Chapter 4: Export Pricing

◆ Export Pricing Strategies

◆ Marginal Cost Pricing
─ Cost to produce the export product
─ cost to selling in the foreign market
─ cost of moving the goods
◆ Sales term (INCOTERMS® 2020)
◆ Payment Methods
─ Cash with Order or in Advance of Order
─ Documentary Credit
─ Documentary Draft
─ Open Account
─ Consignment
◆ Dealing with Foreign Currency

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 ◆ Export Pricing Strategies
The export pricing strategies are:
─ Market penetration;
─ Market skimming;
─ Transfer Pricing;
─ Marginal Cost Pricing;
─ Market Oriented Pricing; and
─ Competitor's Pricing (Export Pricing Strategies, 2019).

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 ◆ Marginal Cost Pricing
The most effective method of pricing the export product is
marginal cost pricing (Goldsmith, 1989).

Marginal cost pricing includes following incremental costs

(Goldsmith, 1989):
1. Cost to produce the export product over and above the
costs to produce items sold domestically.
2. Cost of selling in the foreign market, such as advertising and
credit.
3. Cost of moving the goods from factory to final destination.

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 ◆ Marginal Cost Pricing
▪ Cost to Produce the Export Product
Cost of Production includes:
─ Fixed cost
executive salaries, rent, and interest payments
─ Variable Cost
cost of materials and sales

❖ Marginal cost pricing includes variable costs, but

not fixed costs.

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 ◆ Marginal Cost Pricing
▪ Cost to Selling in the Foreign Market

─ New packaging to market overseas

─ Travel to foreign market
─ Advertising and promotion abroad
─ Credit

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 ◆ Marginal Cost Pricing
▪ Cost of Moving the Goods
─ Loading and unloading cost
─ Shipping
─ Marine insurance
─ Tariffs
─ Warehousing
─ Port charges
─ Commissions of agent
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 ◆ Terms of Sale: INCOTERMS® 2020
▪ INCOTERMS stands for International Commercial Terms.
▪ INCOTERMS specify the duties and responsibilities of the buyer
(importer) and seller (exporter).
▪ International Chamber of Commerce (ICC) updated the terms of
trade named as 'INCOTERMS 2020' in 2019 (ICC, 2019).
▪ Initially created in 1936 by ICC.
▪ INCOTERMS® 2020 is the 9th revision.
▪ INCOTERMS® 2020 enter into force on January 1, 2020.

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 ◆ Terms of Sale
▪ 'INCOTERMS 2020’ consists of 11 terms (ICC, 2019):
EXW – Ex Works
FCA – Free Carrier
FAS – Free Alongside Ship
FOB – Free On Board Rules for sea and
inland waterway
CFR – Cost and Freight transport
CIF – Cost Insurance and Freight
CPT – Carriage Paid To
CIP – Carriage and Insurance Paid To
DAP – Delivered at Place
DPU – Delivered at Place Unloaded
DDP – Delivered Duty Paid
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 ◆ Payment Methods
▪ There are five methods of payments (Goldsmith, 1989):

Favor the ▪ Cash with order or in advance of order

Exporter
▪ Letter of credit
▪ Documentary drafts
Favor the
importer ▪ Open account
▪ Consignment

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 ◆ Payment Methods
▪ Cash with order or in advance of order

─ Receiving cash in advance or with order

─ Most favorable to exporter
─ Specially designed products are paid by this method
─ Less practiced method

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 ◆ Payment Methods
▪ Letter of credit / Documentary Credit

─ A letter of credit (LC) is a payment mode opened by importer

with a bank located in his/her locality.
─ An LC is a financing instrument for the buyer.
─ Issuing bank undertakes responsibility to pay the bill after
specified courses of action have been completed.
─ Exporter feels the security under LC arrangement.

