Business Explain: Pricing for International Markets

Pricing for International Markets

Showing posts with label Pricing for International Markets. Show all posts

What is demand elasticity?

Refers to how demand for a product changes due to minor changes in the price. High elasticity means larger changes can occur without affecting the demand, whereas low elasticity means demand is very sensitive to changes in price.

Standardized/undifferentiated products are generally more sensitive to changes in price than differentiated products.

What factors influence international pricing?

1. Pricing objective

2. Competition

3. Target customer

4. Pricing controls

4. Price escalation

Which out of the four types of countertrade is the most beneficial to the seller?

The counter-purchase, as it provides the seller with more flexibility than the other types due to the time period, generally 6-12 months, to complete the second contract. During the time that markets are sought for the goods in the second contract, the seller has received full payment for the original sale. Further, the goods to be purchased in the second contract are generally of greater variety than those offered in a compensation deal.

Why is counter trade increasing?

There are a variety of reasons purchasers impose countertrade obligations on the seller.

1. The most important being a shortage of hard currencies. This is the most prevalent.

2. When a country produces a product in large quantities in which there is a low market demand, the country may offer products in counterpurchases as a means of getting rid of excess supply. Generally speaking, goods are offered for countertrade when there is a low or minimal market for the goods.

3. Another reason is because the country does not have an established international market in which to dispose of the goods. There may be a world market for the goods but the country does not have the ability or access to the market and thus may force products in countertrade.

Why do governments scrutinize transfer pricing arrangements so carefully?

Transfer pricing refers to when a company uses selective prices for internal transactions, and there are several reasons for governments to look over them carefully. Transfer pricing can be used to hide subsidiary profits and to escape foreign market taxes, by reaping the benefits of a lower tax rate in the country that the subsidiary resides.

What are the alternative objectives in setting transfer prices?

1. Lowering duty costs → goods shipped into high-tariff countries at minimal transfer prices, making duty base and duty low.

2. Reducing income taxes (in high-tax countries) → overpricing goods transferred to units in these countries, eliminates profits and shifts them to low-tax countries. Helps make financial statements look good too.

3. Facilitates dividend repatriation → invisible income may be taken out in the form of high prices for products or components shipped to units in that country.

4. Showing the feasible amount of profit → profit is flexible depending on who the company wishes to please.

In what various ways does the government set prices? Why do they engage in such activities?

1. Establishing margins, set prices and ceilings

2. Restricting price changes, competing in the market, or granting subsidies

3. Acting as a purchasing monopsony
Monopsony = Buying-side of a selling-
side monopoly, a 'buyer's monopoly'

4. Enforcing price freezes
Price freezes = Price of a product cannot be increased

Government price setting is encountered in a number of ways when companies conduct business in foreign countries. In order to control prices, governments may establish margins, set prices and floors on ceilings, restrict price changes, compete in the market, grant subsidies or act as a purchasing monopsony or selling monopoly. The government may also influence prices by permitting, or even encouraging, business to collude in setting manipulative prices.

Price controls are normally exercised for political and social reasons such as to control inflation, protect consumers from unjustified price increases and stimulate equal distribution of wealth.

Why has dumping become such an issue in recent years?

The growing importance of world trade to individual companies has combined with saturated domestic markets, overproduction and increased competition to encourage dumping in many product areas. Procedures are looking to the marginal revenue contribution which can be gained when products are sold above direct cost into markets not normally sold.

In recent years the number of dumping complaints in the United States has exploded and interest in antidumping enforcement and legislation has grown apace.

How can a marketer adjust prices to accommodate exchange-rate fluctuations?

Exchange rate fluctuations refers to how all major currencies nowadays are floating freely relative to one another, and how no one is quite sure of the value of any currency in the future. If exchange rates are not carefully considered in long-term contracts, companies find themselves unwittingly giving 15-20 per cent discounts. Hedging means insuring against a negative currency rate, and is becoming more common as a means of ensuring no discounts are given unwittingly.

Do value-added taxes discriminate against imported goods?

A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of general consumption tax that is collected incrementally, based on the increase in value of a product or service at each stage of production or distribution. VAT is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer.

Why are companies generally not "allowed" to perform price fixing, but governments are?

Price fixing relates to attempts to establish/fix prices for an entire market. The end goal of all administered pricing activities is to reduce the impact of price competition or eliminate it. It is not considered acceptable if done by corporations, but if the government steps in, its for the "greater good".

How can the problem of price escalation be counteracted?

Lower the cost of goods → results in a lower cost throughout the chain, and a lower final price.

Lower the tariffs → reclassifying products to receive lower tariff costs

Lower the distribution costs → fewer middlemen results in less taxes and middlemen markup.

Use foreign-trade zones → lowers costs in general in terms of shipping, holding and freight costs etc.

What is transfer pricing?

When a company uses selective prices for internal transactions, for example between two subsidiaries.

What is dumping?

An export practice, generally prohibited by laws and subject to penalties and fines, defined by some as the selling of products in foreign markets below the cost of production and by others as the selling of products at blow the prices of the same goods in the home market.

What is price escalation?

The pricing disparity in which goods are priced higher in a foreign market than in the home market (caused by added costs in exporting).

What is skimming?

A method of pricing, generally used for foreign markets, in which a company seeks to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for the value received.

What is parallel imports?

When products intended to be sold in one market, exclusively at a particular low price (often a government controlled low price), are sold in a second market (usually illegally) where market prices are higher.

What are the causes of price escalation? Do they differ for exports and goods produced and sold in a foreign country?

Causes for price escalation are incurred costs from the following;

Taxes, tariffs, and administrative costs
Inflation

Exchange variation → Variation in the exchange rate of two currencies.

Basically, if a company is experiencing high inflation in a country where they are selling their products, it may sometimes be even better to retain its inventory instead of selling at below its replacement costs. Ways of controlling inflation can be done by charging for extra services, inflate costs in transfer pricing, break up products into components and price each part separately.

Exchange-rate fluctuations hedging → insuring against a negative currency rate

Varying currency values

Middlemen withdrawals (from longer distribution channels)

Transportation and shipping

Why is it so difficult to control consumer prices when selling overseas?

There are many variables which must be considered when attempting to control consumer prices overseas. Among these are: tariffs on imports, "dumping" tariffs, sales taxes, distributive channel costs, added middlemen costs, and shipping costs. It is very difficult to control consumer prices when selling overseas.

Price escalation is one of the main reasons, as prices escalate differently. Some profiteering is also found in some countries, thus upsetting any consumer price control. Dumping, being defined differently, is treated differently under various laws making for more varied prices. Firms operating overseas have less ways to protect themselves from price variations and fluctuating exchange rates also tend to increase price fluctuations. In addition, many retailers overseas don't like price competition and avoid it if possible by raising or lowering their prices.

What are the causes and solutions for parallel imports and their effect on price?

Parallel markets occur when products are imported into a country without the consent of the brand owner. They result from ineffective management of prices and lack of control, and come up when importers buy products from distributors in one country and sell them in another to distributors who are not part of the manufacturer's regular distribution system. The possibility of parallel markets occurs whenever price differences are greater than the cost of transportation between two markets. Solution to parallel markets is to keep tight and effective controls over its management.