CHPT 11

Chapter 11
Export Pricing
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Price Dynamics
• Price
– The only element in the marketing mix that generates
revenue.
– Serves as a means of attracting and communicating an
offer to a potential buyer.
– A competitive tool for dealing with rivals and
substitutes.
– Used to position the product or service in the market.
– Pricing problems are technically identical in the
domestic and international market, but vary according
to the degree of foreign involvement.
Price Dynamics
• The alternatives strategies for first-time pricing are:

– Skimming - Achieve the highest possible contribution
in a short initial time period, and then gradually lower
the price as more segments are targeted and more
products are available.
– Market pricing – Determined based on competitive
prices; production and marketing is adjusted to the
price.
– Penetration pricing – Offer products at a low price to
generate volume sales and achieve high market share,
to compensate for lower per unit return.
Price Dynamics
• Price changes occur when:

– a new product is launched.
– a change occurs in the overall market conditions.
– there is a change in the exporter’s internal situation.
• With multiple-product pricing, the various items in the
line may be differentiated by pricing them
appropriately.
The Setting of Export Prices
• Export price setting is influenced by both internal and

external factors, as well as their interaction.
• Factors to be considered while establishing the basic
premise for pricing include
– the importance of price in customer decision making,
– the strength of perceived price-quality relationships,
– and potential reactions to marketing-mix manipulation
by marketers
– competition
Exhibit 11.2 – Stages in Setting of Export
Prices
• Export pricing strategy

– The standard worldwide price may be the same
regardless of the buyer or may be based on average
unit costs of fixed, variable, and export-related costs.
– Dual pricing differentiates between domestic and
export prices.
• Export pricing strategy

– The two approaches to pricing products for exports are
• Cost plus method – Is the true cost, fully allocating
domestic and foreign costs to the product; ensures profit
margins; however, the firm’s competitiveness is
compromised.
• Marginal cost method - Considers the direct costs of
producing and selling products for export as the floor
beneath which prices cannot be set.
• Market-differentiated pricing
– Is based on the dynamic conditions of the marketplace.
– Prices change frequently due to changes in
competition, exchange rate, or environment.
• Export-related costs
– The unique export-related costs which exist along with
the normal costs include:
• Cost of modifying a product for a foreign market.
• Operational costs of exporting.
• Cost incurred in entering the foreign market.
• Price escalation
– A combined effect of clear-cut and hidden costs.
– Results in an increase in export prices over and above
the domestic prices.
• Export-related costs
– Creative strategies employed to combat price
escalation:
• Reorganize the channel of distribution.
• Product adaptation.
• Use new or more economical tariff or tax classifications.
• Assemble or produce overseas.
Exhibit 11.5 - Distribution Adjustment to
Decrease Price Escalation
Terms of Sale
• Incoterms – The internationally accepted standard

definitions for terms of sale set by the International
Chamber of Commerce (ICC) since 1936.
• They are grouped into four categories:
– E-terms - Seller delivers the goods to the buyer only at
the former’s own premises.
– F-terms - Seller delivers the goods to a carrier appointed
by the buyer.
– C-terms - Seller contracts for carriage without assuming
the risk of loss or damage to the goods.
– D-terms - Seller bears all costs and risks to deliver goods
to the destination determined by the buyer.
Terms of Sale
• Common Incoterms used in international marketing:

– Ex-works (EXW)
– Free carrier (FCA)
– Free alongside ship (FAS)
– Free on board (FOB)
– Cost and freight (CFR); cost, insurance, and freight
(CIF)
– Carriage paid to (CPT); carriage and insurance paid to
(CIP)
– Delivered duty paid (DDP)
– Delivered duty unpaid (DDU)
Exhibit 11.6 - Selected Trade Terms
(Incoterms)
Terms of Payment
• An exporter’s credit policy determines the degree of

