Chapter – VII

Pricing and Terms of Payment

•Price is the measure of value of something: an estimate of what
somebody or something is worth
•In any country, three basic factors determine the boundaries within
which market prices should be set:
a) Product cost: which establishes a price floor, or minimum price.
Although it is certainly possible to price a product below the
cost boundary, few firms can afford to do this for extended
periods of time.
b) Competitive prices for comparable products create a price
ceiling, or upper boundary.
c) Differences in transportation charges and tariffs cause the landed
price of goods to vary by country. Differences in distribution
practices also affect the final price the end consumer pays.
Basic International Pricing Concepts:
• As the experience of many companies show, the global manager
must develop pricing systems and pricing policies that address
price floors, price ceilings, and optimum prices in each of the
national markets in which his or her company operates.
• The task of determining prices in global marketing is complicated
by fluctuating exchange rates, which may bear only limited
relationship to underlying costs.
• A firm's pricing system and policies must also be consistent with
other unique global constraints.
• In addition to the diversity of national markets in all three basic
dimensions- cost, competition, and demand-the international
executive is also confronted by conflicting governmental tax
policies and claims as well as various types of price controls.
Environmental Influences on International Pricing Decisions:
a) Currency Fluctuations: Are price adjustments appropriate when
currencies strengthen or weaken? change in currencies' relative
values: changes in the value of a currency in relation to others over a
period of time. There are two extreme positions;
 Fix the price of products in the currency of target country.
 Fix the price of products in home country currency.
• Pricing decisions should be consistent with the company's overall
business and marketing strategy
b) Exchange Rate Clauses: An exchange rate clause allows the buyer and
seller to agree to supply and purchase at fixed prices in each
company's national currency.
• If the exchange rate fluctuates within a specified range, say plus or
minus 5 %, the fluctuations do not affect the pricing agreement that is
spelled out in the exchange rate clause.
c) Pricing in an Inflationary Environment: Inflation requires
periodic price adjustment. These adjustments are necessitated
by rising costs that must be covered by increased selling prices.
d) Government Controls and Subsidies:
 If government action limits the freedom of management to
adjust prices, the maintenance of margins is definitely
compromised.
 In a country that is facing foreign exchange shortage government
officials are under pressure to take some type of action.
 Government control can also take the form of prior cash deposit
requirements imposed on importers.
 Other government requirements that affect the pricing decision
are profit transfer rules that restrict it
e) Competitive Behavior: pricing decisions are bounded by cost, nature of
demand and by competitive action.
f) Price and Quality Relationships: The authors conclude that the lack of a
strong price-quality relationship appears to be an international
phenomenon.
• This is not surprising when one recognizes that consumers make purchase
decisions with limited information and rely more on product appearance
and style and less on technical quality as measured by testing organizations.
g) Global Pricing Policies:
i) Standard Price Policy: An international marketer following a geocentric
approach to international marketing will adopt a standard price policy.
• Firms that adopt this policy are generally of two types: first, firms whose
products or services are highly visible and allow price comparisons to be
readily made. Second, a firm that sells commodity goods in competitive
markets.
ii) Two- Tiered Pricing Policy:
 Firm that follows an ethnocentric approach will use it.
 Firm sets one price for all its domestic sales and a second price for
all its international sales.
 A firm that adopts this policy commonly allocates to domestic sales
all accounting charges associated with research & development,
administrative overheads, capital depreciation, and so on.
iii) Market Pricing Policy: International marketers that follow a
polycentric approach to international marketing use it.
Two conditions must met to successfully practice it:
 The firm must face different demand and / or cost conditions in
which it sells its products.
 Firms most likely to use this approach are those that produce and
market their products in many different countries.
Accompany may follow different pricing strategies:
i) Market Skimming:
 It is a deliberate attempt to reach a market segment that is willing to pay a
premium price for a product.
 Initially setting high price
 It is often used in the introductory phase of the product life cycle, when both
production capacity and competition are limited.
 Its goal is to maximize revenue on limited volume and to match demand to
available supply.
ii) Penetration Pricing:
 Use price as a competitive weapon to gain market position.
 Initially setting low price
 Scale-efficient plants and low-cost labor allow these companies to blitz the
market. It should be noted that a first-time exporter is unlikely to use
penetration pricing.
 The reason is simple: Penetration pricing often means that the product may be
sold at a loss for a certain length of time.
iii) Market Holding: It is frequently adopted by companies that want to
maintain their share of the market. In single-country marketing, this
strategy often involves reacting to price adjustments by competitors.
