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Guide to pricing for export

This is one of three practical guides to the more important and technical aspects of the export process. Familiarising yourself with the issues covered in this guide will help you plan your international market strategy, and ensure that the first export sale you make develops into long-term, self-sustaining business.

Why is export pricing different?

Pricing for any market requires an understanding of relative costs, demand and competition in that market. In offshore markets these factors vary greatly from those in Australia. Careful analysis of prevailing conditions in the markets you choose, and an accurate assessment of the way to structure your export price, determine whether you can be competitive and write profitable business.

Checklist Exporting will place different demands on your finances. Cost plus is the traditional approach to pricing in any market. Marginal costing is a standard export pricing technique but it assumes you have stable revenues in your domestic business. Beware of aggressive pricing to gain market entry. It can set your base prices in the buyers mind. Matching market price is essential to gain market share. Calculate your ex-works price on a top down basis to determine how you can be competitive and be profitable. Plan for surprises. Entering new markets always poses higher risks due to unforeseen factors.

Options for calculating export price

The traditional method of price calculation is the cost-plus approach. The price calculation will include the components of domestic price, but the addition of costs that are specific to export transactions can render a price constructed on this basis uncompetitive. Marginal (or differential) costing 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. Care must be taken to ensure that your existing business continues to run at stable volumes and that your marginal price is applied to new business. A marginal costing example has been provided within this guide. Other pricing techniques are more emotive and can involve predatory pricing at a loss to gain market access. Operating in this manner requires an agile on the ground presence to capture new business and combat your competitors response. Unfortunately, being a price taker provides the buyer with a negotiating advantage, as your opening price is often perceived as a base level from which future discounting is anticipated.

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. An example of this technique is provided to enable you to work back to compute your ex-works price to be competitive in the export market.

What are the export components I need to consider?

Export market development can involve a range of costs that do not apply to domestic sales. Your knowledge of these costs will only be developed through experience. It is critical at the outset that you recognise these costs and include realistic values for them. Some of the costs specific to export transactions include market research, travel, international communications, production of export literature (including translation), freight forwarding and other logistics charges. These also include export packing, product modifications, packaging, labeling and compliance with foreign standards, insurance, credit checking, export documentation, export financing charges and training of an overseas distributors staff. Austrades EMDG program provides a level of rebate for these costs. Full details are available on the Austrade website.

What are the traps?

Without adequate research into the build up of an export price and an under-allowance for unforeseen cost components and contingencies, export transactions that initially appear attractive may prove unprofitable and/or unexpectedly resource-intensive. Ensure that the understanding with your buyer is clear and well documented. A handshake on the deal sometimes works well but is the exception. Typical cost elements that can frequently be overlooked or under-estimated include: > > > > > > > Additional freight and handling costs due to a misunderstanding of trading terms and conventions (Incoterms see next section). Last-minute product modifications to meet an export standard. Packaging and labeling requirements (language, ingredients, use-by dates). Documentation requirements such as certificates of origin and expensive legalisation of invoices by embassies. Insurance (including credit insurance), finance and banking charges. Delays in customs clearance at port of discharge if documentation, packaging and labeling is not in order. For service exports, vaguely worded contracts or agreements where the buyer can enforce clauses which require after sales service or implied warranties.

Checklist When dealing in new markets check with advisers and other Australian exporters to identify the areas where things can go wrong and costs escalate. Export documentation may be complex. Use an expert. Getting an order is exciting. But take extreme care about your costs. Having your product rejected at a port of entry can result in heavy losses. Pricing behaviour varies widely. Take time to understand pricing behaviours. The 13 Incoterms are the basic language governing international transactions. Take time to understand them.

Other export pricing watch points

> The temptation to accept an order, often under time pressure, can result in losses unless you are closely monitoring your finances. Costs of production can change, as well as fixed costs. These factors can have a critical impact on your pricing, notably for marginal costing, where it is imperative to maintain close control and monitoring of fixed costs. Delays in customs clearance are common in many markets. Ensure that your liabilities for delivery are worded explicitly to avoid unanticipated demurrage and other logistics charges. Take care with packaging, documentation and labeling requirements as rejection of your product at the port of entry can result in high expenses in remediation or product return. Avoid promises from agents or buyers that all will be OK unless you are confident that you have fully complied with local regulations. Get good advice on your foreign currency exposure. All Australian banks offer foreign exchange risk management products. When dealing with documentary credits (such as a letter of credit), remember that the wording on all documents must be precise and matching contractual requirements. Simple mistakes in clauses in documentary credits can cause extensive delays in receiving payment. Get a good feel for price behaviour in the markets of interest. In some countries, bargaining is expected as a matter of course. Get good local advice and experience of the market environment first-hand. Stress product or service benefits wherever possible, before accepting demands for a lower price. Services exporters are often faced with different issues. Terminology in many countries can be different and result in misunderstandings in areas such as warranties, performance bonds and the handling of contract variations.

