Chapter 2

PRICING IN INTERNATIONAL
TRADE & INCOTERMS

Assoc. Prof. Dr. BÙI THANH TRÁNG

 KEY POINTS

–  Pricing in export & import

•  Pricing Considerations
•  Approaches to Export Pricing

–  INCOTERMS-Terms of Sale
•  Understand Scope and Structure of Incoterms
•  Appreciate important differences
Approaches to Export Pricing

v Cost-based pricing: Export price is based

on full cost and markup or full cost plus a
desired amount of return on investment.

v Marginal pricing: Export price is based on

the variable cost of producing the product.
Approaches to Export Pricing

v Marginal pricing: is a technique commonly

employed in export and produces a more
competitive price to assist market entry. This
method establishes the base price of a product
or service using the direct costs of production
and sales, with fixed costs apportioned to the
volume of the sale.
Approaches to Export Pricing
v Skimming versus penetration pricing:
² Price skimming is charging a premium price for a
product;
² Penetration pricing is based on charging lower prices
for exports to increase market share.

v Demand-based pricing: Export price is based on

what the market could bear.

v Competitive pricing: Export prices are based on

competitive pressures in the market.
PRICING OBJECTIVES AND PRICING STRATEGY

Pricing Objectives
Pricing Objectives
Maximize sales
Achieve a desired profit level
Increase market share
Covey image of prestige
Covey image of discounts

Minimum price Maximum price

Same price for all markets Different prices for all markets

Pricing Strategies Pricing Strategies

•  Penetration pricing •  Price Skimming
•  Cost-based pricing •  Demand-based pricing
 What are INCOTERMS?
v A set of rules for the interpretation of trade terms, in a
contract of sale.
v Incoterms are not law.

v ICC official rules for the interpretation of the trade terms

v INCOTERNS 1936 is first published by ICC,

amendments and additions were made in 1953, 1967,
1976, 1980 , 1990, 2000 and 2010.
 What are INCOTERMS?

INCOTERMS : INternational COmmercial TERMS

Define the mutual obligations of seller and buyer
arising from the movement of goods under an
international contract from the standpoint of risks,
costs and documents”
 PURPOSE OF INCOTERMS

v Ditermining the obligations of the seller and buyer:

§  Costs and expenses
§  Transfer of Risk (loss of or damage to the
goods passes from the seller to the buyer)

v  Calculating exporting price for term of sale.

 SCOPE OF INCOTERMS

v Do not deal with:

§  Transfer of ownership and other property right
§  Breach of contract
 Key Definitions for
Understanding INCOTERMS
•  Pre-carriage: Inland transportation on seller’s
side from shipment origin point to port of
departure
•  Main-carriage: Transportation from the seller's
side to the buyer's side
•  On-carriage: Transportation from the arrival
point on the buyer's side to any other place
(such as to the buyer's premises).
 Pre-carriage, Main-carriage, On-carriage

Export Import
Clearance Clearance

PRE -CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller Buyer
Goods

Risk

Cost
 Incoterms’ Functions
1.  Shipping responsibilities and costs

§  Export Clearance

§  Pre-carriage for Export: Inland transportation on
seller’s side:
ü  From shipment origin point to port of departure
ü  Deals separately with: Loading and Unloading
 Incoterms’ Functions
§  Main Carriage for Export: International transportation
ü  From seller’s country to buyer’s country
ü  Deals separately with: Loading and Unloading

§  On Carriage for Export: Inland transportation on

buyer’s side
§  From import entry port to location designated by
buyer
§  Deals separately with: Loading and Unloading
 Incoterms’ Functions
§  Import Clearance
ü  Import licenses, when applicable
ü  Customs import formalities
ü  Possible payment of:
• Import duties
• Import taxes, such as VAT
• Other fees / charges
2. Insurance
§  Only two Incoterms deal with insurance: CIF & CIP
§  nsurance required = minimum cover
 Incoterms’ Functions
3.  Setting export price:
–  Guide seller in setting export price and clarify for buyer
“buyer’s costs”
–  Seller increases export price to include seller’s costs
under relevant Incoterm
–  Example: EXW
ü  Plus: Export Clearance
ü  Pre-Carriage Loading, etc.
 Incoterms’ Functions
4.  Clarify subsidiary contract responsibilities
of seller & buyer
§  Contract with Freight forwarder: Export clearance
§  Contract with Carriers: Pre, Main, On
§  Contract with Insurer
§  Contract with Customs broker: Import clearance
 Incoterms’ Functions
5.  Clarify when “delivery” occurs and “risk
of loss” transfers
§  Risk of loss transfers with “Delivery”
 The structure of INCOTERMS 2010

