PRICING GOODS AND SERVICES FOR FOREIGN MARKETS
Pricing products to be competitive in international markets can be a challenge. Pricing that works in one market may be totally uncompetitive in another. A well-considered pricing strategy, then, is regarded as an essential component of any business’s exporting plan. Any business, large or small, needs to ponder several factors when putting together a pricing strategy for foreign markets.
In addition to considering operating and marketing expenses, businesses should weigh both competition and product demand within the targeted country. Finally, a business owner pondering entry into the world of international trade needs to establish practices that are in concert with his or her ultimate goals. Your goals will vary depending on the target overseas market. Are you entering the market with a new or unique product? Are you selling excess or obsolete products? Can your product demand a higher price because of brand recognition or superior quality? May be you are willing to reduce profits to gain market share for long-term growth. Your pricing decisions will be affected by your company’s goals.
Very few exporters are able to set prices for their goods and services without carefully evaluating their competitor’s pricing policies. In a crowded foreign market that features a number of competitors, an exporter may have little choice but to match the going price or even go below it to establish a market share. Consequently, an exporter armed with a product or service that is new to a particular foreign market may be able to set a higher price than normally charged domestically. Of course, sometimes a company introduces abroad new product or service into a foreign market, only to discover to its great distress that nobody is interested in the product or service. Businesses that find themselves in such situations almost invariably did not devote sufficient time or resources to assessing market demand.
Payment Mechanisms in International Trade
There are five principal arrangements that exporters use in securing payment for their products or services. The most popular method of payment among exporters is, understandably, one in which they receive payment for their goods in advance. Indeed, many businesses refuse to make exporting arrangements with a buyer who is unwilling to agree to this transaction method.
Payment in Advance
This protects exporters from buyers who prove unwilling or unable to make full payment once they have received the ordered goods. Some business analysts contend, however, that this insistence on such advantageous (for the exporter) terms may cost a company business over time if it is not careful. They point out that some importers of their goods might interpret this stipulation as a suggestion that they do not conduct their business honorably.
Well-established and respected and buyers with good credit histories are even more likely to take offence at such a requirement. Consultants thus encourage some business clients to be somewhat malleable regarding payment mechanisms instead of insisting on strict adherence to up-front payments on all occasions.
Letter of Credit
Another payment method is known as the letter of credit (LC). The LC payment mechanism is a complex transaction that can seem somewhat cumbersome, but its safeguards make it quite attractive to many businesses involved in international trade. In this situation, a bank in assesse ensures that the importer’s credit is good by bestowing upon it an LC.
Under this arrangement, the bank makes payment to the importer. The terms of an irrevocable letter of credit cannot be changed without the express permission of the exporter once it has been opened. The letter of credit also extends some protection to the importers, for it includes steps that ensure that the exporter has fully complied with the terms of sale. But some importers balk at the added costs that LC arrangement bring on them. Letters of credit can be shaped in accordance with a number of different payment schedules. For instance, some LCs call for payment within 72 hours, while others call for payment a certain number of days after export materials have been received. Most exporters, however, prefer to have a specified date of payment included in the letter of credit.
This payment mechanism, which is also known as a draft, is roughly equivalent to COD (cash on delivery) or payment by cheque terms. Under this system of payment, a draft is drawn that requires the buyer to make payment either on sight (sight draft) or by a specified date (time draft). Legal possession of the products does not pass from the exporter to the importer until the draft has been paid or accepted. Analysts note that this arrangement serves to protect both parties (although the exporter may still have to pursue legal options to secure payment if the buyer defaults).
Under terms of consignment, an exporter receives no revenue for his or her sale until the buyer of the goods has sold the products. Exporters run a great risk of being burned financially under this arrangement than under any of the above-mentioned payment systems. If the importer proves unable to sell all the goods that he or she has received, the exporter’s profits, already compromised, can be lost completely because of the cost of recovering the unsold products. Indeed, even if the goods are all sold, the exporter has no way of predicting the amount of time that will be required to do so.
Among exporters, this is the most unpopular of the various international payment mechanisms that are available. It should be avoided by businesses except in circumstance when you have an established, secure relationship with a healthy buyer who is operating in a stable country. With this arrangement, goods are manufactured and delivered to the buyer before payment is required. In some cases, payment is not required until as long as 60 days after delivery.
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