• If the competitive situation in market countries is price sensitive,
manufacturers must absorb the cost of currency appreciation by accepting
lower margins in order to maintain competitive prices in country markets.
iv) Cost Plus/Price Escalation: Companies new to exporting frequently use a
strategy known as cost -plus pricing to gain a toehold in the global
marketplace. Sum of all direct and indirect manufacturing and overhead
costs. An approach used in recent years is known as the estimated future
cost method.
• Cost-plus pricing requires adding up all the costs required to get the
product to where it must go, plus shipping and ancillary charges, and a
profit percentage.
• Price escalation:- is the increase in a product's price as transportation,
duty, and distributor margins are added to the factory price.
Using Sourcing as a Strategic Pricing Tool against Price Escalation
• Price escalation is the increase in a product's price as transportation, duty, and
distributor margins are added to the factory price. Marketers of domestically
manufactured finished products may be forced to switch to lower-income,
lower-wage countries for the sourcing of certain components or even of
finished goods to keep costs and prices competitive.
A) Dumping
• It is the sale of an imported product at a price lower than that nominally
charged in a domestic market.
Types of dumping
i) Sporadic dumping: occur when a manufacturer with unsold inventories warts to
get rid of distressed and excess merchandise.
• One way to find a solution involves destroying excess supplies, as in the
example of Asian farmers dumping small chickens in the sea or burning them.
Another way to solve the problem is to cut losses by selling for any price that
can be realized.
• The excess supply is dumped abroad in a market where the product is normally
not sold.
ii) Predatory dumping: Selling at a loss to gain access to a market and perhaps
to drive out competition. Once the competition is gone or the market
established, the company uses its monopoly position to increase price.
iii) Persistent dumping: is the most permanent type of dumping, requiring a
consistent selling at lower prices in one market than in others. This
practice may be the result of a firm's recognition that markets are different
in terms of overhead costs and demand characteristics. For example, a firm
may assume that demand abroad is more elastic than it is at home.
 The three kinds of dumping just discussed have one characteristic in
common: each involves charging lower prices abroad than at home.
B) Transfer Pricing
• Transfer pricing refers to the pricing of goods and service bought and sold
by operating units or divisions of a single company. In other words,
transfer pricing concerns intra-corporate exchanges-transactions between
buyers and sellers that have the same corporate parent.
• There are three major alternative approaches to transfer pricing are:
i) Cost-Based Transfer Pricing:
 Because companies define costs differently, some companies using the cost-based
approach may arrive at transfer prices that reflect variable and fixed manufacturing costs
only.
 Alternatively, transfer prices may be based-on full costs, including overhead costs from
marketing, research and development (R&D), and other functional areas.
ii) Market-Based Transfer Price:
• A market based transfer price is derived from the price required to be competitive in the
international market.
• The constraint on this price is cost. However, as noted previously, there is a considerable
degree of variation in how costs are defined.
• Because costs generally decline with volume, a decision must be made regarding whether
to price on the basis of current or planned volume levels.
• To use market-based transfer prices to enter a new market that is too small to support local
manufacturing,
iii) Negotiated Transfer Prices: It allow the organization's affiliates to negotiate transfer prices
among themselves. In some instances, the final transfer price may reflect costs and market
prices, but this is not a requirement. The gold standard of negotiated transfer prices is
known as an arm's-length price: the price that two independent, unrelated entities would
negotiate.
Cartels
• It exists when various companies producing similar products or services work together to
control markets. It may use formal agreements to set prices. They eliminate cutthroat
competition and “rationalize” business, permitting greater technical progress and lower
prices to consumers. Eg. OPEC.
Sale and Forms of Payment in International Marketing
I).Terms of sale (Trade terms )
• Terms differ from country-to-country. International terms indicate how buyers and seller
divide risks and obligations. The most commonly used international trade terms include:
a). CIF- (Cost, insurance, freight) to a named overseas port of import. It is more meaningful to
buyer b/c it includes the costs of goods, insurance and all transportation and miscellaneous
charges to the named place of debarkation.
b). C&F-(cost and Freight) to named overseas port. The price includes cost of goods and
transportation costs to the named place of debarkation. The cost of insurance is borne by
the buyer.
c). FAS- (Free Alongside) at a named port of export. The price includes cost of goods and charges
for delivery of goods alongside the shipping vessel. The buyer is responsible for the cost of
loading on to the vessel, transportation and insurance.
d).Ex (Named Port of origin) the price quoted covers costs only at the point of origin (example ex
factory). All other charges are buyers concern.
II).Forms of payment
The three basic forms of international marketing payment:
a). Letter of credit:
 It is an undertaking by a bank, so the seller can look to the bank for payment
 It shift the buyer’s credit risk to the bank issuing it.
