Pricing in International Trade

Dr Tran Thi Anh Tam

School of International Business & Marketing -
UEH
 Definition
 Determinants of Export Prices
 Pricing in Export Markets
 Pricing Objectives
 Calculating the Export Price
 Trade Terms
 Case 7.1
 Price is an important factor in determining a
firm’s ability to compete in world markets.
 For many countries, pricing policies and
procedures are secret information
 Export price should be high enough to make
a reasonable profit and yet low enough to be
competitive in the market.
 Sources of nonprice competition include :
- Reliable delivery
- Short delivery time
- Product reliability
- Product quality
- (Dussage, Hart, and Ramanantsoa, 1987)
 The crucial element in determining price
relates to the value consumers place on the
product. Value results from consumers’
perceptions of the total satisfaction provided
by the product (Hiam and Schewe, 1992)
Pricing policy of a company at the export price
should be:
 Firm enough to achieve the targeted level of
profits or sales
 Flexible to accommodate the overall
marketing objectives, to optimize profits
Mismanagement of export pricing leads to:
- Pressures for price reduction
- Development of parallel markets :
=> appropriate pricing and control systems of
quality and distribution outlets are important
in reducing such incidents of parallel markets
 Export Competitiveness
❖ Price and nonprice factors:
- Reliability
- Delivery time
- Product reliability
- Product quality
- Design flexibility
- Support services
- Financial services
 Pricing and Markup Policy
❖High markups (few competitors,
differentiated products)

❖Low markups (increased competition)

 The following policies for pricing and
markups generally apply to both domestic
and export markets:
 High markups are common in industries with
relatively few competitors
 Markups are higher in industries in which
companies produce differentiated products
rather than homogeneous ones
 High markups may be due to R&D
expenditures and costs of increasing the
skills of the workforce.
 Export prices tend to be relatively low:
- In sectors There is increased competition
- Changes in competitors’ prices
- State id demand triggers a reduction in
export prices.
- Markups are relatively low for textiles, food,
electric machinery, motor vehicles,
- Markups remain high in medicines,
computers, industrial chemicals, television
and communications equipment
Product cost
Legal ramifications of pricing the product:
-Too low -> dumping
-Too high -> being attacked from the importing
nation
=> Both the buyer and seller would have explored
which origin-destination set results in the lowest
import duties and minimizes other charges
 Determinants of Export Price
❖ Internal variables
- Cost of production
- Cost of market research
- Business travel
- Product modification
- Packaging
- Consultants
- Distribution
- Freight forwarders
- Level of product differentiation
 Determinants of Export
Prices (cont.)
❖External variables
- Supply and demand
- Location and environment of foreign
market (host country)
- Economic policies such as exchange
rates, price controls, and tariffs
- Home country regulations
 Approaches to Export Pricing
 Cost-based pricing: most common; Export price is
based on full cost and markup or full cost plus a
desired amount of return on investment.
 Marginal pricing: pricing in domestic market;
Export price is based on the variable cost of
producing the product.
 Skimming versus penetration pricing: industries
have few competitors
 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 consumers are willing to pay
 E.g.: Cartier watches, Levi’s jeans

 Competitive pricing: Export prices are based on

competitive pressures in the market.
 Export Pricing Objectives
❖Market share

❖Profits

❖Targeted level of return on investment

 Calculating Landed cost and distributor/
Retail Price:
There are 2 steps:
- Calculating the landed cost: landed cost is the
total of a product once it has arrived at the
buyer’s door.
Landed cos t = original cos t + bro ker age & log isticsfees
+ shippingfees + crafting cos ts + handlingfees
- Calculating the distributor’s and retailer’s
price: markup depends on industries (gifts &
house ware 100%, others: 35-60%)
 Illustrative Example
A US manufacturer exports medical equipment from Miami, Florida to a distr
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
 Assessing price competitiveness: this method
compares the price competition of the U.S.
export item sold in Brazil and Uruguay.
Uruguay is a member of MERCOSUR customs
union, which also includes Brazil, Argentina
and Paraguay. The trade agreement
eliminates all tariffs and nontariff barriers
among member nations. This means that
exporters from Uruguay and Brazil do not pay
importing duties.
 Assuming that both competitors can produce
the product at $ 30,000, the Brazilian and
Uruguayan producer will have a tremendous
cost advantage over the U.S. exporter: a
difference of $33,885 and $26,970.
 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
 The Incoterms are a set of terms that define
respective responsibilities and are published by
the International Chamber of Commerce (ICC).
 They are periodically reviewed and updated by
delegates selected from many countries in order
to reflect current practice and changing
technologies.
 The last revision was in the year 2020. Incoterms
2020 became effective on Jan 1st 2020.
 Incoterms are recognized worldwide as legally
binding upon the parties to an int’l transaction
 Incoterms 2010 consists of 11 terms and
are divided into two major groups:

Any •Ex-Works (EXW)

•Free Carrier (FCA)
•Carriage Paid To (CPT)

mode of •Carriage and Insurance Paid To (CIP)

•Delivered at Terminal (DAT)

transport
•Delivered at Place (DAP)
•Delivered Duty Paid (DDP)

•Free Alongside Ship (FAS)

Maritime
•Free On Board (FOB)
•Cost and Freight (CFR)
•Cost, Freight, and Insurance (CIF)

transport
 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.