MRKT 4504 Week 9 Export Pricing Note Example

From Factory Door to Foreign Shelf: An Export Pricing Note Tracing Price Escalation for One Barbecue Sauce, Naming the Incoterm to Quote, Assigning Currency Risk and Testing the Landed Price Against Rivals

Student Name

Walden University

MRKT 4504: Global Marketing

Instructor Name

Month Day, Year

From Factory Door to Foreign Shelf: An Export Pricing Note Tracing Price Escalation for One Barbecue Sauce, Naming the Incoterm to Quote, Assigning Currency Risk and Testing the Landed Price Against Rivals

Why the Price Escalates

A bottle of Ember County Smokehouse's Original Hickory sauce leaves the factory at a price that makes sense in Kansas. By the time it sits on a supermarket shelf in Market A, its price has been raised by every cost and margin added along the way: packing for export, freight to the port, ocean freight and insurance, import duty and taxes and the margins of the importer and the retailer. Each margin is calculated on a price that already includes the costs before it, so the increases compound. Cavusgil (1988) called this price escalation and noted that exporters who ignore it often find their products priced far above local competitors. This note traces the escalation using the case's figures, recommends an Incoterm and tests the landed price against rival sauces.

The Escalation

The bottle's ex-works price is $2.40; its shelf price in Market A is about $5.76, roughly 2.4 times as much. The largest additions are the two margins, not freight or taxes. The importer's 25 percent margin on its selling price adds $1.01, and the retailer's 30 percent adds $1.73. Shipping and taxes together add about $0.62.

Table 1

Price Escalation for One 300-Milliliter Bottle, in US Dollars

Composite company and market. Figures are illustrative; margins are calculated on selling price, so each adds more than its percentage of the previous total.

Which Incoterm to Quote

Incoterms, published by the International Chamber of Commerce, define which party pays for and bears the risk of each stage of shipment (International Chamber of Commerce, 2019). Ember County could quote EXW, ex works, which leaves almost everything to the importer; FOB, free on board at Oakland, under which Ember County delivers the goods loaded on the vessel and the importer takes risk from that point; or CIF, cost, insurance and freight to Market A's port, under which Ember County also pays ocean freight and minimum insurance.

The note recommends FOB Oakland. Ember County already ships to West Coast ports for domestic customers and can manage inland freight and export clearance. Under FOB, the importer arranges ocean freight, which it does regularly and more cheaply than a small exporter could. EXW would push export clearance in the United States onto a foreign importer, which many importers dislike. CIF would add freight and insurance costs and risks Ember County is not well placed to manage.

Currency Exposure

The importer wants to pay in its local currency; Ember County wants dollars. If the price is set in dollars, the importer bears the currency risk: if the local currency weakens, the bottle costs it more and it may raise the shelf price or reduce orders. If the price is set in local currency, Ember County bears the risk. The note recommends dollar pricing with a review every six months, so that a large currency move can be shared through a price adjustment rather than landing entirely on one side. This keeps Ember County's revenue predictable while giving the importer a route to raise concerns.

The Landed Price Against Rivals

At about $5.76 for 300 milliliters, Ember County's sauce sits above locally made table sauces, which sell for about $1.50 to $2.50 for a similar size, and close to other imported American and Australian barbecue sauces, which sell for about $5.00 to $6.50 in Market A's supermarkets. It cannot compete with local sauces on price and should not try. Its competition is other imports, against which it is reasonably placed.

What the Firm Can Change

The ex-works price is the only figure Ember County fully controls. A reduction of $0.20 at the factory would lower the shelf price by about $0.41, because the taxes and margins multiply it. The smaller bottle proposed in the adaptation brief would lower the shelf price per bottle and bring it closer to the price points shoppers in Market A expect for table sauces. Cateora et al. (2020) note that shortening the distribution chain is often more effective at controlling escalation than cutting the factory price; the direct supermarket route chosen in the channel comparison already does that.

References

Cateora, P. R., Money, R. B., Gilly, M. C., & Graham, J. L. (2020). International marketing (18th ed.). McGraw-Hill Education.

Cavusgil, S. T. (1988). Unraveling the mystique of export pricing. Business Horizons, 31(3), 54-63. https://doi.org/10.1016/0007-6813(88)90009-2

International Chamber of Commerce. (2019). Incoterms 2020: ICC rules for the use of domestic and international trade terms. ICC.