The amount of money charged for a product or service, or the sum of the values that consumers exchange for

the benefits of having or using the product or service.

What is Pricing : To a manufacturer - pricing represents the quantity of money, received by the firm or seller for its product. To a customer - it represents a monetary sacrifice.

Quantity of money received by the seller

PRICE = ---------------------------------------------Quantity of goods & services received by buyer

In this equation both the parts are important for price decisions. The ratio parameters can be changed under following conditions
a. b. c. d.

e.

Changing the customers value perception of the product. Change the quantity of money or goods & services to be paid by the buyer Change the quality of goods & services offered Price changes through changes in sales promotion or discounts By making changes in any of the following
Time and place of transfer of ownership Place and time of payment Acceptable form of payment

A firm may choose its pricing objectives from any of the following(a) Maximize current profits and return on investment (b) Exploit competitive position (c) Survival in a competitive market (d) Balance price over product line

Inflation Exchange

Rate Fluctuations Parallel Imports Price Escalation Government Influences

Inflation

Eliminates consumers purchasing power Inflation Adjust price Delayed payment will erode profit Problem with consignment basis shipment I.e. paid when sold
Careful price quotations and supply contracts Increase brand value Retain and win trust of customers

Strategy

A disparity in pricing where goods have higher costs in a foreign market than in the domestic market due to transportation and exporting costs. Price escalation can also refer to the sum of cost factors in the distribution channels which add up to a higher final cost for a product in a foreign market. Increase in price, specially due to inflation.

 Cost

of exporting

Taxes,

tariffs and administrative costs

Inflation/deflation Exchange Varying

rate fluctuations

currency values and transportation costs

Middlemen

Price
A

Escalation

direct result of products moving across borders Importers Distributor Jobber Consumer costs

Manufacturers

Operating

Two

distributors: high lot and low lot

Insurance,

packaging, country of origin, other admin. costs

 Lowering

cost of goods

Using efficient method of manufacturing Off-shore manufacturing Global sourcing Lowering product quality

Lowering

tariffs (using customs classification) Lowering distribution costs Using Foreign Trade Zones Dumping Taking a lower profit

 Move

to low cost manufacturing countries distribution costs

Lower Lower

features and lower quality

of the product to

Re-classification

save on duty

Adjust

dimension

Exchange Rate Fluctuations

It fluctuates Govt. may intervene if too much fluctuations Weak currency export and vice-versa Monitor other currencies movement also
Review entire operation system Adjust cost structure Increase brand value Check mode of operation in foreign markets

Strategy

Exports vs. licensing vs. investment

Parallel Imports

Distributors in one country sell in another country Not illegal Overstocking Distributor bankrupt Exclusive distributors, luxury products, upscale retailers, margin Internet I.e. inexpensive

Strategy

Self-certify the product! Language, packaging For sale in specific country only Product is not suitable for another country e.g. too sweet/color Warranty/repair not transferable between countries Close relationship with distributors

Government Influences

Reduces the impact of price competition or eliminate it Keeps retail margins below exorbitant level Correlation between car-owners and superstores visits Maximum/suggested retail price Limited period of discount EU Feb & Aug. Wal-mart Everyday Low Price (EDLP) i.e., No discount

Strategy

North American Approach Govt creates environment conducive to conducting business

Adjusting interest rate Monitoring the market to prevent abuses Canada Competition Bureau

Cocoa, coffee, sugar, wheat Board

International Pricing considerations

Global pricing is one of the most critical and complex issues in international marketing. Price is the only marketing mix instrument that creates revenues. All other elements entail costs. A companys global pricing policy may make or break its overseas expansion efforts. Multinationals also face the challenges of how to coordinate their pricing across different countries.