 Seller can draw a draft against the bank issuing it and receive payments by shipping
documents.
 In it, the credit of one or more bank is involved and the seller risk is reduced
considerably
 The Procedure for it begins with completion of the contract when the buyer goes to
a local bank and arranges for the issuance of a letter of credit, the buyer’s bank then
notify its correspondent bank in seller’s country that the letter has been issued.
b). Bills of exchange: - It is defined as an unconditional order in writing, addressed by
one person to another signed by the person giving it requiring the person to whom
it is addressed to pay on demand
• When the customer signs it, it becomes accepted and this means that the customer
has accepted the terms and agreed to pay by the date designated in the document.
• In it the seller assumes all risk until the actual payment is
received. It has one of three time periods- sight, arrival or date.
• A sight draft requires acceptance and payment on presentation
of the draft and often before arrival of the goods.
• An arrival draft requires payment be made on arrival of goods.
• A date draft has an exact date of payment and in no way is
affected by the movement of good.
c) Cash payment in advance: Cash places unpopular burden on the
customer and typically is used where buyer is unknown or
known to be unstable and there is little likelihood of further
orders being requested and being paid for.
• It is also used when exchange restrictions within the country of
destination are such that the return of funds from abroad may
be delayed for an unreasonable period.
 Export Documents and Shipment:
 Principal export documents are as follows: -
i). Export Declaration:
• To maintain a statistical measure of the quantity of goods shipped
abroad and to provide a means of determining whether regulations are
being met.
• Declaration presented at the port of exit includes the names and
addresses of the principals involved, the destination of the goods a full
description of the goods and their declared value.
ii). Bill of Lading: a list of merchandise being transported, especially by
ship, together with the conditions that apply to its transportation.
 It serves the following purposes :
 as a contract for shipment between the carrier and shipper
 as a receipt from the carrier for shipment
 as a certificate of ownership or title to the goods.
iii). Commercial Invoice: Commercial invoice is a bill for good sold stating basic information
about the transaction merchandise description, cost of goods shipper and seller
addresses and delivery and payment terms. It include information such as the origin of
goods, export packing marks
iv). Insurance policy or certificate: It is evidence that insurance has been obtained to cover
stipulated risks, during transit. The risks of shipment due to political or economic unrest
in some countries
v). Export/Import Licenses: In many countries for exporting/importing goods the exporter/
importer require license.
• Export license is a government document that permits the exporter to export. Export
licenses are of two kinds, they are general export license(GEL) and validate export license
(VEL)
• GEL is any export license covering export commodities for which a VEL is not required. It
requires no formal application.
• VEL is a required document issued by the government authorizing the export of specified
commodities. VEL is a special authorization for a specific shipment and it is issued only on
formal application.
vi). Certificate of product origin: Certificate of product origin confirms that the goods being
shipped were produced in the exporting country. The importing country may require this
so that it can assess tariffs and enforce quotas
vii) Inspection(check) Certificates:
 Inspection certificates may be needed to provide
assurance that the products have been inspected and
that they confirm to relevant standards like absence
of disease and pests.
 Buyers of agricultural products, grain, foodstuffs and
live animals frequently require inspection certificates,
before a country allows goods to enter its borders.
 For example imported foodstuffs must often meet
rigorous standards regarding pesticides, cleanliness,
sanitation and storage.
Channel distribution(Place )

INTERNATIONAL CHANNELS OF
DISTRIBUTION
CHANNELS OF DISTRIBUTION
A channel is an institution through which goods and services are marketed. Channels
give place and time utilities to consumers. In order to provide these and other services,
channels charge a margin. The longer the channel the more margins are added.

Direct and Indirect Selling Channels

Indirect selling, also known as the local or domestic channel, is employed when a
manufacturer market its product through another firm that acts as the manufacturer's
sales intermediary
Advantages of indirect domestic channel:
Channel is simple and inexpensive.
The manufacturer incurs-no-start-up cost for the channel
Manufacturer is relieved of the responsibility of physically moving the goods
overseas.

An indirect channel have limitations:

The manufacturer has given up control over the marketing of its product to another
firm.
This situation may adversely affect the product's success in the future.
If the chosen intermediary is not aggressive, the manufacturer may become vulnerable,
Direct selling:
• Is employed when a manufacturer develops an overseas channel.
• Manufacturer deal directly with a foreign party without going through
an intermediary in the home country.
• The manufacturer exports through its own internal export department
One advantage of direct-selling:
 Channel is active market exploiter since the manufacturer is more
directly committed to its foreign markets.