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What are Incoterms?

Incoterms (International Commercial Terms) were introduced in 1936 to avoid confusion over the interpretation of shipping terms and define the roles of the buyer and seller. The International Chamber of Commerce, based in France, is responsible for the administration of Incoterms. The latest version (Incoterms 2000) covers 13 terms and defines the responsibility between the buyer and seller for each component of an export transaction. The chart provides a clear assignment of responsibility for both buyers and sellers in international transactions. For precise definitions of the 13 Incoterms, consult the ICC website (http://www.iccwbo.org/incoterms ) and study carefully the liabilities of both buyer and seller. Mistakes and misunderstandings can be costly. Incoterms 2000 Chart of Responsibility EXW FCA FAS FOB CFR CIF CPT CIP DAF DES DEQ DDU DDP

SERVICES

Free Free Cost Carriage Delivered Ex Free Cost & Carriage Delivered Alongside Onboard Insurance Insurance At Works Carrier Freight Paid To Ex Ship Ship Vessel & Freight Paid To Frontier Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller

Delivered Delivered Ex Quay Delivered Duty Duty Duty Paid Unpaid Unpaid Seller Seller Seller

Warehouse Storage Warehouse Labor Export Packing Loading Charges Inland Freight Terminal Charges Forwarders Fees Loading On Vessel Ocean/Air Freight Charges On Arrival At Destination Duty, Taxes & Customs Clearance Delivery To Destination

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* There are actually two FCA terms: FCA Sellers Premises where the seller is responsible only for loading the goods and not responsible for Inland Freight; and FCA Named Place
(International Carrier) where the seller is responsible for Inland Freight.

Cost plus export pricing model All terms must be followed by a named place eg CIF Tokyo, FOB Sydney. EXW + EX WORKS Wholesale price (not including GST or delivery) EXW (Named Place) FOB FREE ON BOARD EXW Price plus + + + + Transport to carrier (eg wharf, airport) Customs clearance (ECN) Additional packing/labour for transport Agents commission (eg 10% of FOB price) FOB (Named Place) CFR CPT COST AND FREIGHT or CARRIAGE PAID TO FOB Price plus + + + + Sea/air freight charges to wharf/airport Sea/air document fees (eg Airway Bill, B/L) BAF (Bunker Adjustment Factor)** Transport contingency# CFR or CPT (Named Place) CIF COST, INSURANCE, FREIGHT CFR or CPT price plus + Marine Insurance Premium CIF (Named Place) DDP DELIVERY DUTY PAID*** CIF plus + + + Import duty/tax (calculated as 20% of CIF price) Customs clearance fees Delivery charge from airport to customer DDP (Named Place)
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$ 100 100

100 17 8 5 13 143

143 32 11 2 2 190

190 2 192

192 39 8 10 249

Suggested 5% of transport costs. ** May be charged by shipping/airfreight company (fuel surcharge). *** Please note in some markets that sales taxes/VAT/GST may be applicable. Seek further advice from a local financial adviser.

Top down export pricing model In overseas markets it will usually be the market place that will set your retail price. The following is an example of how to estimate a competitors FOB price or to work down from a target price for your product in this case, wine. Examining the prices of competitive wines will give you another part of the jigsaw in understanding the market, and price points to negotiate with your agent. Per Bottle Similar wine per bottle at retail store Deduct VAT Consumer Price per bottle Excluding VAT Deduct retail margin of 60% Retailers Buying Price Per Bottle Importers Buy Price per bottle HK $ Deduct Importers margin of 30% + Clearance & Warehouse Allowance of 3% + Advertising & Promotion Allowance of 5% = total of 38%
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Quick Tips

HK $305 HK $0 HK$305 HK $183 HK $122 HK $ 88 HK $1056 HK $587 AUD $146.00 AUD $146 AUD $1.00 AUD $1.00 AUD $144 305 x 0.60 305 183 122 /1.38 88 x 12 1056 / 1.8 587/4

Importers Buy Price per case with duty HK $ Importers Price per case before duty Deduct Duty (80%) of CIF Convert to AUD $ CIF per case Deduct Freight FOB per case
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Deduct Marine Insurance

VAT and sales taxes are applied in many overseas markets. In this example there are no VAT or Sales Taxes in Hong Kong. Retailers take a full margin on the selling price not the buying price. 3 Assumes an exchange rate of AUD $1 to HK $4. 4 Assumes a freight rate of AUD $1200 for 20 foot FCL, sea freight container that packs 1200 cases.