International Pricing Strategies

Company Internal Factors Market Factors
Income Levels Competition Customers Culture

Environmental Factors
Foreign Exchange Rates Inflation Rates Price Controls Regulations

Analytic Transports Costs Dimensions Tariffs

Taxes Production Costs Channel Costs

Profitability

DecisionMaking

Market-by-Market Pricing

International Pricing Strategies

Uniform Pricing

Managerial Issues

Financing International Transaction Risks Customer-Arranged vs. Supplier-Arranged

2005 Prentice Hall

Source of Financing Commercial Banks Governments Non-cash Transactions: Counter-trading

11-16

DecisionMaking

Transfer Pricing Foreign Currencies Parallel Imports/Grey Markets Export Price Escalation Global Pricing Strategies

 The

Global Manager must develop systems and policies that address

Price Floors Price Ceilings Optimum Prices

Must

be consistent with global opportunities and constraints

Marginal Cost Pricing is a pricing method according to which firms set the prices of their products by taking into consideration, the marginal cost of production, which is the cost of producing one extra unit of the product. The increase in cost of producing goods to be sold in the overseas market. Such firms regard the foreign sales as bonus sales and assume that any return over their variable cost, makes a contribution to Net Profit

A benefit of this approach is its simplicity and it is fact-based. It helps to pursue aggressive pricing policy thereby increasing the sales and possibly reducing the marginal cost through increased productivity and lower input price It could be used by a company during a period of poor sales where the additional sales generated allow it to remain operational without having to reduce its labor force. Of course businesses must normally recover their total costs. Marginal cost pricing is generally seen as being superior to full cost pricing for some or all of the following reasons: It is more effective in the short run than full costing because of the virtual impossibility of calculating the total cost of different products in a product portfolio and because the optimal relationship between cost and prices will vary substantially both among different products and between different markets.

Further, the emphasis upon innovation and the rate of change means that long-run situations are often highly unpredictable so that one should aim at maximizing contribution in the short run. It lends a marketing rather than a costing orientation to pricing policy; prices are fixed in relation to market conditions so as to take advantage of the elasticity of demand. Marginal cost is more relevant to pricing decisions than absorption cost as it reflects future as distinct from present cost levels and cost relationships. Marginal cost pricing permits a manufacturer to develop a policy to make prices more differentiated and more flexible through time which leads to higher sales and possibly reduced marginal costs through increased marginal physical productivity and lower input factor prices. It gives a much clearer indication of profit potential and so enables decision-makers to decide better which products they should sell in what markets.

A disadvantage is the risk of underestimating customer demand and the value as perceived by the customer as important mechanisms. The conclusion that marginal cost tends to equal price is important in that it shows how the quantity of output produced by a firm is influenced by the market price. If the market price is lower than the lowest point on the average variable cost curve, the firm will cut its losses by not producing anything. At any higher market price, the firm will produce the quantity for which marginal cost equals that price. Thus the quantity that the firm will produce in response to any price can be found.

Explain transfer prices and Four criteria used to evaluate them.

A transfer price is the price one subunit charges for a product or service supplied to another subunit of the same organization.
Intermediate products are the products transferred between subunits of an organization.

Transfer pricing should help achieve a companys strategies and goals. Fit the organizations structure. Promote goal similarity. Promote a sustained high level of management effort.

Transfer prices Can be Calculated using three different methods.

1. 2. 3.

Market-based transfer prices Cost-Based Transfer price Negotiated transfer prices

Market-based transfer prices : By using market-based transfer prices in a perfectly competitive market, a Company can achieve the following: Goal similarity Management effort Subunit performance evaluation Subunit autonomy Market prices also serve to evaluate the economic viability and profitability of divisions individually. When supply outstrips demand, market prices may drop well below their historical average. Distress prices are the drop in prices expected to be temporary.

Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for accounting purposes. In dealings between sovereign states, the term bilateral trade is used. OR "Any transaction involving exchange of goods or service for something of equal value. Countertrade is an umbrella term used to describe many different types of transactions each in which the seller provides a buyer with goods or services and promises in return to purchase goods or services from the buyer.

 Countertrade

may or may not involve the use of currency, as in barter.