risk the firm is willing to assume and the preferred
selling terms.
• Factors considered for negotiating terms of payment:
– The amount of payment and the need for protection.
– Terms offered by competitors.
– Practices in the industry.
– Capacity for financing international transactions.
– Relative strength of the parties involved.
Exhibit 11.7 - Methods of Payment for
Exports
Terms of Payment
• Cash in advance
– Relieves the exporter of all risks and allows for
immediate use of the money.
– Used for first time transactions or situations where the
exporter doubts the importer’s solvency.
Terms of Payment
• Letter of credit
– An instrument issued by the bank at the request of the
buyer.
– The bank promises to pay money on presentation of
specified documents like the bill of lading, consular
invoice, and description of the goods.
– Classified as irrevocable versus revocable, confirmed
versus unconfirmed, and revolving versus
nonrevolving.
Exhibit 11.8 - Letter of Credit: Process and
Parties
Terms of Payment
• Drafts
– Similar to personal check; an order by one party to pay
another.
– Buyer must obtain shipping documents before
obtaining possession of the goods involved in the
transaction.
• Documentary collection
– The seller ships the goods, and the shipping
documents and the draft are presented to the importer
through banks acting as the seller’s agent.
– The draft , also known as the bill of exchange, may be
either a sight draft or a time draft.
Terms of Payment
• Banker’s acceptance - A time draft drawn on and

accepted by a bank; it is sold in the short-term money
market.
• Discounting - Selling a draft to the bank at a discount
from face value; it can be with recourse or without
recourse.
• Open account - The normal manner of doing
business in the domestic market; also known as open
terms.
• Consignment selling – Allows the importer to defer
payment until goods are actually sold.
Getting Paid for Exports
• Commercial risk
– Refers to the insolvency of, or protracted payment
default by, an overseas buyer.
– Results from deterioration of conditions in the buyer’s
market, fluctuations in demand, unanticipated
competition, or technological changes.
• Political risk
– Can neither be controlled by the buyer nor the seller.
Getting Paid for Exports
• Complications in assessing the buyer’s credit

worthiness:
– Credit reports may not be reliable.
– Audited reports may not be available.
– Financial reports may have been prepared according
to a different format.
– Many governments require that assets be annually re-
evaluated upward, which can distort results.
– Statements are in local currency.
– The buyer may have the financial resources in local
currency but may be precluded from converting to
dollars because of exchange controls and other
government actions.
Managing Foreign Exchange Risk
• To prevent currency related risks, the exporter can:

– Shift the risk through foreign currency contractual
hedging.
– Modify the risk by manipulating prices and other
elements of a marketing strategy.
• Forward exchange market
– The exporter gets the bank to agree to a rate at
which it will buy the foreign currency the exporter
receives when the importer makes payment.
– The rate is either a premium or a discount on the
current spot rate.
• Currency option - Gives the holder the right to buy or

sell foreign currency at a prespecified price on or up
to a prespecified date.
• Currency futures market - Conceptually similar to
forward market; however, the minimum transaction
sizes are considerably smaller than the forward
market.
Exhibit 11.13 - Exporter Strategies Under
Varying Currency Conditions
• Techniques to adjust pricing in view of either a more

favorable or an unfavorable domestic currency rate:
– Pass through – Make no change in the price, resulting
in a less favorable price in foreign currencies and, most
likely, lower sales.
– Absorption - Decrease the export price in conjunction
with increases in the value of the currency to maintain
stable export prices in foreign currencies.
– Pass-through only a portion of the increase.
• Pricing-to-market - Destination-specific adjustment

of mark-ups in response to exchange-rate changes.
• Adjustment strategies beyond price manipulation for
managing foreign exchange risks:
– Market refocus.
– Streamlined operations.
– Shift in production.
Sources of Export Financing
• International marketers assist their customers abroad

in securing appropriate financing.
• Export financing terms affect the final price paid by
buyers.
• Commercial banks
– Provide assistance to only first rate credit risks.
– Provide enhanced services which help exporters
monitor and expedite their international transactions.
– Marketers should assess the overseas reach of banks
to avail greater market coverage.
• Forfaiting
– Forfaiting provides the exporter with cash at the time
of shipment.
– The importer uses bills of exchange or promissory
notes to pay the exporter at the time of shipment.
– The exporter sells them to a third party at a discount
from their face value for immediate cash.
• Benefits accrued by the exporter through forfaiting:

• Reduction of risk.
• Simplicity of documentation.
• Cent percent coverage.
• Helps to avoid content or country restrictions.
• The major issues about forfaiting are availability and
cost.
• Factoring houses
– May purchase an exporter’s receivables for a
discounted price.
– Provide the exporter with a complete financial package
that combines credit protection, accounts-receivable
bookkeeping, and collection services.
• Forfaiting and factoring methods differ in three

significant ways:
– Factors usually want a large percentage of the
exporter’s business, while most forfaiters work on a
one-shot basis.
– Forfaiters work with medium-term receivables, while
factors work with short-term receivables.
• Forfaiting and factoring methods differ in three

significant ways:
– Factors usually do not have strong capabilities in the
developing countries, since forfaiters usually require a
bank guarantee, most are willing to deal with
receivables from these countries.
– Forfaiters work with capital goods, factors typically with
consumer goods.
• Official trade financing can take the form of either a loan

or a guarantee, including credit insurance.
• Advantages of trade financing by the government are:
– Protection in the riskiest part of an exporter’s business.
– Protection against political and commercial risks over which
the exporter does not have control.
– Encouragement to exporters to make competitive offers by
extending terms of payment.
– Broadening of potential markets by minimizing exporter
risks.
– Possibility of leveraging exporter accounts receivable.
– Opportunity for commercial banks to remain active in the
international finance arena.
• The following entities insure credit risks for exports.

– Export credit agencies (ECAs)
– The Export-Import Bank of the United States (Ex-Im
Bank)
– The Overseas Private Investment Corporation (OPIC)
– The Agency for International Development (AID)
– The U.S. Department of Agriculture’s Commodity
Credit Corporation (CCC)
– The Small Business Administration (SBA)
Price Negotiations
• Pricing is the most sensitive issue in business

negotiations; the exporter should discuss it as part of
a comprehensive package and should avoid price
concessions early on in the negotiations.
• Carefully consider concessions that reduce price or
profitability; example: discounts, payment terms,
product features.
• Revisit competitive prices to ascertain that the price
reflects market conditions accurately.
• Focus negotiations first on substantive issues (quality
and delivery), then on price.
Leasing
• Trade liberalization is expected to benefit lessors both

through expected growth in target economies and
eradication of country laws and regulations hampering
outside lessors.
• Allows market penetration for the firm’s products,
which is not possible through outright sale.
• Total net income from leasing is often higher than it
would be if the unit was sold.
Dumping
• Selling goods overseas at a price lower than in the

exporter’s home market or below the cost of
production, or both.
• Ranges of dumping
– Predatory dumping – Intentionally selling at a loss in
another country in order to increase its market share at
the expense of domestic producers.
– Unintentional dumping - Result of time lags between
the dates of sales transaction, shipment, and arrival.
Dumping
• Remedies for dumping

– Antidumping duty - Levied on imported goods sold at
less than fair market value.
– Countervailing duties - Imposed on imports which are
subsidized in the exporter’s home country.
• To minimize the risk of being accused of dumping,
the marketer can focus on value-added products and
increase differentiation by including services in the
product offering.

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Chapter 11

• The alternatives strategies for first-time pricing are:

• Price changes occur when:

• Export price setting is influenced by both internal and

• Export pricing strategy

• Export pricing strategy

• Incoterms – The internationally accepted standard

• Common Incoterms used in international marketing:

• An exporter’s credit policy determines the degree of

• Banker’s acceptance - A time draft drawn on and

• Complications in assessing the buyer’s credit

• To prevent currency related risks, the exporter can:

• Currency option - Gives the holder the right to buy or

• Techniques to adjust pricing in view of either a more

• Pricing-to-market - Destination-specific adjustment

• International marketers assist their customers abroad

• Benefits accrued by the exporter through forfaiting:

• Forfaiting and factoring methods differ in three

• Forfaiting and factoring methods differ in three

• Official trade financing can take the form of either a loan

• The following entities insure credit risks for exports.

• Pricing is the most sensitive issue in business

• Trade liberalization is expected to benefit lessors both

• Selling goods overseas at a price lower than in the

• Remedies for dumping

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