UNIT 4

INTERNATIONAL PRICING
DECISION
BY-PROF.TANVI BAGGA
COST BASED PRICING
Cost-based pricing is price setting based on the actual cost
of producing the product or services, including all aspects
from production to marketing and distribution.
Cost based pricing is one of the pricing methods of determining
the selling price of a product by the company, wherein the price
of a product is determined by adding a profit element
(percentage) in addition to the cost of making the product. It
uses manufacturing costs of the product as its basis for coming
to the final selling price of the product.
Advantages of Cost Based Pricing

• A straightforward and simple strategy

• Ensures that all production and overhead costs are covered before profits are
calculated
• Ensures a steady and consistent rate of profit generation
• To find the maximum possible cost of product manufacturing allowable if the final
selling price is fixed
• To find the price of the customized product which has been produced as per the
specifications of a single buyer
• In cases where the customers have enough knowledge about product costs and
thus have an upper hand
FULL COST PRICING
a pricing strategy in which all relevant
variable costs and a full share of fixed
costs directly attributable to the product
are used in setting its selling price.
MARGINAL COST PRICING
the practice of setting a product's price to cover the variable
expense resulting from producing an additional unit is known as
marginal cost pricing. This pricing policy presupposes charging
only the addition to the total cost of labor and materials. When
sales are low, businesses frequently set prices near to the
marginal costs. For example, a company used to charge $3 for a
cup of coffee. When demand declined, it lowered the price to
$1.25 to cover $1 of raw materials and barista’s labor: it resulted
in $0.25 of pure profit. The reason the coffeeshop would pick this
strategy is because a 25 cent profit from the transaction is better
than no sale at all.
market based pricing
In a market based pricing strategy, the price of the product is based on the
current market price for similar products in the market. Simply, it is the
setting of the price of a product based on the market demand and supply.
It’s also called market oriented pricing.
For instance, if the demand is high, you can increase the price. When the
demand is low, you can offer discounts or incentives to encourage
customers into buying the item.
This is a common case in electronics. Also, when a product is rare, people
are willing to pay higher prices; but when many people have it, the charm of
buying it is gone and that’s when you can consider reducing the price.
Factors affecting pricing decisions
Internal Factors Affecting Pricing Decisions
four internal factors that affect the company’s pricing
are;

1.Company’s Marketing Objectives.

2.Marketing Mix Strategy.
3.Costs.
4. Organizational Considerations.
1) Marketing Objectives - The company must decide on its strategy for the
product before setting the price. The task of pricing becomes fairly direct if the
company has selected its target market and positioning carefully.

The company might have other objectives. The clarity of the objective makes it
easy to set the price. Common objectives sought by marketers are survival,
current profit maximization, market-share leadership, and product-quality
leadership.

These objectives can be stated as under:

1.Survival

2.Current Profit Maximization

3.Market Share Leadership

4.Product-Quality Leadership
2) Marketing Mix Strategy - Price is one of the four marketing mix tools
that a company uses to accomplish its marketing objectives. Price
decisions must be synchronized and coordinated with product design,
distribution, and promotion decisions to constitute a uniform and
effective marketing program.
Decisions made for other marketing-mix variables usually affect pricing
decisions.
Companies often make their pricing decisions first. Then other
marketing-mix decisions are made based on the price they set. Here,
price is a key product positioning factor determining the product’s
market, competition, and design. The desired price determines what
features the product will possess and what production costs it can
afford.
3) Costs
Costs set the lowest level of the price below, which the company can
not charge for its product. The company wants to charge a price that
covers all of its costs for producing, distributing, and selling the
product and brings a good return for its effort and risk.

A company’s costs may play an important role in its pricing strategy.

Companies having lower costs can set lower prices, which generates
greater sales and profits.
4) Organizational Considerations

A company’s management must decide who should be given the responsibility of

setting prices. Companies deal with pricing in several ways.

In small companies, prices usually are set by top management rather than by the
marketing or sales departments.

In contrast, in large companies, pricing typically is handled by divisional or

product line managers. In industrial markets, salespeople may be authorized to
negotiate with customers within certain price ranges.
External Factors Affecting Pricing Decisions

1.Market and Demand.

2.Competition.
3.Other Environmental Elements.
1) The Market and Demand
While cost considerations set the lower limit of
prices, the market demand sets the upper limit. Both
consumer and industrial buyers weight the price of a
product or service against the benefits of having it.