Acceptance

of transaction in this form is called countertrade. Economic environment prevailing in a particular country often determine the significance and value of countertrade

Companies countertrade in order to: Expand or maintain foreign markets Increase sales Avoid liquidity problems Repatriate blocked funds Clean up bad debt situations Build customer relationships Keep from losing markets to competitors Gain foreign contracts for future sales Find lower-cost purchasing sources

There are Six main types of countertrade

Barter Switch Trading Counter Purchase/Offset Buyback

 Exchange

of goods or services directly for other goods or services without the use of money as means of purchase or payment. is the direct exchange of goods between two parties in a transaction. The principal exports are paid for with goods or services supplied from the importing market
For Ex :The Malaysian govt brought 20 dieselelectric locomotives from GE, govt officials said the GE will be paid with palm oil of 200,000 metric tons for a period of 30 months.

It

Practice in which one company sells to another its obligation to make a purchase in a given country. "Imbalances in long term bilateral trading agreements sometimes lead to the accumulation of uncleared credit surpluses in one or other country, For example, Brazil at one time had a large credit surplus with Poland. These surpluses can sometimes be tapped by third countries so that, for example UK exports to Brazil

It is probably the most frequently used type of counter trade. For this trade the seller agrees to sell a product at a set price to a buyer and receives payment in cash. However two contracts are negotiated. The first contract is contingent on a second contract that is an agreement by the original seller to buy goods from the buyer for the total monetary amount involved in the first contract or for a set of percentage of that amount.

Sale of goods and services to one company in other country by a company that promises to make a future purchase of a specific product from the same company in that country.

Occurs when a firm builds a plant in a country or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant's output as partial payment for the contract.

Systems Pricing in Turnkey Sales

Pricing of turnkey package

Bundled?

Unbundled

Get supplier discounts? System discounts? Package Price

No firm-specific advantages

Components where firm has FSA's

Price taker

Price maker

Competitors: standalone profit centers?

Competitive entry? Make or buy?

Profit sharing or penalty for nonperformance

Component prices? No profit sharing or penalty for nonperformance

In Quoting the price of goods for international sale, a contract may include specific elements affecting the price, such as credit, sales terms, and transportation. Parties to the transactions must be certain that the quotation settled on all the above terms. For Ex : Quantity, Quality, Terms of Payment, Mode of Payment, Transportation cost, Failures, and so on

ICOTREMS is provided a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. Thus the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a certain degree.

 Exporter

must know the terms before preparing a quotation or a pro forma invoice. Incoterms are standardized names created by the International Chamber of Commerce (ICC) for describing terms of sale.

Term
EXW - Ex Works

Definition
Buyer arranges for pick up of goods at the sellers location. Seller is responsible for packing, labeling, and preparing the goods for shipment on a specified date or time

Risk

Cost

Include on Quotation
N/A

Buyer assumes Buyer pays all all risk transportation costs

FCA - Free Carrier

Seller is responsible for costs until the buyers named freight carrier takes charge
Buyer arranges for the ocean transport. Seller is responsible for packing labeling, preparing the goods for shipment, and delivering the goods to the dock.

Seller and Buyer

Split

N/A

FAS - Free Alongside Ship (over water only)

Seller: until the goods reach the dock. Buyer: from dock to destination

Buyer: all ocean transport costs. Seller is responsible for costs associated with transporting the goods to the dock.

Costs of transporting goods to the dock.

Term

Definition

Risk

Cost

Include on Quotation

FOB* - Free Seller arranges for Buyer: Once On Board ocean transport of the the items are FOB should goods, preparing the on board also never be used unless you goods for shipment, and loading the goods specify what and where such onto the vessel. The as "FOB ocean goods ship ocean vessel at New freight collect. York City CFR - Cost and Freight Seller has the same responsibilities as when shipping FOB, but shipping costs are prepaid by the seller, instead of shipping collect. Seller has the same responsibilities as when shipping CFR with addition of including a marine insurance policy Seller: assumes the risk until the shipment reaches the overseas dock.

Seller: Wharfage Costs, until on (charges to load board the goods onto the ship) and freight forwarder fees.

Seller: costs of freight fees up to destination.

Add Freight to cost of product.

CIF - Cost, Insurance, and Freight

Seller:; until the Seller insurance shipment and freight reaches the forwarder fees. overseas dock.

Insurance, freight and cost of goods