Group E Group F Group F Group D

Departure terms Main carriage Main carriage Arrival terms
unpaid paid (seller pays)
(buyer pays)
EXW FCA CFR DAT
FAS CIF DAP
FOB CPT DDP
CIP

•  FAS, FOB, CFR, CIF – Marine restricted

•  EXW, FCA, CPT, CIP, DAT, DAP, DDP – Omni-modal (all transport modes)
 INCOTERMS 2010

GROUP E : Departure
v  EXW: Ex Works
(named place)
GROUP F : Main Carriage Unpaid
v  FCA: Free Carrier
(named place)
v  FAS: Free Alongside Ship
(named port of shipment)
v  FOB: Free On Board
(named port of shipment)
 INCOTERMS 2010
GROUP C: Main Carriage Paid
v  CFR: Cost and Freight
(named port of destination)
v  CIF: Cost, Insurance and Freight
(named port of destination)
v  CPT: Carriage Paid To
(named place of destination)
v  CIP: Carriage and Insurance Paid To
(…named place of destination)
 INCOTERMS 2010
GROUP D : Arrival

v DAT: Delivered At Terminal

(named terminal at port or place of destination)
v DAP: Delivered At Place
(named place of destination)
v DDP Delivered Duty Paid
(named place of destination)
 INCOTERMS
SELLER’S OBLIGATIONS
A1. General obligations of the seller
A2. Licences and formalities
A3. Contract of carriage & insurance
A4. Delivery
A5. Transfer of risks
A6. Division of costs
A7. Notice to the buyer
A8. Delivery document
A9. Checking- Packaging –Marking
A10. Assistance with information
and related costs
BUYER’S OBLIGATIONS
B1. General obligations of the buyer
B2. Licences and formalities
B3. Contract of carriage & insurance
B4. Taking delivery
B5. Transfer of risks
B6. Division of costs
B7. Notice to the seller
B8. Proof of delivery
B9. Inspection of goods
B10. Assistance with information
and related costs
 EXW-EX WORKS (named place)
SELLER BUYER
•  Licences No Export & Import
•  Carriage No No
•  Insurance No No
•  Delivery Named place of Taking delivery of
delivery, not loaded goods
•  Transfer of risks When goods From the time
delivered goods delivered
•  Division of costs Pay costs goods Pay costs goods
until delivered from delivered

Transfer of risks : bear all risks of loss of or damage

 EX WORKS (EXW)
(named place)
Critical points :
v Seller minimizes risk by only making the goods available
at premises.
v Buyer must arrange pre-carriage, export clearance, main
carriage, import clearance and on carriage
v Neither party is required to insure
v Transport Mode: All
 Group F: FCA/FAS/FOB
v  More obligations for seller than EXW
v  “Delivery” occurs:
•  FCA - when seller delivers goods to carrier or named
place
•  FAS – when seller places goods alongside vessel at
shipment port
•  FOB – when goods places on board the vessel at
shipment port
v  FCA/FAS/FOB = Shipment Contracts
v  Under F-terms, the seller arranges and pays for pre-
carriage in the country of export. Including export
clearance
 FAS –FREE ALONGSDE SHIP
(..name port of shipment)
SELLER BUYER
•  Licences Export Import
•  Carriage No Yes
•  Insurance No No
•  Delivery Places goods Taking delivery of
alongside vessel at goods
shipment port
•  Transfer of risks When goods From the time
places alongside goods delivered
vessel at
shipment port
•  Division of costs Pay costs goods Pay costs goods
until delivered from delivered
 FAS –FREE ALONGSDE SHIP
(..name port of shipment)

Critical points :
1.  FAS: the seller delivers when the goods are placed
alongside the vessel at the named port of shipment.
2.  Buyer has to bear all costs and risks of loss of or
damage to the goods from that moment.
3.  The FAS term requires the seller to clear the goods for
export.
 FCA –FREE CARRIER (..name place)
SELLER BUYER
•  Licences Export Import
•  Carriage No Yes
•  Insurance No No
•  Delivery Seller delivers goods to Taking
carrier. Delivery is completed: delivery of
•  At the seller’s premises, goods
goods loaded on the means of
transport
•  In any other case, goods on
the seller’s means of transport
ready for unloading
 FCA –FREE CARRIER (..name place)

SELLER BUYER
•  Transfer of risks When goods From the time
delivers to carrier goods delivered

•  Division of costs Pay costs goods Pay costs goods

until delivered from delivered
 FCA –FREE CARRIER (..name place)