 Greater control.
 The channel improves communication.
Limitations of Direct selling:
• It is a difficult channel to manage if the manufacturer is unfamiliar with
the foreign market.
• Channel is time consuming and expensive.
• Exporters who do not undertake international marketing research have
a tendency to sell directly to their own home country export agent.
Direct Channel:
a) Foreign Distributor:
• A foreign distributor is a foreign firm that has exclusive rights
to carry out distribution for a producer in a foreign country
• Orders must be channeled through the distributor, even when
the distributor chooses to appoint a subagent or sub-
distributor.
• Distributor purchases goods from the producer at a discount
and then resell or distributes the goods to retailers/consumers
• There are a number of benefits in using a foreign distributor.
• Unlike agents, the distributor is a merchant who buys and
maintains merchandise in its own name.
• This arrangement simplifies the credit and payment activities
for the manufacturer.
b)Foreign Retailer: If it is used, the product in question must
be a consumer product rather than an industrial product.
c) State - Controlled Trading Company: For some products,
particularly utility and telecommunication equipment, a
producer must contact and sell to state-controlled
companies.
• Companies that have a complete monopoly in the buying
and selling of goods.
d) End User: Sometimes, a producer is able to sell directly to
foreign end users with no intermediary involved in the
process.
• This direct channel is a logical and natural choice for costly
industrial products.
Indirect Channel : firm does not have to correspond with foreign parties in foreign
countries. Local sales intermediaries, all can be grouped under two broad
categories:
Domestic agent: It never take title of goods, regardless of whether the agents take
possession of the goods or not. It represents the producer. It can bind the producer
in authorized matters to contracts made on the producer's behalf.
Domestic merchants: It own the merchandise, regardless of whether the merchants
take possession or not. The basic difference between the two is title rather than
just the physical possession of the merchandise. Merchant/distributor represents
the manufacturer's product. The merchant has no power to contract on behalf of
the manufacturer
a). Export Broker: bring a buyer and a seller together. Negotiates the best terms for
the seller but cannot conclude the transaction without the principal's approval of
the arrangement. For any action, the broker receives a fee or commission. An
export broker does not take possession or title to the goods. Only make an
arrangement for credit.
b). Manufacturer's Export Agent or Sales Representative: this is an independent
business person who usually retains his or her own identity by not using the
producer's name. Having more freedom that the firm's own salesperson
• Like a broker, the manufacturer's export agent works for
commission.
• Unlike the broker, the relationship with the manufacturer is
continuous and more permanent.
• An export agent may take possession but not title to the goods
and thus assumes no risk-the risk of loss remains with the
manufacturer.
c) Export Management Company (EMC): manages, under contract,
the entire export program of a manufacturer.
• An EMC is also known as a combination export manager (CEM)
because it may function as an export department for several
allied but non-competing manufacturers.
• When compared with export brokers and manufacturers' export
agents, the EMC has greater freedom and considerable authority.
d) Cooperative Exporter: It is a manufacturer with its own export
organization that is retained by other manufacturers to sell in
some or all-foreign markets.
• The usual arrangement is to operate as an export distributor for
other suppliers, sometimes acting as a commission.
• Because the cooperative exporter arranges shipping, it takes
possession of goods but not title.
• A cooperative exporter is often referred to as a "mother hen,"
a "piggyback exporter," or an "export vendor".
E) Webb – Pomerania Association: It is formed when two or more
firms, usually in the same industry, join together to market
their products overseas.
• The association constitutes an organization jointly owned by
competing manufacturers exclusively for the purpose of export.
f)Purchasing/Buying Agent
• It represents the foreign buyer.
• By residing and conducting business in the exporter's
country, the purchasing agent is in a favorable
position to seek a product that matches the foreign
principal's preferences and requirements.
• This agent may also become an export-confirming
house when confirming payment and paying the
seller after receiving invoice and title documents for
the client.
g) Country-Controlled Buying Agent: A variation on the purchasing agent is a
country-controlled buying agent.
• It performs exactly the same function as the purchasing buying agent, the
only distinction being that a country-controlled buying agent is actually a
foreign government's agency.
• This agent is empowered to locate and purchase goods for its country.
This agent may have a permanent office location in countries that are
major suppliers
h) Resident Buyer: is an independent agent that is usually located near highly
centralized production industries.
• It helps to maintain a steady and continuous business relationship as long
as the supplier remains competitive in terms of price, service, style, and
quality.
