part of the buyer, because these terms oblige the seller to deliver the goods to
an agreed destination in the buyer’s country. (The term which is most onerous of all where the
seller is concerned is the DDP term.) The intermediate terms in categories F and C impose
intermediate levels of obligation on each party; C is more onerous where the seller is concerned
than is F.
♪ Ex-Works or Ex – Named Point of Origin
‘Ex-works’ means that the seller fulfils his/her obligation to deliver when he/she has made the
goods available at his/her premises (i.e. works, factory, warehouse, etc.) to the buyer. In
particular, he/she is not responsible for loading the goods on the vehicle provided by the buyer or

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for clearing the goods for export, unless otherwise agreed. The buyer bears all costs and risks
involved in taking the goods from the seller’s premises to the desired destination. This term thus
represents the minimum obligation for the seller. This term should not be used when the buyer
cannot carry out directly or indirectly the export formalities. In such circumstances, the FCA term
should be used.
♪ Free Carrier (FCA)
FCA requires that the seller deliver the goods to the carrier nominated by the buyer, at the
specified place, after having cleared them for export. Once delivery has been effected, the seller
has fulfilled his/her delivery obligations. The term is suitable for all forms of transport and for
multi-modal operations.
♪ Free Alongside Ship (FAS) (…Named Port of Shipment)
‘Free alongside ship’ means that the seller fulfils his/her obligation to deliver when the goods
have been placed alongside the vessel on the quay or in lighters at the named port of shipment.
This means that the buyer has to bear all costs and risks of loss of or damage to the goods from
that moment. The FAS term requires the buyer to clear the goods for export. It should not be used
when the buyer cannot carry out directly or indirectly the export formalities. This term can only
be used for sea or inland waterway transport.
♪ Free On Board (FOB) (…Named Port of Shipment)
‘Free on board’ means that the seller fulfils his/her obligation to deliver when the goods have
passed over the ship’s rail at the named port of shipment. This means that the buyer has to bear all
costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller
to clear the goods for export. This term can only be used for sea or inland waterway transport.
When the ship’s rail serves no practical purpose, such as in the case of roll-on/roll-off or container
traffic, the FCA term is more appropriate to use.
♪ Cost, Insurance and Freight (CIF) (…Named Port of Destination)
‘Cost, insurance and freight’ means that the seller has the same obligations as under CFR but with
the addition that he has to procure marine insurance against the buyer’s risk of loss of or damage
to the goods during the carriage. The seller contracts for insurance and pays the insurance
premium. The buyer should note that under the CIF term the seller is only required to obtain
insurance on minimum coverage. The CIF term requires the seller to clear the goods for export.
This term can only be used for sea and inland waterway transport. When the ship’s rail serves no
practical purposes such as in the case of roll-on/roll-off or container traffic, the CIP term is more
appropriate to use.
♪ Carriage Paid To (CPT)
The carriage paid to (CPT) term requires the seller to organize and pay for carriage to the agreed
destination named in the contract; to deliver the goods to the carrier (or first carrier, if there is

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more than one); and to obtain export clearance. The risks and costs divide at the point of delivery
to the carrier.
♪ Carriage and Insurance Paid To (CIP) (…Named Place of Destination)
‘Carriage and insurance paid to…’ means that the seller has the same obligations as under CPT
but with the addition that the seller has to procure cargo insurance against the buyer’s risk of loss
of or damage to the goods during the carriage. The seller contracts for insurance and pays the
Insurance premium.
♪ Delivered At Frontier (DAF) (…Named Place)
‘Delivered at frontier’ means that the seller fulfils his/her obligation to deliver when the goods
have been made available, cleared for export, at the named point and place at the frontier, but
before the customs border of the adjoining country. The term ‘frontier’, may be used for any
frontier including that of the country of export. Therefore, it is of vital importance that the frontier
in question be defined precisely by always naming the point and place in the term. The term is
primarily intended to be used when goods are to be carried by rail or road, but it may be used for
any mode of transport.
♪ Delivered Ex-Ship or DES (…Named Port of Destination)
Delivered ex-ship (DES) is confined to contracts involving carriage by sea or inland waterway. It
requires the seller to deliver the goods to the agreed port (which usually will be in the buyer’s
country). The goods are to be placed by the seller at the disposal of the buyer (on the ship). The
seller completes his/her delivery obligation at the port; thus, he/she must contract for (main)
carriage. He/she must also clear the goods for export; but the buyer has responsibility for import
clearance. The DES term places the seller at risk during the voyage (unlike the C class terms, such
as CIF, where delivery is earlier).
♪ Delivered Ex-Quay (Duty Paid)/ (DEQ) (…Named Port of Destination)
The delivered ex-quay (duty paid) is only for use where the main carriage is to be by ship or
inland waterway. DEQ parallels DES (which has just been reviewed) but it has two points of
distinction—it imposes additional obligations upon the seller, i.e.:
[Link] seller must make the goods available on the quay (or wharf) at the named port of
destination (i.e. he must unload from the ship); and
b. The seller must organize and pay for import clearance. The buyer’s obligation to take delivery
arises when the goods are duly delivered on the quay.
♪ Delivered Duty Unpaid (DDU) (…Named Place of Destination)
‘Delivered duty unpaid’ means that the seller fulfils his/her obligation to deliver when the goods
have been made available at the named place in the country of importation. The seller has to bear
the costs and risks involved in bringing the goods thereto (excluding duties, taxes and other
official charges payable upon importation) as well as the costs and risks of carrying out customs

