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CHAPTER 14
PRICING STRATEGIES AND TACTICS
Chapter Outline
A. Price Dynamics
B. The Setting of Export Prices
1. Export Pricing Strategy
2. Export-Related Costs
C. Terms of Sale
1. Commercial Banks
2. Forfaiting and Factoring
3. Official Trade Finance
H. Leasing
I. Pricing within Individual Markets
1. Corporate Objectives
2. Costs
J. Pricing Coordination
K. Transfer Pricing
Chapter Objectives
The objectives of this chapter include understanding how pricing can serve as a means of strategy
or as a competitive tool with buyers. It also helps us to determine complete and accurate
quotations, choosing the terms of the sale, and selecting the payment method in selling a product
Suggestions for Teaching
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A lecture delivered by some guest speakers on case histories, which are typically the most
confidentially-held information in a company, would bring life to what students generally
perceive as the most boring element of the marketing mix.
One way of making the discussion on transfer prices exciting for the class is to treat it (after
A good way of bringing the subject of countertrade closer to students is by beginning a discussion
around domestic barter. Students will especially be able to contribute many examples because in
their younger years, due to lack of money, many of them would have carried out barter
transactions with their peers. From that discussion one can then gradually introduce the notion of
Introduction
In spite of new factors influencing the pricing decision, the objective remains the same: to create
demand for the marketer’s offerings and to do so profitably in the long term.
A. Price Dynamics
Price is the only element of the marketing mix that generates revenue; all the others are costs.
A summary of international pricing situations is provided in Exhibit 14.1.
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B. The Setting of Export Prices
In setting the export price, a company can use a process like the one illustrated in Exhibit
14.2.
In all marketing decisions, the intended target market will establish the basic premise for
pricing. Factors to be considered include the importance of price in customer decision
1. Export Pricing Strategy
There are three general price-setting strategies in global marketing:
• setting a standard worldwide price
• dual pricing, which differentiates between domestic and export prices
• market-differentiated pricing.
2. Export-Related Costs
Export-related costs include the following:
• The cost of modifying the product for foreign markets
• Operational costs of the export operation
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to lower cost: duty drawbacks.
C. Terms of Sale
Incoterms are the internationally accepted standard definitions for terms of sale set by the
International Chamber of Commerce (ICC) since 1936.
The most common of the Incoterms used in international marketing are summarized in
Exhibit 14.4.
Delivered at place (DAP) means the seller’s obligation ends when it has delivered the
goods to the disposal of the buyer at the named destination place and they are cleared for
export but not cleared for import.
With delivered duty paid (DDP), the seller delivers the goods with import duties paid,
including inland transportation from import point to the buyer’s premises.
Free alongside ship (FAS) at a named port of export means that the exporter quotes a
price for the goods, including charges for delivery of the goods alongside a vessel at the
port.
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D. Terms of Payment
The exporter will be concerned over being paid for the goods shipped and will therefore
consider the following factors in negotiating terms of payment:
• the amount of payment and the need for protection
The most favorable term to the exporter is cash in advance because it relieves the
exporter of all risk and allows for immediate use of the money.
A letter of credit is an instrument issued by a bank at the request of a buyer.
Exhibit 14.6 summarizes the process of obtaining a letter of credit and the relationship
between the parties involved.
Letters of credit can be classified along three dimensions:
• Irrevocable versus revocable
When a time draft is drawn on and accepted by a bank, it becomes a banker’s acceptance,
which is sold in the short-term money market.
Even if the draft is not sold in the secondary market, the exporter may convert it into cash
by discounting.
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E. Getting Paid for Exports
The exporter needs to minimize the risk of not being paid if a transaction occurs.
The term commercial risk refers primarily to the insolvency of, or protracted payment
default by, an overseas buyer.
In addition, noncommercial or political risk is completely beyond the control of either the
buyer or the seller.
The assessment of a foreign private buyer is complicated by some of the following
factors:
• Credit reports may not be reliable.
• Audited reports may not be available.
F. Managing Foreign Exchange Risk
Unless the exporter and the importer share the same currency (as is the case in the 17
countries of Euroland), exchange rate movements may harm or benefit one or the other of
the parties.
Two types of approaches to protect against currency-related risk exist:
Whatever the currency movements are, the marketer needs to decide how to adjust
pricing to international customers in view of either a more favorable or an unfavorable
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G. Sources of Export Financing
Export financing terms can significantly affect the final price paid by buyers.
