Mkt 4134 International Marketing Fourth Year First Semester

MKT 4134 International Marketing Fourth Year First Semester

Unit 02. Global Marketing Mix • International product policy • Pricing credit terms of business • Distributional decisions • Promotional impact on international marketing.

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Chapter 01

Exporting and Importing marketing and International Marketing

Pricing, credit terms of business

Introduction We need to set price when we have a new product, or when we enter a new market with an existing product •How? Need to decide what position you want your product to be in.

Possible Pricing Objectives •Profit objectives e.g. –Targeted profit return •Volume objectives e.g. –Dollar or unit sales growth –Market share growth •Other objectives e.g. –Match competitors’ price MKT 4234 International –Non-price competition Marketing

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Domestic and international price setting Pricing is a highly conspicuous element of the marketing mix and therefore has many publics to satisfy 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. Price is the only element of the marketing mix that produces revenue; all other elements represent costs. It is also one of the most flexible elements of the marketing mix. It can be changed quickly. At the same time, pricing can be the number one problem: How to generate sufficient sales while maximizing profits. MKT 4234 International Marketing

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Domestic and international price setting Appropriate pricing over the product development life cycle depends on the development of three different aspects of industry, which usually move in parallel paths: • Technical maturity, indicated by declining rate of product development, increasing standardization among brands, and increasing stability of manufacturing processes and knowledge about them. • Market maturity, indicated by consumer acceptance of the basic service idea and by enough familiarity and sophistication to permit consumers to compare brands competently. • Competitive maturity, indicated by increasing stability of market shares and price structures.

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Consumer sensitivity to pricing Sampson (1964) has argued that many desensitizing factors operate to diminish the impact of price changes. Insensitivity will be greater where the following conditions prevail: Personal selling, and therefore, variation in pointof-sale effectiveness. Promotion is local rather than standardized nationally. Service after sale is important. Consumers loyalties are significant. Products are highly differentiated and difficult to compare. There are multiple dimensions of product quality. Unit price is low. 7 The product is sophisticated.

Consumer sensitivity to pricing… Shapiro and Jackson (1978) cite five principles of a customer approach to pricing, which are; 2. The customer chooses products by measuring benefits against costs. 3. Benefits include more than physical attributes, and additional components such as services are important in differentiating products. 4. Cost involves more negative aspects of the purchase than price alone. 5. Benefits and costs must be understood in terms of a complete usage system, not as an isolated part of the system. 6. Different customers view benefits and costs in different ways, meaning that careful market segmentation is necessary.

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A multi-stage approach to pricing There are six major elements which have been identified by Oxenfeldt (1960) in a domestic market pricing decision, which in sequential order are:

1. Selecting market targets 4. Selecting a pricing polic

2. Choosing a brand image 5. Determining a pricing stra

Composing a marketing mix 6. Arriving at a specific pric MKT 4234 International Marketing

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International pricing standardization In an ideal world the same price for one’s product would prevail everywhere, but this does not happen. Price standardization can not happen within international marketing because of currency fluctuations, different factor costs, different product requirements, national standards, tariffs, duties and specific product category taxation plus official governmental controls on pricing and discounting. For example: McDonalds fast food ‘Bic Mac’ Prices differ in different countries due above factors described. McDonalds ‘Bic Mac’ MKT 4234 International Marketing

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Export market overheads Overheads arise with the sale of goods to their final destination, the customer. In international marketing, there are costs of freight and of distribution if the goods are simply to be exported but remain competitive on the foreign markets; and, the problems of critical mass and economies of scale if the products are to be produced locally in that foreign market. The cost of market entry and representation isInternational an overhead, as11 is MKT 4234 Marketing any required product modification to

Foreign currency invoicing and financing • The advantages of foreign currency invoicing include the following: • The ability to invoice in international currencies such as the US dollar which may be more attractive to buyers in the home country concerned. • The buyer is relieved of exchange risk where the price quotation is given in his own currency. • When sterling is at discount on the forward exchange markets, an exporter can sell his expected currency receipts forward for more sterling than he would receive at currently prevailing spot rates. MKT 4234 International Marketing

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Methods of payment

Many exporters still rely on overdrafts unconnected to the company’s export business, but overdrafts are for short term needs and must be repaid on demand. Payment in advance

Bonding

Open account

Methods of Payment Leasing

Bills of exchange Letter of credit MKT 4234 International Marketing

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Methods of payment Payment may either cash with order (CWO) or cash on delivery (COD), but this has very limited application and is quite rare. It would kill relationship before started to ask for cash upfront. This may be requested only where the buyer is unknown. There is less likelihood of further orders being requested and being paid for. MKT 4234 International Marketing

Payment in advance

Methods of Payment

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Methods of payment As this is based on trust, it offers the least security to the exporter, so should be limited to the most creditworthy customers, as well as subsidiaries and affiliates. It save money and procedural difficulties, but increases risk. Consignment account is a variation of Open account where exporter retains ownership of goods until they are sold. MKT 4234 International Marketing

Open Account

Methods of Payment

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Methods of payment unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time, a certain sum in money to, or to the order of, a specified person, or the bearer. MKT 4234 International Marketing

Bills of exchange

Methods of Payment

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Methods of payment

• A letter of credit is a conditional undertaking by a bank regarding payment. • A letter of credit offers both parties to a transaction a degree of security combined with a possibility, for a creditworthy partner, of securing financial assistance more easily. • It has 3 forms; – Revocable credit (it gives the buyer maximum flexibility as it can be cancelled without prior notice to the seller. – Irrecoverable credit (it is much less flexible and can only be amended or cancelled if all parties agree. MKT 4234 International Marketingcredit – Confirmed irrecoverable