So, before setting prices, the marketer must

appreciate the relationship between price and
demand for its product.
2) Competition Another important external factor affecting the firm’s pricing
decisions is competitors’ costs and prices and probable competitor responses to
its own pricing decisions.
A consumer who is contemplating buying a National micro oven will compare
National’s price and value against the prices and values of micro ovens of Sharp,
Toshiba, Sanyo, and others.
Moreover, a firm’s pricing strategy may affect the nature of the competition it
meets. If national follows a high-price, high-margin strategy, it may invite the
competition.
Reversely, a low-price, low-margin strategy may weaken competitors or eliminate
them from the market.
A firm needs to benchmark its costs against its competitors’ costs to ascertain
whether it operates at a cost advantage or disadvantage. It also should know the
price and quality of each competitor’s offer.
3) Environmental Elements
A firm must also consider other elements of its external environment
while setting the price. A country’s economic milieu can have a strong
impact on the firm’s pricing strategies.

Economic factors such as boom or recession, inflation, and interest rates

influence pricing decisions because they affect both production costs and
consumer perceptions of its price and value.
TERMS OF PAYMENT IN INTERNATIONAL MARKET
1. Cash in Advance Secure ✅
Using the cash-in-advance payment method is the safest for exporters because they get paid before goods are shipped and
ownership changes hands.

Usually, payments are made using wire transfers or credit cards.

This is a highly undesirable option for importers as there's a risk of not receiving the goods, making it infeasible for business cash flow.

Small purchases are often paid for in advance with cash.

Exporters that rely solely on this method of payment cannot remain competitive.

Cash in advance is one of the most commonly used payment methods for international trade. Essentially, it requires the buyer to pay
for goods before they're shipped. This gives importers better control over costs since they have access to the products before they
actually have to make any payments
2. Letter of Credit Safer 🔒

A letter of credit, or documentary credit, is basically a promise by a bank to pay an exporter if all terms of the
contract are executed properly. This is one of the most secure methods of payment.

It is used if the importer has not established credit with the exporter, but the exporter is comfortable with the
importer’s bank.

Here are the general steps in a letter of credit transaction:

1. The contract is negotiated and confirmed.

2. The importer applies for the documentary credit with their bank.
3. The documentary credit is set up by the issuing bank and the exporter and the exporter’s bank (the
collecting bank) are notified by the importer’s bank.
4. The goods are shipped.
5. Documents verifying the shipment and all terms of the sale are provided by the exporter to the exporter’s
bank and the exporter’s bank sends the documents to the importer’s issuing bank.
6. The issuing bank verifies the documents and issues payment to the exporter’s bank.
7. The importer collects the goods
3. Documentary Collection
Documentary collection or draft is a popular payment method among international traders. The payment process
starts when the exporter sends a bill of exchange, also known as a sight draft, to the importer. The sight draft
includes conditions for payment, such as the amount and due date.

The importer may obtain possession of goods if the importer has the shipping documents.

The documents are only released to the buyer after payment has been made
4. Open Account Terms
Risky ⚠

An open account transaction is a sale where the goods are shipped and delivered before payment is due usually
in 30, 60, or 90 days.

Also known as O/A, is an international payment term in which payment for goods is due at a future date according
to an agreement between the buyer and seller.

This is one of the most advantageous options to the importer, but it is a higher-risk option for an exporter.

Foreign buyers often want exporters to offer open accounts because it is much more common in other countries,
and the payment-after-receipt structure is better for the bottom line.
5. Consignment and Trade Finance
Risky ⚠

Consignment is similar to an open account in some ways, but payment is sent to the exporter only after the goods
have been sold by the importer and distributor to the end customer.

The exporter retains ownership of the goods until they are sold.

Exporting on consignment is very risky since the exporter is not guaranteed any payment.

Consignment, however, helps exporters become more competitive because the goods are available for sale
faster.

Selling on consignment reduces the exporter’s costs of storing inventory.

DUMPING
Dumping is a term common in international trade. We can say it is an
unfair strategy by an exporting nation to gain market share in the
importing nation. In dumping, an exporting country reduces the price
of its product to gain market share in the foreign market. The price at
which the country exports are even less than the price they charge for
the same product back home.