Marginal or differential costing export pricing model This is a commonly used export pricing technique which is based on variable costs such as direct labour, direct material and variable manufacturing overheads. It is particularly useful where a company has excess production capacity and needs to reduce its export prices to be competitive. Marginal costing enables you to calculate the break-even point the minimum price at which you can profitably sell to an overseas customer. In this example, the selling price per unit is $10.00. UNIT SALES TOTAL $ Revenue Variable costs Contribution Fixed costs Net profit/(Loss) 400,000 160,000 240,000 150,000 90,000 40,000 PER UNIT $ 10.00 4.00 6.00 3.80 2.20 TOTAL $ 200,000 80,000 120,000 150,000 (30,000) 20,000 PER UNIT $ 10.00 4.00 6.00 7.50 (1.50)

To determine the minimum price that this company can sell to overseas buyers it is necessary to calculate the break-even point. The contribution margin is the difference between selling price and variable costs ($6.00) divided by the sales price ($10.00). In this case the margin is 60%. The break-even point is calculated by dividing the fixed costs ($150,000) less the net profit ($0 to break even) = $150,000 divided by the contribution ($6). In this case, the company would need to manufacture 25,000 units at a selling price of $10 to break even.

Useful websites and links

Austrades site www.austrade.gov.au provides a wealth of information on exporting as well as links to other organisations involved in facilitating export. Learn more about the Export Market Developments Scheme (EMDG) from the Austrade website. State governments provide a range of services for exporters. The New South Wales Exporters Network includes practical advice, online forums and links to other service providers. This site includes advice on export pricing. www.smallbiz.nsw.gov.au. Consult the Business Victoria website www.business.vic.gov.au for excellent advice and templates and follow the link to Vic Export, the section of the site catering for exporters. The Government of Queensland has some good modules for exporters, including grants and finance access it through the main website of the Queensland Department of State Development, Trade and Innovation at www.sdi.qld.gov.au and find the heading Export and International Trade. Western Australias Department of Industry and Resources offers a most useful Online Guide to Exporting that includes a module on pricing. Start at the homepage www.doir.wa.gov.au and click on Export and Trade. The South Australia Department of Trade and Economic Development home page www.southaustralia.biz/dted provides a link to Export South Australia www.exportsa.sa.gov.au. This website incorporates an excellent Export Road Map which will take you through the export journey. There is good information on pricing and quotations in the Finance module. The Tasmanian Department of Economic Development includes a well-arranged series of modules on exporting, all with useful links. www.development.tas.gov.au.

Australian Business Limited (ABL) provides a range of international trade services to its members. www.australianbusiness.com.au. The Australian Industry Group (AIG) provides extensive services to members operating in export markets. Click on Trade and Export on their homepage. www.aigroup.asn.au. All of the major banks (ANZ, Commonwealth, HSBC, NAB, Westpac) include extensive information on their websites for exporters, with details of the range of services for small and large businesses. Many complex, paper-based transactions are now executed electronically at a low cost and high efficiency. The Export 911 site has some useful data on pricing formats. www.export911.com. A US site from University of North Carolina adds some useful background on export pricing and quotations. www.cecunc.org/business/international/export.html. The first step in researching import duties for overseas markets is understanding the Australian Harmonised Commodity Classification (AHECC) code for your product. The Australian Bureau of Statics (ABS) maintains this list and can be found at their website www.abs.gov.au and follow the links: Statistics -> By Catalogue Number -> Chapter 1 - General -> 12 - Classification and Work Manuals -> 1233.0. The Australian Federation of International Forwarders (AFIF) www.afif.asn.au brings together companies who specialise in freight and logistics for international trade. A good forwarder will help you avoid many pitfalls ranging from freight rates and terms to documentary requirements.

For more information on Austrade phone 13 28 78 or visit www.austrade.gov.au

October 2006