Critical points :
1.  FCA -the seller delivers the goods, cleared for export, to
the carrier nominated by the buyer at the named place.
2.  If delivery occurs at the seller’s premises, the seller is
responsible for loading.
3.  If delivery occurs at any other place, the seller is not
responsible for unloading
4.  Risks are transferred when the goods have been delivered
to the first carrier
FOB –FREE ON BOARD (..name port of shipment)

SELLER BUYER
•  Licences Export Import
•  Carriage No Yes
•  Insurance No No
•  Delivery Deliver the goods on Taking delivery
board the vessel at of goods
shipment port
•  Transfer of risks When goods places From the time
on board the vessel goods delivered
at shipment port
•  Division of costs Pay costs goods until Pay costs goods
delivered from delivered
FOB –FREE ON BOARD (..name port of shipment)

Export Import
SELLER BUYER
Clearance Clearance

Goods

PRE-CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk

Seller’s Cost
FOB –FREE ON BOARD (..name port of shipment)

Critical points :
1.  Carriage to be arranged by the buyer.
2.  Risk transfer from the seller to the buyer when the
goods are on board the vessel
3.  Cost transfer from the seller to the buyer when the
goods are on board the vessel
Group C: Main Carriage Paid by Seller

Ø  CFR - Cost & FReight

Ø  CIF - Cost, Insurance & Freight
Ø  CPT - Carriage Paid To
Ø  CIP - Carriage & Insurance Paid to
Under C-terms, the seller arranges and
pays for the main carriage but without
assuming the risk of the main carriage.
CFR–COST AND FREIGHT (name port of destination)

SELLER BUYER
•  Licences Export Import
•  Carriage Yes No
•  Insurance No No
•  Delivery Deliver the goods on Accept delivery &
board the vessel at receive goods
shipment port from carrier at
destination port
•  Transfer of risks When goods places From the time
on board the vessel goods delivered
at shipment port
•  Division of costs Pay costs goods until Pay costs goods
delivered from delivered
CFR–COST AND FREIGHT (name port of destination)

SELLER Export Import BUYER

Clearance Clearance

Goods

PRE-CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk

Seller’s Cost
CFR–COST AND FREIGHT (name port of destination)

Critical points :

1.  Carriage to be arranged by the seller.

2.  Risk transfer from the seller to the buyer when the
goods placed on board the vessel
3.  Cost transfer at port of destination.
 CIF–COST INSURANCE AND FREIGHT
(..name port of destination)
SELLER BUYER
•  Licences Export Import
•  Carriage Yes No
•  Insurance Yes No
•  Delivery Deliver the goods on Accept delivery &
board the vessel at receive goods
shipment port from carrier at
destination port
•  Transfer of risks When goods places From the time
on board the vessel goods delivered
at shipment port
•  Division of costs Pay costs goods until Pay costs goods
delivered from delivered
 CIF–COST INSURANCE AND FREIGHT
(..name port of destination)

SELLER Export Import

Clearance Clearance BUYER

Goods

PRE-CARRIAGE MAIN CARRIAGE ON-CARRIAGE

Seller’s Risk

Seller’s Cost + Insurance

 CIF–COST INSURANCE AND FREIGHT
(..name port of destination)

Critical points :

1.  Carriage and insurance arranged by the seller.

2.  Risk transfer from the seller to the buyer when the
goods placed on board the vessel.
3.  Cost transfer at port of destination including insurance
 CPT–CARRIAGE PAID TO
(..name place of destination)
SELLER BUYER
•  Licences Export Import
•  Carriage Yes No
•  Insurance No No
•  Delivery Deliver the goods to Accept delivery &
the first carrier receive goods
from carrier at
destination place
•  Transfer of risks When goods From the time
delivered to first goods delivered
carrier
•  Division of costs Pay costs goods until Pay costs goods
delivered from delivered
 CPT–CARRIAGE PAID TO
(..name place of destination)

Critical points :

1.  Carriage to be arranged by the seller.

2.  Risk transfer from the seller to the buyer when the
goods have been delivered to the carrier.

3.  Cost transfer at the place of destination

 CIP–CARRIAGE AND INSURANCE PAID TO
(..name place of destination)
SELLER BUYER
•  Licences Export Import
•  Carriage Yes No
•  Insurance Yes No
•  Delivery Deliver the goods to Accept delivery &
the first carrier receive goods
from carrier at
destination place
•  Transfer of risks When goods From the time
delivered to first goods delivered
carrier
•  Division of costs Pay costs goods until Pay costs goods
delivered from delivered
 CIP–CARRIAGE AND INSURANCE PAID TO
(..name place of destination)