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 ◆ Payment Methods
▪ Letter of credit / Documentary Credit…….. Definition

The ICC (2006) in the ‘Uniform Custom and Practice for

Documentary Credit’ (UCP 600, Article 2) defines documentary
credit is as follows:
"an arrangement, however named or described, that is
irrevocable and thereby constitutes a definite undertaking of the
issuing bank to honor a complying presentation.
Honor means:
• to pay at sight if the credit is available by sight payment.
• to incur a deferred payment undertaking and pay at maturity
if the credit is available by deferred payment.
• to accept a bill of exchange (draft) drawn by the beneficiary
and pay at maturity if the credit is available by acceptance”.
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 ◆ Payment Methods
▪ Letter of credit / Documentary Credit
Figure 4.1: Typical Letter of Credit Transaction

Documents forwarded to issuing

bank to authorize payment
Advising (6) Issuing
Bank Letter of Credit Bank
(2)
(5) (1)
Importer’s
Exporter/ Freight account is
Forwarder Application
Advises debited (or
presents financed) and
exporter of L/C
documents to documents
bank for payment (3) (8) are release
Ship the merchandise
(7) Exporter (4) Importer
Payment

Note: Adopted from Goldsmith, H. R. Import/export: A Guide to Growth, Profits, and Market Share. Prentice Hall Inc., 1989
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 ◆ Payment Methods
▪ Common Types of Letter of credit

─ Revocable vs. Irrevocable

─ Confirmed Vs. Unconfirmed
─ Revolving Credit: Noncumulative vs Cumulative
─ Transferable Credit
─ Back to Back Credit
─ Red Clause Credit
─ Standby LC (Letter of Credit Operation….,2012)

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 ◆ Payment Methods
▪ Confirmed irrevocable documentary credit

Confirming
Bank
Request

Advising Issuing
Bank Letter of Credit Bank
(2)
(1)

Application
Advises
exporter of L/C

(3)
Ship the merchandise
Exporter (4) Importer

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 ◆ Payment Methods
▪ Revolving documentary credit

Jan Feb Mar Apr May June Dec

$10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 = $120,000

• Noncumulative vs Cumulative revolving documentary credit

Jan Feb Mar Apr May June Dec

$10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 = $120,000

$10,000 $10,000 $6,000 $10,000 $10,000 $10,000 Noncumulative $10,000 = $116,000

+ $4,000
$10,000 $10,000 $6,000 $14,000 $10,000 $10,000 Cumulative $10,000 = $120,000

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 ◆ Payment Methods
▪ Back to Back (BTB) Letter of Credit
2.Letter
Backofto Issuing Bank of
Bank of Beijing (5.1) Credit
Back L/C New L/C Issuing Bank
Advising Bank
1. Back
Letter of EXIM
Advising Chase
(4.1) to Back Export Letter of Credit
AB Bank Credit Bank Letter of Credit Bank
L/C Bank (2)
Advising Bank
(4) (1)
Advises Advises Supplier Application
Supplier Application
to open L/C
(4.2) in favor of Advises exporter
Supplier 1 Supplier
[Gazipur]
(3)
(5.2)
Ship the goods (4.3) Ship the merchandise
Supplier 2
Exporter (6) Importer
Ship the materials (5.3) [Dhaka] [NY City]
[China]

Back to back letter of credit is a special type of LC that is opened against export
letter of credit to procure raw materials and/or accessories.
The total value of these two LCs can not exceed the value of master LC.
 ◆ Payment Methods
▪ Red Clause Credit

A red clause letter of credit is a specific type of letter of credit in which a buyer
extends an unsecured loan to a seller. Red Clause Letters of Credit permit
documentary credit beneficiaries to receive funds for any merchandise outlined in
the letter of credit.

These letters are commonly used by beneficiaries who act as purchasing

agents for buyers in another country.

These letters of credit were originally written in red ink.