• If the foreign client decides to visit manufacturing plan or offices, the
resident buyer can assist by making' hotel reservations, announcing the
visit to suppliers, arranging vendor appointments, and so on.
i) Export Merchant: domestic merchants are independent businesses that
are' in business to make a profit rather than to receive a fee. All domestic
merchants take title, they are distinguished by other features such as
physical possession goods and services rendered.
• One kind of domestic merchant is the export merchant. This merchant
seeks out needs in foreign markets and makes purchases from
manufacturers in its own country to fill those needs. It resells the goods in
its own name. In completing all these arrangements, the merchant
assumes all risks associated with ownership.
j) Export Drop Shipper: is known as a desk jobber or cable merchant, is a
special kind of export merchant. As all these names imply, the mode of
operation requires the drop shipper to request a manufacturer to "drop
ship" a product directly to the overseas customer. It is neither practical nor
desirable for the shipper to physically handle or possess the product.
• It places an order with a manufacturer, directing the manufacturer to
deliver the product directly to the foreign buyer. The manufacturer
collects payment from the drop shipper, who in turn is paid by the foreign
buyer.
• Use of it is common in marketing of bulky products of low unit value
• It can reduce the risk while simplifying the transactional tasks.
k) Export Distributor: Whereas export merchants and drop shipper’s
purchase from a manufacturer whenever they--receive-orders from
overseas, an export distributor deals with the manufacturer on a
continuous basis.
• This distributor is authorized and granted an exclusive right to represent
the manufacturer. It pays for goods in its domestic transaction with the
manufacturer and handles all financial risks in the foreign sale.
• The export distributor, in comparison, is located in the manufacturer's
country and is authorized to sell in one or more markets abroad.
• The export distributor operates in its own name
l) Trading Company: Those that want to sell and those that want to buy often
have no knowledge of each other or no knowledge of how to contact each
other. Trading companies have come into existence to fill this void.
 A trading company performs many functions:
1) has more diverse product lines,
2) offers more services,
3) Is largest and letter financed,
4) takes' title (ownership) 'to merchandise,
5) Is not exclusively restricted to engaging in export trade
• As the name imply the trading company trades on its own account for
profit.
• By frequently taking title to the goods it. Handles, its risks of doing
business greatly increase.
• A trading company does not merely represent manufacturers and/or
buyers thus reducing risks, because increased risks are usually
accompanied by increased rewards.
• Manufacturers and buyers use trading companies for good reasons.
Channel Decision:
Three channel decisions: length, width, and number of channels of distribution:
a). Channel length: is about the number of times a product changes hands
among intermediaries before it reaches consumer. It is long when a
manufacturer move its product through several middlemen. It is short when
the product has to change once or twice. If the manufacturer elects to sell
directly to final consumers, the channel is direct.
b). Channel width: is about the number of middlemen at a particular
distribution channel. It is a function of the number of wholesalers used and
kind of retailers used. More intermediaries are used, it becomes wider and
more intensive. Few qualified intermediaries are needed, the channel is
selective.
c). Number of distribution channels to be used: manufacturer may employ
many channels. It may use a long and a direct channel simultaneously. The
use of dual channel is common if the manufacturer has different brands
intended for different kinds of consumers. Another reason for using multiple
channels may involve the manufacturer's setting up its own direct sales force
in a foreign market
Determinants of Channel Types:
a) Legal Regulations: A country may have specific laws that
rule out the use of particular channels or middlemen for
example, prohibits the use of doors to door selling.
b) Product Image: The product image desired by a
manufacturer can dictate the manner in which the product is
distributed.
• A product with a low- price image requires intensive
distribution. On the other hand, it is not necessary or even
desirable for a prestigious product to have wide distribution.
c) Product Characteristics: The type of product determines
how that product should be distributed.
• For low high-turnover convenience products, the
requirement is for an intensive distribution network.
d) Middlemen's Loyalty and Conflict: As the channel widens and as it number
increases, more direct competition among channel members in inevitable.
Some members will perceive large competing member and self-service
members as being unfair.
• Some members will blame the manufacturer for being motivated be greed
when setting up a more intensive network. In effect intensive distribution
reduces channel members.
e) Local Customs: Local business practices, whether outmoded or not, can
interfere with efficiency and productivity and may force a manufacturer to
employ a channel of distribution that is longer and wider than desired.
f) Control: If it has a choice, a manufacturer that wants to have better control
over its product distribution may want to both shorten 'and-narrow 'its
distribution channel. Apparently, manufacturers want to get closer to final
customers.
• One study employed a model based on transaction cost analysis to explain
exporters' vertical control selections.
• Exporters of specialized products should establish channel structures that
require a greater commitment of resource.
 r !
p te
ch a
th e
o f
n d
E