1. Commercial Banks
Commercial banks around the world provide trade financing depending on their
2. Forfaiting and Factoring
Forfaiting provides the exporter with cash at the time of the shipment.
3. Official Trade Finance
Official financing can take the form of either a loan or a guarantee, including credit
insurance.
The government provides for risk protection through programs which provide
H. Leasing
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forming relationships with others who can provide these services.
I. Pricing within Individual Markets
Pricing within the individual markets in which the company operates is determined by (1)
corporate objectives, (2) costs, (3) customer behavior and market conditions, (4) market
structure, and (5) environmental constraints.
1. Corporate Objectives
2. Costs
Costs are frequently used as a basis for price determination largely because they are
3. Demand and Market Factors
Demand will set a price ceiling in a given market.
4. Market Structure and Competition
Competition helps set the price within the parameters of cost and demand.
5. Environmental Constraints
Governments influence prices and pricing directly as well. In addition to policy
J. Pricing Coordination
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The issue of standard worldwide pricing has been mostly a theoretical one because of the
K. Transfer Pricing
Transfer pricing or intracorporate pricing, is the pricing of sales to members of the
extended corporate family.
Appropriate transfer price should be established by corporations to achieve the following
objectives:
• Competitiveness in the international marketplace
• Reduction of taxes and tariffs
managers
Transfer pricing, when viewed from a company-wide perspective, enhances operational
performance (including marketing), minimizes the overall tax burden, and reduces legal
exposure both at home and abroad.
Transfer prices can be based on costs or on market prices.
Economic conditions in a market, especially the imposition of controls on movements of
funds, may require the use of transfer pricing to allow the company to repatriate
revenues.
1. Use of Transfer Prices to Achieve Corporate Objectives
Three philosophies of transfer pricing have emerged over time: (1) cost-based price
(direct cost or cost-plus), (2) market-based price (discounted “dealer” price derived
2. Transfer Pricing Challenges
Transfer pricing policies face two general types of challenges.
• The first is internal to the multinational corporation and concerns the
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headquarters.
Taxation
Transfer prices will by definition involve the tax and regulatory
jurisdictions of the countries in which the company does business.
The rapid changes in international marketing caused by e-business will
also have an impact on transfer pricing.
The starting point for testing the appropriateness of transfer prices is a
comparison with comparable uncontrolled transactions involving
unrelated parties.
Uncontrolled prices exist when:
If this method does not apply, the resale method can be used.
The cost-plus approach is most applicable for transfers of components or
unfinished goods to overseas subsidiaries.
L. Countertrade
Conditions that foster countertrade are a lack of money, lack of value of money, lack of
acceptability of money as an exchange medium, or greater ease of transaction by using
goods. However, the shrinking of established markets and the existence of a substantial
product surplus are also conditions that foster countertrade.
1. Why Countertrade?
Many countries are deciding that countertrade transactions are more beneficial to
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2. Types of Countertrade
Under the traditional types of barter arrangements, goods are exchanged directly for
other goods of approximately equal value.
Exhibit 14.12 provides an overview of the different forms of countertrade that are in
use today.
Key Terms
Skimming: Offering a product at an initial high price to achieve the highest possible sales
contribution in a short time period; as more market segments are identified and more products are
available, the price is gradually lowered.
Market pricing: Determining the final price of a product based on competitive prices and
Dual pricing: Differentiation of domestic and export prices.
Cost-plus method: A pricing strategy based on the true cost of a product (inclusive of domestic
and foreign marketing costs); ensures profit margins but lowers the firm’s competitiveness.
Marginal cost method: A pricing strategy that considers only the direct cost of producing and
selling products for exports as the floor beneath which prices cannot set; overhead costs are
disregarded, allowing an exporter to lower prices to be competitive in markets that otherwise
might not be accessed.
Market-differentiated pricing: Export pricing based on the dynamic, changing conditions of
each marketplace; the marginal cost reflects the basic price level, which can change due to
changes in competition, exchange rate changes, or other environmental changes.
Incoterms: The internationally accepted standard definitions for terms of sale set by the
International Chamber of Commerce (ICC) since 1936.
Cash in advance: A method of payment for exported goods. The most favorable term to the
exporter; not widely used, except for smaller, custom orders, or first-time transactions, or
situations in which the exporter has reason to doubt the importer’s ability to pay.
sight draft or a time draft.