 ◆ Payment Methods
▪ Standby LC

Advising (2) Standby Letter Issuing

Bank of Credit Bank

(5) (1)
Exporter/ Freight
Forwarder Application
presents Advises
documents to exporter
importer for
payment (3)

Ship the merchandise Importer

Exporter
(4)
 ◆ Payment Methods
▪ Common documents needed to open a Letter of credit in
Bangladesh
Importer in both public sector and private sector in Bangladesh shall
submit to their nominated Banks the following documents along with the
Letter of Credit Authorization (LCA) Form for opening Letter of Credit:
• L/C Application Form duly signed by the importer;
• Indents for goods issued by Indentor or a Proforma Invoice obtained
from the foreign supplier, as the case may be; and
• Insurance Cover Note.

Additional document to be furnished by public sector importers:

• Attested photocopy of sanction letter from the Administrative
Ministry or Division or Authority.

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 ◆ Payment Methods
▪ Common documents needed to open Letter of credit in
Bangladesh
Additional documents to be furnished by private sector importers:
• Valid Membership certificate from the registered local Chamber of
Commerce and Industry or any Trade Association established on all
Bangladesh basis, representing any special trade/business;
• Renewal Import Registration Certificate for the concerned financial year;
• A declaration, in triplicate, that the importer has paid income-tax or
submitted income tax return for the preceding year;
• Proof of having Tax Identification Number(TIN) in all cases of imports,
excepting personal use;
• Vat registration number
• Insurance Cover Note either from Shadaran Bima Corporation or from any
Bangladeshi Insurance Company and duly stamped insurance policy against
this cover-note; and
• Any such document as may be required as per this Order or Public Notice, or
instruction issued by Chief Controller, from time to time under the Import
Policy Order. 21
 ◆ Payment Methods
▪ Documentary drafts
is a written
Documentary Draft or Draft or Bill of Exchange (B/E)
document drawn by exporter (seller) on importer (buyer)
for certain some of money payable at sight or at some
definite future time (Goldsmith, 1989).

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 ◆ Payment Methods
▪ Documentary drafts
Figure 4.2: Typical Documentary Draft Transaction

Funds transmitted to
exporter’s bank
(7)
Exporter’s Forwards documents to Importer’s
Bank importer’s bank Bank
(4)

Exporter/Freight
forwarder presents
Application for
documents to bank Importer pays
document
or accepts
collection
documents
(3) (1) (5)
Ship the merchandise (6)
Exporter (2) Importer Importer picks
up merchandise
with documents
Note: Adopted from Goldsmith, Howard R. Import/export: A Guide to Growth, Profits, and Market Share. Prentice Hall Inc., 1989
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 ◆ Payment Methods
▪ Documentary drafts

Types of documentary drafts:

▪ Sight Draft Documents against payment (S/D, D/P)
▪ Documents against acceptance (D/A)

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 ◆ Payment Methods
▪ Documentary drafts: Documents against Payment (D/P)
─ If the term of draft is payment at sight, the arrangement is
called sight draft documents against payment (S/D).
─ The buyer needs to pay the bill immediately for receiving the
shipping documents to pick up the goods.

▪ Documentary drafts: Documents against Acceptance (D/A)

─ If the terms of draft are payment by acceptance, the
arrangement is called documents against payment (D/A).
─ The buyer needs to accept the draft for receiving the
shipping documents to pick up the goods.
─ The buyer pays the bill at maturity (e.g., 90 days D/A).

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 ◆ Payment Methods
▪ Open account
─ Open account is an arrangement where the importer pay the
balance of bill account periodically after the import
(Goldsmith, 1989).
─ This is used generally between a large company and its
subsidies abroad.
─ Exporter needs to have full confidence in the importer to
apply this method.
─ Some open account payments require monthly payment for
outstanding bills.

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 ◆ Payment Methods
▪ Consignment
When goods are exported on consignment, the exporter is not paid
until the goods are sold in the overseas marketplace.