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formalities. The buyer has to pay any additional costs and to bear any risks caused by his/her
failure to clear the goods for import in time.
♪ Delivered Duty Paid (DDP) (…Named Place of Destination)
DDP is, from the seller’s viewpoint, the most demanding of all of the Incoterms. The DDP term is
identical to DDU with one exception: the seller must, additionally, procure import clearance and
pay for it (the corollary is that this obligation has been dropped from the buyer’s obligations). The
term is apt if the seller can readily obtain import clearance; otherwise, if the buyer can more
readily effect this, the DDU should be used. Also, DDU may be preferred if clearing the goods for
import involves the payment of a VAT or equivalent tax which can only be deducted for tax
purposes by a resident of the country of importation.
The seller’s DDP obligations then, broadly, are to deliver the goods at the point specified in the
named place of destination in the import country. He/she must arrange both export and import
clearance and pay for these, and likewise organize and pay for the fulfilment of any customs
formalities where carriage is to be through a third country or countries. He/she has to organize
and pay for main carriage. He/she is at risk until the goods are delivered, and must bear the costs
until this point. The buyer’s main obligations are to pay the contract price and to take delivery.

6.3.2. 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.

1. Proforma Invoice: An exporter prepares this after he receives an order from an importer. It is a

standardized 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.

2. 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.

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3. 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.

4. 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.

6.4. International Pricing Policies and Strategies

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. 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.

1. Market Penetration Strategy

Under this strategy, exporters offer a very low introductory price to speed up their sales and,

therefore, to widen their market base. It aims at capturing the products in the market especially if

the quality of the product is proved with its wide acceptance.

2. 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.

3. 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

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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.

4. 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.

5. Standard Worldwide Price

The standard worldwide price may be the same price regardless of the buyer (if foreign product

or foreign marketing costs are negligible) or may be based on average unit costs of fixed,

variable, and export-related costs.

6. Dual Pricing (Cost-Plus Method and Marginal Cost Method)

In dual pricing, domestic and export prices are differentiated, and two approaches, to pricing

export products are available: the cost-plus method and the marginal cost method. The cost-plus

strategy is the true cost, fully allocating domestic and foreign costs to the product. Firms

following this strategy insist that no unit of a similar product is different from any other unit in

terms of cost and that each unit bears its full share of the total fixed and variable cost. Although

this type of pricing ensures margins, the final price may be so high that the firm’s competitiveness

may be compromised.

The marginal cost method considers the direct costs of producing and selling products for

export as the floor beneath which prices cannot be set. Fixed costs for plants, R & D, and

domestic overhead, as well as domestic marketing costs, are disregarded. In marginal cost pricing

method the firm is concerned only with the marginal or incremental cost of producing goods to be

sold in overseas markets. Such firms regard foreign sales as bonus sales and assume that any

return over their variable cost makes a contribution to net profit.

Firms following marginal cost method may be able to price most competitively in foreign

markets, but because they are selling products abroad at lower net prices than they are selling

them in the domestic market, they may be subject to charges of dumping. In that case, they open

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themselves to antidumping tariffs or penalties that take away from them their competitive

advantage.