Letter of credit

Methods of Payment

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Methods of payment Characteristics of letter of credit; 2. They are an arrangement by banks for setting international commercial transactions. 3. They provide a form of security for the parties involved. 4. They ensure payment, provided that the terms and conditions of the credit have been fulfilled. MKT 4234 International 5. Payment by such Marketing means is

Letter of credit

Methods of Payment

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Methods of payment

Exporters of capital equipment may use leasing in one of two ways: 2. To arrange cross-border leases directly from a bank or leasing Leasing company to the foreign buyer. 3. To obtain local leasing facilities either through overseas branches or subdivisions of UK banks or through international Methods of leasing associations. When leasing, the exporter receives Payment prompt payment for goods directly from the leasing company and at the same time avoids any recourse. 19 A leasing facility is best set up at

Methods of payment

It means that the buyer loses some of his leverage over his supplier as he cannot withhold payment as elsewhere contracts are of a longer duration. Bonding In this situation, a bond or guarantee is a written instrument issued to an overeas buyer by an acceptable third party, either a bank or insurance company. It guarantees compliance by anMethods of exporter or contractor with his obligations, or the overseas Payment buyer will be indemnified for a stated amount against the failure of the exporter/contractor to fulfill his obligations under the 20 MKT 4234 International contract. Marketing

Discounting and factoring

The factors are mainly owned by the large bank. They offer two services • Invoice discounting • Factoring

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Discounting and factoring Discounting Invoice discounting is a means of financing whereby the exporter sells his invoices to the factor at a discount in return for up to 80% of purchase price in advance MKT 4234 International Marketing

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Discounting and factoring Discounting In recent years, invoice factoring has enjoyed a remarkable rise in popularity, with both large and small companies taking advantage of the opportunity to get discounted cash flow. It is now often combined with asset-based lending (on vehicles, property or IT for example).

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Discounting and factoring Factoring When a company factors its accounts receivable, it sells individual accounts to a financial institution (called a factor).

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Intermediate Accounting 6 Cash and Receivables

Customers

Goods and Services Provided

Cash from Factoring Accounts Receivable

Factor

Sale of Accounts Receivable

Payment of Accounts Receivable

Discounting and factoring

Company

Accounts Receivable Established MKT 4234 International Marketing

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Intermediate Accounting 6 Cash and Receivables

Discounting and factoring The advantages to the exporter of factoring include: 2. Only one debtor- the factor. 3. No sales ledgering necessary. 4. No need to credit check or credit insurance. 5. No-recourse finance available. 6. Regular cash flow. 7. No foreign currency risk. 8. Substantial savings in staff and collection systems. MKT 4234 International Marketing

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Discounting and factoring Factoring disadvantages •

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Factoring companies are invariably selective in their choice of client and of the debtors they will factor. The service charge may be greater than the cost of employing own staff and systems. Contact with customers is reduced or eliminated. As the business grows and the factor’s charge becomes unacceptable, the exporter will not have developed inhouse experience. MKT 4234 International Marketing

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Intermediate Accounting 6 Cash and Receivables

Forfaiting Forfaiting is an arrangement whereby exporters of capital goods can obtain medium-term finance, usually for periods of between one and seven years. The forfaiting owes its origin to a French term ‘forfait’ which means to forfeit (or surrender) one’s rights on something to some one else. Under this mode of export finance, then exporter forfaits his rights to the future receivables and the 28 MKT 4234 International forfaiter loses recourse to the Marketing

Countertrade Countertrade is a sale that encompasses more than an exchange of goods, services, or ideas for money. Countertrade transactions are those transactions that 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. Countertrade transactions have therefore always arisen when economic circumstances made it more acceptable to exchange goods directly rather than to use money as an intermediary. 29 MKT 4234 International Countertrade is an alternative means of structuring an Marketing international sale when conventional means of

Countertrade (CT).. There are five main variants of countertrade: •

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Types Of counter trade

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Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment. Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country. Counter purchase : Sale of goods and services to a country by a company that promises to make a future purchase of a specific product from the country. Buyback 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. Offset : Agreement that a company will offset a hard - currency purchase of an unspecified product from that nation in the future.

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Countertrade

Advantages

1. The world debt crisis has made ordinary trade financing very risky. 2. The use of countertrade permits the covert reduction of prices and therefore allows the circumvention of price and exchange controls. 3. “You scratch my back and I’ll scratch yours” – Bilateralism 4. Excellent mechanism to gain entry into new markets 5. Countertrade can be a good 31 MKT 4234 way to International attract new buyers. Marketing

Countertrade • May involve the exchange of poor quality goods • Importing firm must find a market for goods in an unrelated industry Disadvantages • Can involve building a marketing infrastructure to dispose of a stream of such goods • More suitable to large firms

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Cartels In these are illegal but for exporting, they are permissible, just as questionable payments may be illegal in the home market but, if for international trade promotions, suddenly become allowable for tax allowances. This is similar to the consortium or federated approach to exporting, where several independent companies may choose to collaborate to make a concerted pitch to a target foreign market. Other well-known examples include: OPEC: As its name suggests, OPEC is organized by sovereign states. It cannot be held to antitrust enforcement in other jurisdictions by virtue of the doctrine of state immunity under public international law. However, members of the group do frequently break rank to increase production quotas. De Beers is a cartel of companies that trade in rough diamond exploration. Many trade organizations especially in industries dominated by only a few major companies, have been accused of being fronts for cartels: Although cartels are usually thought of as a group of corporations, some consider labour Unions to be cartels, as they seek to raise the price of labor (wages) by preventing competition. MKT 4234 International Marketing

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Thank You.

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Any questions ?

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