For example, a Chinese manufacturer sells a mobile in the U.S. for

$200 but in China for $350. The cost of producing this mobile is $250.
Such a tactic could disrupt the U.S. mobile industry.
Why Dumping?
The following are the reasons why an exporting nation goes for dumping:

● To gain market share in the importing country.

● Destroy the local completion and industry in the importing
country/target country.
● It helps the company to minimize its investment risk by having a large
market share in the importing country.
● Helps an exporting nation to reap the benefits of economies of
large-scale.
● It helps to export country to clear their unsold inventory.
● Eventually, it helps the company to reduce the price in the domestic
market as well as a cost-volume benefit effect.
● It also helps the company to earn various export incentives, recognition,
and cheap funds for exports.
GREY MARKETING
Gray Market is a marketplace with unofficial distribution channels or sellers who
sell goods, securities, or other commodities. It is a market where buyers and
sellers meet as unregulated entities and transact business or information to
benefit from low prices, no or little regulations, or profit through bargains.
Grey marketing channels, also known as parallel marketing channels or gray
market channels, involve the unauthorized or unintended distribution of products
through channels not authorized by the manufacturer or trademark holder. These
channels can arise due to various reasons such as price differentials between
markets, regional restrictions, or excess inventory. Here are the main types of
grey marketing channels:
Gray Market is a middle market that gives access to both
sellers and buyers through unofficial or unauthorized
channels. However, it is not illegal when compared to black
markets. In a black market, transactions are done through
smuggling or escaping the legal systems of a country. In
contrast, business in white markets progresses according
to a jurisdiction’s legal framework.
Suppose a consumer buys a car from a grey market in another country and imports the car with minimal
costs. The consumer imports a gray market vehicle due to the extremely low purchase and shipment cost
when put together and compared with local retailers. However, when it comes to authorized servicing and
repair of the gray market vehicle, the consumer faces problems.

It happens because the company to which the car belongs has not officially authorized the grey market
seller. Thus, the buyer will require legal documentation and licenses from authorized dealers or sellers to
put insurance claims, authorized car services, or meet other legal obligations. Additionally, gray market
vehicle owners find it difficult to purchase suitable car parts.
TYPES OF GREY MARKETING CHANNELS
1. Parallel Imports:Parallel imports occur when products intended for sale in one market are imported and sold in
another market without the authorization of the manufacturer or trademark owner. This often happens when there
are significant price differences between markets, leading to arbitrage opportunities. Parallel imports can involve
genuine products, but they bypass authorized distribution channels and may result in warranty or support issues.

2. Diverted Goods: Diverted goods refer to products that are diverted from their intended distribution channels by
unauthorized resellers or distributors. This can occur when products meant for a specific market or customer
segment are sold to other markets or customer groups without permission. Diverted goods can lead to pricing
inconsistencies, channel conflicts, and brand reputation risks.

3. Grey Market Websites: Grey market websites are online platforms or e-commerce sites that sell products
without the authorization of the manufacturer or brand owner. These websites often offer products at discounted
prices or sell products that are not officially available in certain regions. Grey market websites may source
products from parallel imports, unauthorized distributors, or excess inventory channels.
4. Unauthorized Distributors: Some grey market channels involve unauthorized distributors or wholesalers who acquire
products through unofficial channels and then resell them in markets where they are not authorized to operate. These
distributors may obtain products through various means such as overstock, clearance sales, liquidation auctions, or
unauthorized imports.

5.Backdoor Selling:Backdoor selling occurs when authorized distributors or retailers sell products to unauthorized resellers or
parallel importers who then sell the products through grey market channels. This can happen due to incentives, pricing
pressures, or conflicts of interest within the authorized distribution network. Backdoor selling can undermine pricing policies
and create channel conflicts.

6. Excess Inventory Channels:Excess inventory channels involve the sale of surplus or discontinued products through
channels not authorized by the manufacturer. This can include clearance sales, liquidation auctions, discount stores, or
secondary markets where products are sold at reduced prices. Excess inventory channels can lead to brand dilution and
cannibalization of sales in authorized channels.

7. Cross-Border E-commerce: Cross-border e-commerce platforms may inadvertently become grey market channels when
sellers list and sell products without proper authorization or compliance with regional distribution agreements. This can result in
the sale of counterfeit, refurbished, or unauthorized products, posing risks to brand integrity and consumer tr
THANK YOU