7. Market-Differentiated Pricing

It calls for export pricing according to the dynamic conditions of the marketplace. For these firms,

the marginal cost strategy provides a basis, and prices may change frequently due to changes in

competition, exchange rate changes, or other environmental changes.

8. 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, and

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.

6.5. Transfer Pricing

Transactions between unrelated parties and prices charged for goods and services tend to reflect

prevailing competitive conditions. Such market prices cannot be assumed when transactions are

conducted between related parties, such as a group of firms under common control or ownership.

If a parent company sells its output to a foreign marketing subsidiary at a higher price, it moves

overall gains to itself. It if charges a lower price, it will shift more of the overall gains to the

subsidiary. Even though transfer prices do not affect the combined income or absolute amount of

gain or loss among related persons or “controlled group of corporations,” they do shift income

among related parties in order to take advantage of differences in tax rates.

Transfer Pricing Methods

A number of factors are considered in the determination of comparable prices between parties

dealing at arm’s length transactions: contractual terms, such as provisions pertaining to volume of

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sales, warranty, duration or extension of credit, functions performed such as marketing, R & D,

etc., and risks assumed including responsibility for currency fluctuations, credit collection, or

product liability. Other factors include economic market conditions (similarly of geographical

market, competitive conditions in industry and market) as well as nature of property or services

transformed.

In the case of sale of tangible goods between related parties, arm’s length charge is determined by

using the following methods:

♪ The comparable uncontrolled price method: prices on the sale of similar goods to unrelated

parties.

♪ Resale price method: resale price to unrelated parties using gross profit margin.

♪ Cost plus method: cost plus method is used in situations in which products are manufactured

and sold to related parties.

♪ Comparable profits method: this method uses profit level indicators such as rate of return on

operating assets, etc., of uncontrolled parties to adjust profit levels of each group.

♪ Profit split method: allocation of profit between related parties based on the relative value of

the contribution to the profit of each party.

In the performance of services to related parties, the regulations do not require that a profit be

made on the change for services unless the services are an integral part of the business activity of

the providing party, that is, the principle activity of the service provider is that of rendering such

services to related or unrelated parties.

Tax Treaties

Income tax treaties are entered into by countries to reduce the burden of double taxation on the

same activity and to exchange information to prevent tax evasion. Tax treaty partners generally

agree on rules about the types of income that a country can tax and the provision of a tax credit

for any taxes paid to one country against any taxes owed in another country.

6.6. Pricing Under Counter Trade

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

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and benefit the buyer. In short, a good-for-goods deal is counter-trade. Countertrade is an

umbrella term used to describe unconventional trade-financing transactions that involve some

form of non-cash compensation.

Types of Counter-trade

There are several types of counter-trades including barter, counter purchase, compensation trade,

switch trading, and offsets and clearing agreements.

a. Barter

It is the simplest of many types of counter-trades. It is a onetime 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.

b. Counter purchase

It 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, counter purchase

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 non-resultant 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.

c. Compensation trade (Buyback)

A compensation trade (Buyback) requires a company to provide machinery, factories or

technology and to buy products made from this machinery over an agreed on period. Unlike

counter purchase, 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.

d. Switch trading

It 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.

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e. Offset

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.

f. Clearing agreement

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. Therefore, two governments agree to import a set specified

value of goods from one another over a given period. Each party sets up an account that is debited

whenever goods are traded. Imbalances at the end of the contract period are cleared through

payment in hard currency or goods.

Motives behind Countertrade

Companies engage in countertrade for a variety of reasons.

♪ Gain access to new or difficult markets

♪ Overcome exchange rate controls or lack of hard currency

♪ Overcome low country creditworthiness

♪ Increase sales volume

♪ Generate long-term customer goodwill

Shortcomings of Countertrade

 No ‘‘in-house’’ use for goods offered by customers. Exporters often face the problem of what

to do with the goods they are offered. Goods that cannot be used in-house need to be resold.

 Timely and costly negotiations

 Uncertainty and lack of information on future prices

 Transaction costs. Cost of finding buyers for the goods (if there is no in-house use),

commissions to middlemen (if any), insurance costs to cover risk of faulty or non-delivery,

hedging costs to protect against sinking commodity prices.

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