Banker’s acceptance: A method of payment for exported goods; a time draft, with a specified
term of maturity, which is drawn on and accepted by a bank; it is sold in the short-term money
market.
Discounting: Selling a time draft to the bank before its maturity at an amount lower than its face
exporter enters into an agreement with a bank for selling its foreign exchange on a future date at a
prespecified rate of exchange; the rate is expressed as either a premium or a discount on the
current spot rate.
Option: A method used to counter challenges in currency movements; gives the holder the right
to buy or sell foreign currency at a prespecified price on or up to a prespecified date.
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Pricing-to-market: Destination-specific adjustment of markups in response to exchange-rate
changes.
Price manipulation: Adjusting prices of exported goods to compensate for changing exchange
rates.
Forfaiting: A trade financing technique; the importer pays the exporter with bills of exchange or
would have arrived at for the same transaction.
Countertrade: A sale that encompasses more than an exchange of goods, services, or
ideas for money; transactions which have as a basic characteristic a linkage legal or otherwise,
between exports and imports of goods or services in addition to, or in place of, financial
settlements.
1. What are the implications of price escalation?
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Price escalation is the effect of both clear-cut and hidden costs on the final export price of a
product that far exceeds the domestic price. The implications of this phenomenon are:
• The marketer must look again at the entire marketing mix to analyze whether any
elements of the mix should be changed for the exported good as a result of the increased
price. A price increase will usually lead to a repositioning of the product in the
2. The standard worldwide base price is most likely looked on by management as full–cost
pricing, including an allowance for manufacturing overhead, general overhead, and selling
expenses. What factors are overlooked?
Basing the standard worldwide base price on full-cost pricing is a conservative attitude, but
overlooks several factors. First, pricing based on incremental costs would allow for some
3. Suggest different importer reactions to a price offer and how you, as an exporter, could
respond to them.
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Exporters generally face problems in initial negotiations with importers, most of which
Importer’s reaction
Exporter’s reaction
1. Initial quote too high; a
substantial drop is required.
Ask buyer what is meant by too high;
on what basis is drop called for; stress
product quality and benefits before
discussing price.
2. Better offers have been
received.
More details on such offers; seriousness
of such offers; convince buyer of
exporter offer’s superiority.
Avoid making better offer without
Avoid accepting such an offer
immediately; find out details (e.g.,
quantities, responsibilities, etc.)
5. Product is acceptable, price is
Discuss details of costing; promote
product and service benefits.
check competition; accept a trial order
3. Counter-offer is required;
4. Comment on the pricing philosophy, “Sometimes price should be wrong by design.”
This pricing philosophy is a rather theoretical approach to multinational pricing in which the
multinational marketer has no restrictions set on how prices are set in the various markets of
operation. What the statement implies is that the marketer could set an internal (transfer)
price higher in markets where restrictions exist on profit repatriation, and in general move
5. The arm’s-length principle of transfer pricing states that the amount charged by one related
party to another for a given product must be the same as if the parties were not related. What
would a product cost if transacted by unrelated parties?
According to Section 482, there are methods of determining an arm’s-length price. The
starting point for testing the appropriateness of transfer prices is a comparison with
6. Discuss the advantages and drawbacks of countertrade.
Countertrade is a sales transaction that provides a legal link between exports and imports
apart from financial settlements. These transactions are mostly encountered when there is a
lack of currency, lack of value of currency, and lack of acceptability of money as a medium
of exchange. Countertrade reduces the risk of the transaction in view of currency
1. The European Union promotes the benefits of the euro as a common currency for the 17 EU
nations that have adopted it (see http://ec.europa.eu/economy_finance/euro/index_en.htm).
What are possible disadvantages of it?
Some of the possible disadvantages of the European Union promoting the benefits of the
euro as a common currency are suggested below:
• A country can no longer conduct monetary policy on its own behalf.
2. Compare the services of the Global Offset and Countertrade Organization
(http://www.globaloffset.org) and the Asia-Pacific Countertrade Association
(http://apca.net).
The main purpose of the Global Offset and Countertrade Organization (G.O.C.A.) is the
promotion of trade and commerce between companies around the world and their foreign
customers through a greater understanding of countertrade and offset. It has sponsored
worldwide meetings focusing on the topics of countertrade and offset and provides