The problems associated with this method include the following:

▪ Delays in payment
▪ Risk of nonpayment
▪ Cost of returning merchandise
▪ Limited sales effort by importers

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 ◆ Dealing with Foreign Currency
▪ Currency Use
─ Buyer and seller must be agreed on use of specific currency.
─ the importer may require that its own currency be used.
─ the exporter can choose his own currency, the buyer’s
currency, or some ‘third party’ currency.
─ Mostly used currency is U.S. dollar.
▪ Choice of currency depends on the factors:
o buyer preferences,
o exchange rates (floating or fixed),
o freedom of exchange,
o the availability of currencies in the importer’s country, and
o government policies (Albaum & Duer, 2011; Goldsmith, 1989) .

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 ◆ Dealing with Foreign Currency
▪ Hedging
─ Hedging is a way for a company to minimize or eliminate
foreign exchange risk (Goldsmith, 1989).
─ A forex hedge is a transaction implemented by a forex trader
or investor to protect an existing or anticipated position from
an unwanted move in exchange rates.
─ Exporter may be protected by contracting to sell the foreign
currency to a bank at a fixed rate of exchange agreeing to
deliver at a given future date.

Two types:
• Forward
• Options
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 ◆ Dealing with Foreign Currency
▪ Hedging: Forward Contract

Today After 60 days After 60 days After 60 days

$ 1 Million $ 1 Million $1 = Tk 82 $1 = Tk 78
$1 = Tk 80 $1 = Tk 80
Tk 80 million Tk 80 million

Contract date/ Payment time Gains of bank Loss of bank

price settlement/
Delivery time

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 ◆ Dealing with Foreign Currency
▪ Hedging: Options

Today After 60 days After 60 days

$ 1 Million $ 1 Million $1 = Tk 82
$1 = Tk 80 $1 = Tk 80
Tk 80 million Tk 80 million

Contract date/ Payment time Can sell the

price settlement/ currency in the
Delivery time spot market

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 ❖ References
• Albaum, G. & Edwin Duerr, International Marketing & Export Management, 7th Edition,
Prentice Hall Inc., 2011
• Export Pricing Strategies. (2019, January 6). Retrieved December 31, 2019, from
https://howtoexportimport.com/Export-Pricing-Strategies-4580.aspx
• Goldsmith, Howard R. Import/export: A Guide to Growth, Profits, and Market Share.
Prentice Hall Inc., 1989
• ICC [International Chamber of Commerce]. (2006) ICC Uniforms Customs and Practice for
Documentary Credits, 2007 Revision. Paris, France: ICC Services.
• ICC [International Chamber of Commerce]. (2019, March 27). Incoterms® 2020.
Retrieved December 31, 2019, from https://iccwbo.org/resources-for-
business/incoterms-rules/incoterms-2020/
• Letter of Credit Operation in Bangladesh. (2012, August 9). Retrieved December 15,
2019, from https://www.educarnival.com/letter-of-credit-operation-in-bangladesh/

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 ❖ Further Reading
▪ Pricing strategy: https://howtoexportimport.com/Export-Pricing-Strategies-4580.aspx
• INCOTERMS: Incoterms® 2020, No. 723E , ISBN : 978-92-842-0510-3
https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/
▪ Payment Methods: https://www.eajournals.org/journals/global-journal-of-politics-and-
law-research-gjplr/vol-3issue-1-march-2015/methods-international-trade-payments-
nigerian-perspective/
▪ http://www.eajournals.org/wp-content/uploads/Methods-of-International-Trade-
and-Payments.pdf
▪ Letter of Credit: https://www.educarnival.com/letter-of-credit-operation-in-bangladesh/
▪ https://ecotex.tistory.com/256
▪ Currency: Albaum, G. & Edwin Duerr, International Marketing & Export Management, 7th
Edition, Prentice Hall Inc., 2011
▪ Hedging: Albaum, G. & Edwin Duerr, International Marketing & Export Management, 7th
Edition, Prentice Hall Inc., 2011
▪ Solutions, S. (n.d.). Download Incoterms 2020 Rules: Chart of Responsibilities.
Retrieved December 14, 2019, from https://www.shippingsolutions.com/incoterms-
chart-of-responsibilities

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