IBM 416 Lecture Notes - Lecture 5: Freight Forwarder, Pro Forma, Marginal Cost

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Chapter 13: Pricing Quotations, & Terms (Alberto)
· What are the facts and insights discussed in the text? Facts: A common misconception
of many company owners is that their prices are too high for foreign markets. Pro forma invoices
are the preferred method of quoting prices. Insights: It is a good practice to include a pro forma
invoice with any international quotation, regardless of whether it has been requested.What makes
your product sell domestically can help it sell abroad. Price is important, but it is not the only
selling point. Other competitive factors are need, utility, quality, service, credit, and consumer
taste. Don’t assume your price is uncompetitive. Your products could still be a bargain in
countries with a strong currency, even after adding overseas delivery costs and import duties
· What are the four critical elements to selling overseas? Pricing your product properly,
giving complete and accurate quotations, choosing the terms of the sale, and selecting the
payment method
· What are the considerations that will help you determine the best price for your
product overseas? 1) At what price should your firm sell its product in the foreign market?
2) What type of market positioning (that is, customer perception) does your company want to
convey from its pricing structure? 3) Does the export price reflect your product’s quality?
4) Is the price competitive? 5)What type of discount (for example, trade, cash, quantity) and
allowances (for example, advertising, trade-offs) should your firm offer its foreign customers?
6) Should prices differ by market segment? 7) What should your firm do about product-line
pricing? 8) What pricing options are available if your firm’s costs increase or decrease? Is the
demand in the foreign market elastic or inelastic? 9) Is the foreign government going to view
your prices as reasonable or exploitative? 10) Do the foreign country’s antidumping laws pose a
· Why pricing is important? the price at which a product or service is sold directly
determines your firm’s revenues. If your firm’s price is too high, the product or service will not
sell. If the price is too low, export activities may not be sufficiently profitable or may actually
create a net loss.
· What are the traditional components of pricing?costs, market demand, and
· What are the Strategies that affect pricing? you may ask whether your company is
attempting to penetrate a new market, seeking long-term market growth, or looking for an outlet
for surplus production or outmoded products. Marketing and pricing objectives may be
generalized or tailored to particular foreign markets. For example, marketing objectives for sales
to a developing nation, where per capita income may be one-tenth of that in the United States,
are necessarily different than marketing objectives for sales to Europe or Japan.
· What is the cost-plus method? the exporter starts with the domestic manufacturing cost
and adds administration, research and development, overhead, freight forwarding, distributor
margins, customs charges, and profit. The effect of this pricing approach may be that the export
price escalates into an uncompetitive range
· What are the characteristics of marginal cost pricing? Marginal cost pricing is a more
competitive method of pricing a product for market entry. This method considers the direct out-
of-pocket expenses of producing and selling products for export as a floor beneath which prices
cannot be set without incurring a loss
· How should pricing be determined according to market demand? A company should
take into account the market demand for its product. If the demand is high enough, then a
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product can sell in low income and high income areas. If there is not enough demand, you have
to be sensitive to the purchasing power and the currency fluctuations.
· How does competition effect pricing decisions? In the domestic market, few companies
are free to set prices without carefully evaluating their competitors’ pricing policies. If there are
many competitors within the foreign market, you may have little choice but to match the market
price or even underprice the product or service in order to establish a market share. If the product
or service is new to a particular foreign market, however, it may actually be possible to set a
higher price than in the domestic market.
· What are the key points to be learned in pricing? 1) Determine the objective in the
foreign market. 2) Compute the actual cost of the export product. 3) Compute the final consumer
price. 4) Evaluate market demand and competition. 5) Consider modifying the product to reduce
the export price. 6) Include “non-market” costs, such as tariffs and customs fees. 7) Exclude cost
elements that provide no benefit
· What is pro forma invoice? a quotation prepared in the format of an invoice; it is the
preferred method in the exporting business.
· What are its characteristics? Pro forma invoices are not used for payment purposes. In
addition to the 15 items previously mentioned, a pro forma invoice should include two
statements—one that certifies the pro forma invoice is true and correct, and another that indicates
the country of origin of the goods. The invoice should also be clearly marked “pro forma
invoice.” Pro forma invoices are models that the buyer uses when applying for an import license,
opening a letter of credit, or arranging for funds.
· What is quotation invoice? A quotation describes the product, states a price for it, sets the
time of shipment, and specifies the terms of sale and terms of payment
· What are its characteristics? Because the foreign buyer may not be familiar with the
product, the description of the product in an overseas quotation usually must be more detailed
than in a domestic quotation.
· What are the characteristics of the terms of sale?(PT) defines obligations, risks, costs
of the buyer and the seller, terms of delivery must be clear, The terms in international business
transactions often sound similar to those used in domestic business, but they frequently have
very different meaning
· What do Incoterms formally define? responsibilities of the exporter, import, specific
transfer point for the good shifts from the exporter to the importer
•Which tasks will be performed by the exporter
Which tasks will be performed by the importer
Which activities will be paid by the exporter
Which activities will be paid by the importer
When the transfer of responsibilities takes place
· Why choosing the correct incoterm is important? creating the right strategy and not
loosing money.
· What is
The following four factors are particularly important:
The type of product being sold (weight, volume, perishability, value, sensitivity to
temperature changes, and so on)
The method of shipment
The ability and willingness of either of the exporter and importer to perform the tasks
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