Critical points :
1.  CIP = CPT + I , Seller contracts for insurance and
pays insurance premium.
2.  Insurance on minimum coverage.
3.  Risk transfer from the seller to the buyer when the
goods have been delivered to the carrier.
 DAT– DELIVERED AT TERMINAL
(..the named terminal at port/ name place of destination)

SELLER BUYER
•  Licences Export Import
•  Carriage Yes No
•  Insurance No No
•  Delivery Delivers goods to Receive goods
destination terminal when goods
on Buyer’s side, delivered
unloaded
•  Transfer of risks When goods From the time
delivered to goods delivered
destination terminal
•  Division of costs Pay costs goods until Pay costs goods
delivered from delivered
 DAP– DELIVERED AT PLACE
(..name place of destination)
SELLER BUYER
•  Licences Export Import
•  Carriage Yes No
•  Insurance No No
•  Delivery Delivers goods to Receive goods
named place, on when goods
means of transport delivered
ready for unloading
•  Transfer of risks When goods delivered From the time
on means of transport goods delivered
ready for unloading
•  Division of costs Pay costs goods until Pay costs goods
delivered from delivered
 DDP– DELIVERED DUTY PAID
(..name place of destination)
SELLER BUYER
•  Licences Export & Import No
•  Carriage Yes No
•  Insurance No No
•  Delivery Delivers goods to Receive goods
named place, on when goods
means of transport delivered
ready for unloading
•  Transfer of risks When goods delivered From the time
on means of transport goods delivered
ready for unloading
•  Division of costs Pay costs goods until Pay costs goods
delivered from delivered
PRICING IN INTERNATIONAL TRADE
 ‘Cost Plus’ export pricing model
1.  Warehouse storage
2.  Warehouse labor
3.  Export packing
4.  Inland Freight (delivery to first carrier/to vessel) (pre-carriage)
5.  Export Customs
6.  Terminal Charges/Loading fees
7.  Documentation fees
8.  Ocean/Air Freight (main-carriage)
9.  Insurance
10.  Charges on Arrival at Destination (on-carriage)
11.  Import duty/Taxes & Customs Clearance
12.  Delivery to Destination
 ‘Cost plus’ export pricing model
All terms must be followed by a named place:
CIF Tokyo, FOB HCMC.

FOB:
EXW Price plus:
–  Transport to carrier(pre-carriage) (port, airport)
–  Customs clearance for export (export duty, customs fee)
–  Additional packing/ labour for transport (loading fee)
–  Document fee
 ‘Cost plus’ export pricing model
All terms must be followed by a named place:
CIF Tokyo, FOB HCMC.

CFR:
EXW Price plus:
•  Transport to carrier (pre-carriage) (port, airport)
•  Customs clearance for export ( export duty,
customs fee)
•  Additional packing/ labor for transport (loading fee)
•  Document fee
•  Sea/air freight charges to wharf/airport (main-
carriage)
 ‘Cost plus’ export pricing model
All terms must be followed by a named place:
CIF Tokyo, FOB HCMC.

CIF:
EXW Price plus:
•  Transport to carrier (pre-carriage) (port, airport)
•  Customs clearance for export ( export duty,
customs fee)
•  Additional packing/ labor for transport (loading fee)
•  Document fee
•  Sea/air freight charges to wharf/airport (main-
carriage)
•  Marine Insurance Premium.
 The ‘top down’ method

•  The ‘Top down’ method: An alternative

pricing technique to the ‘cost plus’ method
is working back from a market price that
you will have to meet to be competitive.
 Example of the ‘top down’ method
Per Bottle Quick Tips
Wine per bottle at retail store (USD) (HCMC) 30.0
Deduct VAT (10%) 3.0
Consumer Price per bottle Excluding VAT 27.0
Deduct retail margin of 40% 10.8 27 x 0.4
Retailers Buying Price Per Bottle 16.2 27- 10.8
Importers Buy Price per bottle – Deduct Importers 11.7 16.2/1.38
margin of 30%+ Clearance &
Warehouse Allowance of 3% + Advertising &
Promotion Allowance of 5% = total of 38%
Importers Buy Price per case with duty 140.4 11.7 x 12
Importers Price per case before duty – Deduct 78.0 140.4/1.8
Duty (80%) of CIF (Saigon)
CIF per case (USD) (case: 12 bottles) 78.0
Deduct Freight 1.5
Deduct Marine Insurance 1.0
FOB per case (USD) (Hong Kong) 75.5