Pricing in International Trade

Export Competitiveness
 Price and nonprice factors:
- Reliability
- Delivery time
- Product reliability
- Product quality
- Design flexibility
- Support services
- Financial services
 Export Pricing Objectives
Market share

Profits

Targeted level of return on investment

 Pricing and Markup Policy
High markups (few competitors,
differentiated products)

Low markups (increased competition)

 Determinants of Export Price
 Internal variables
- Cost of production
- Cost of market research
- Business travel
- Product modification
- Packing
- Consultants
- Freight forwarders
- Level of product differentiation
 Determinants of Export
Prices (cont.)
External variables
- Supply and demand

- Location and environment of foreign

market (host country)

- Home country regulations

 Approaches to Export Pricing
 Cost-based pricing: Export price is based on full
cost and markup or full cost plus a desired amount
of return on investment.

 Marginal pricing: Export price is based on the

variable cost of producing the product.

 Skimming versus penetration pricing: Price

skimming is charging a premium price for a
product; penetration pricing is based on charging
lower prices for exports to increase market share.
 Demand-based pricing: Export price is based on
what the market could bear.

 Competitive pricing: Export prices are based on

competitive pressures in the market.
 Illustrative Example
A US manufacturer exports medical equipment from Miami, Florida to a distrib
in Brazil.
Selling price: $30,000
Terms of sale: Ex-works, Miami, Florida
Payment method: Open account

Table 7.1 Export price calculation

Itemized Cost US dollars
Ex-works price (Miami, Florida) 30,000
Freight to Port Manaus, Brazil 2500
Insurance 750
CIF price 33,250
Landing Charges
Import duty (25% of CIF) 8312.5
Marine tax (20% ocean freight) 500
Warehousing tax (0.65% of CIF) 216.13
Terminal handling charge ($350 per container) 350
Custom broker's union fee ($140.00) 140
Custom brokerage fee ($750) 750
Bank costs (2% ex works price) 600
Total landing charges 10868.63
Landed cost at port manaus (with out local taxes) 44,118.63
Cost to Brazilian distributor 44,118.63
Distributor mark-up (50%) 22,059.32
Cost to retailer 66,177.95
Retailer mark-up (60%) 39,706.77
Price to brazilian consumer before local taxes 105,884.72
Local taxes (manufactures tax and local state tax: $6500) 6,500.00
Price to brazilian consumer after taxes 112,384.72
 Achieving Competitiveness: Long term Vs
short term
 Long-term: Free trade agreements, FDI,

licensing
 Short-term: shorten the channel or export

through an overseas representative; product

differentiation
 Rules for any mode of transport: Ex-works,
FCA (free carrier), CPT (carriage paid to), CIP
(carriage and insurance paid to), DAT
(delivered at terminal), DAP (delivered at
place), DDP (delivery duty paid).
 Rules for sea and inland waterway transport:
FAS (free alongside ship), FOB (free on
board), CIF (cost, insurance and freight),
CFR (cost and freight).
 Trade Terms, Incoterms 2010
Group E
- Ex-works: Buyer or agent must collect the goods at
the seller’s works or warehouse.

Group F
- Free carrier (FCA): Place of delivery could be the
carrier’s cargo terminal (seller not obligated to
unload) or a vehicle sent to pick up the goods at the
seller’s premises (seller required to load the goods
on the vehicle).
- Free alongside ship (FAS): Requires the seller to
deliver goods to a named port alongside a vessel to be
designated by the buyer. Seller’s responsibilities end
upon delivery alongside the vessel.

- Free on board (FOB): Seller is obliged to deliver the

goods on board a vessel to be designated by the
buyer.
 Terms of Sale (cont.)
Group C

- Cost, insurance, freight (CIF): This term requires

the seller to arrange for carriage by sea and pay
freight and insurance to a port of destination.

- Cost and freight (CFR): It is similar to CIF term

except that the seller is not obligated to arrange and
pay for insurance.
- Carriage paid to (CPT) (named place of
destination): Seller delivers goods to carrier
nominated by him and pays for cost of carriage
necessary to deliver the goods to destination. It may
be used for any mode of transportation.

- Carriage and insurance paid (CIP) (named place of

destination): It is similar to CPT term except that
the seller is required to arrange and pay for
insurance. Maybe used for any mode of transport.
 Terms of Sale (cont.)
Group D

- Delivered at Terminal (DAT): Seller delivers and

unloads the goods at agreed destination, place,
quay, container yard or cargo terminal.

- Delivered at Place (DAP): Seller delivers at an

agreed place still loaded but ready for unloading at
an agreed destination in buyer’s country.
- Delivered duty paid (DDP): Seller delivers at an
agreed place still loaded but ready for unloading at an
agreed destination in buyer’s country. Seller bears all
costs and risks to bring the goods including duties
and taxes for importation.