EXPORT PRICING

A. K. Sengupta Executive Director Jagannath International Management School Kalkaji, New Delhi.

Right Price

An important determinant of business success.

Right price does not always mean low price. Right price depends upon factors like nature of the market, costs, competition, buyers purchasing power, foreign exchange fluctuations etc.

Pricing Approaches
Major pricing approaches are Cost based pricing and Market based pricing. Concept of Marginal cost pricing vis-a-vs full cost pricing Pricing Decisions for firms in Developing Countries Inability to influence prices. Lower production technology - base because of marginal supplier.

Export as commodities (with marginal value addition)

Fiercely competitive market margin is low Essential to formulate appropriate pricing strategies with innovations preconditions for success.
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Pricing Objectives

A firms pricing policy may be guided by any one or more of the following objectives:
(i) Market Penetration: Market penetration may be a very important objective, particularly for new exporters. A firm may attempt to penetrate the market with a low price.

(ii) Market Share: The price may be manipulated to increase the market share. (iii) Market Skimming: This is often the case with innovative products. The product is introduced with a high initial price to skim the cream of the market. The price may be subsequently reduced to achieve greater market penetration. (iv) Fighting Competition: Sometimes price is a tool to fight competition. A price reduction by the competitor may have to be countered by price cuts. Sometimes price cuts may be affected to discipline the competitor or to compel the competitor to reduce prices so that his cash flows will be affected. (v) Preventing New Entry: A firm may charge a low price even when there is scope for high price so that the industry does not look very attractive to new entrants.
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(vi)

Shorten Pay-back Period: When the market is uncertain and risky because of factors like swift technological changes, short product life cycles, political reasons, threat of potential competition etc., recouping the investment as early as possible would be an important objective.

(vii) Early Cash Recovery: A firm with liquidity problem might give priority to generate a better cash flow. Hence, it would adopt a pricing that might help it to liquidate the stock and/or encourage prompt payment by the channel members or buyers. (viii) Meeting Export Obligation: A company with specific export obligation may be compelled to adopt a pricing policy that enables it to discharge its export obligation. Sometimes it may even imply a price lower than the cost.

(ix)
(x)

Disposal of Surplus: A company confronted with a surplus stock may resort to exporting to dispose of the surplus.
Optimum Capacity Utilisation: Exporting is sometimes resorted to enable the firm to achieve optimum capacity utilisaton so as to minimize the unit cost of production. In such a case, achieving the required quantity of exports could be the objective of export pricing. Return on Investment: Achieving the target rate of return is the most important pricing objective in a number of cases.

(xi)

(xii) Profit Maximisation: In many cases, the primary pricing objective is maximization of profits. 4

Types of Cost in Export Marketing

Fixed Cost Production cost Variable Cost Selling and delivery costs. Production Costs Fixed Cost

Fixed costs are costs which remain fixed upto a certain level of output (investment in land, building, rent, plant & machinery)
Even if there is no production, some people are paid salary, minimum fixed expenses like electricity cost etc. Variable Costs Variable costs are costs which vary with the variation in the level of output and include cost of factors like labour, material etc.
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Selling and Delivery Costs

Include the cost of holding stocks, packaging, transport, documentation, preshipment inspection, insurance and cost of advertising, personal selling etc.

Salesmans salary fixed cost

Commission and traveling & incidental expenses are variable costs. Marginal cost Pricing Pricing on Marginal cost direct costs are covered i.e. the variable costs. Points in support of use of Marginal cost Export sales are additional sales need not be burdened with overhead costs, recovered from domestic market. Products less known in foreign markets. Markets with low purchasing power. Competition is severe.
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How to recover the fixed cost

Domestic market
Extra loading Feasibility Existence of large domestic market Adoption of mass production technologies which will remove the gap between full cost and the marginal cost Limitations Importers become used to low price Not applicable to industries mainly dependent on export market. Where overheads are insignificant.

Marginal cost sets the lower limit

The idea is not that direct cost should be charged every tune. Marginal cost provides the lower limit upto which a firm can reduce the prices without in any way affecting its overall profitability. 7

Disadvantages Developing countries might be charged of dumping. Competition among exporters from developing countries lead to undercutting each other resulting in loss of foreign exchange. Very often low prices may be quoted in the absence of adequate information about prevailing prices in foreign market.

Elements for Export Price Quotation The following chart gives the various elements of costs. (a) For export price based on marginal cost. (b) For export price based on full cost: 1) Export Price Based on Marginal Cost (a) Direct costs (b) Variable costs: Direct material Direct labour
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Variable production overhead (for example, special dies and jigs) Variable administration overheads (for example, salary of export clerk) (c) Other costs directly related to exports: Selling cost advertising support to importers abroad Special packaging, labeling etc. Commission to overseas agent Export credit insurance Bank charges Inland freight Forwarding charges Inland insurance Port charges Export duties if any Warehousing at port, if required Documentation and incidental Interest on funds involved/cost of deferred credit Cost of after-sales including free part supply Pre-shipment inspection and loss on rejects After-sales service

Total Direct Costs

Less: duty drawback

Direct Cost Net =F.O.B. price at marginal cost II. Freight (volume or weight whichever is higher)

III. Insurance
C.I.F. price (based on marginal cost) 1. Export Price Based on Full Cost i) ii) Direct cost as in (1) Fixed cost/ common cost Production overheads Administration overheads

Publicity and advertising (general)

F.O.B. price (based on full cost) iii) iv) Freight (volume or weight whichever is higher) Insurance
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C.i.f. price based on full cost

Part of the above cost sheet gives the lower limit of the export pricing. As would be clear from the cost sheet, all cost directly related to export are taken into account for fixing the lower limit. If some incentives are allowed on the export of the product concerned the lower limit would be further reduced by the amount of incentives. In the case of export houses purchasing their supplies from supporting manufacturers, the cost price of supplies obtain would constitute the lower limit. Market Oriented Export Pricing The following chart gives the nature of analysis for market oriented pricing

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Analysis for market oriented export pricing Market price _________ Less retail margin on selling price __________ Cost to the retailer _______

Less whole sellers mark up on his cost ________

Cost of the wholesaler ______ Less importers mark up on his cost ________

Cost of the importer _______

Less import duty ________ C.I.f. price _____ Less freight and insurance charges _______ F.O.B. realization of the exporter ___________

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To-down Calculation for International Pricing

Consumer Price: VAT* Market price minus VAT: 1,160 160 1,000 + 16%**

Margin retailer: Price to retailer: Margin wholesaler: Price to wholesaler: Margin to importer
Landed-cost price: Import duties: Other costs (storage, banking): CIF (Port of destination): Transportation costs: Insurance costs: FOB (port of shipment) Transportation costs factory to port: Export price ex-works (EXW): Factory cost price: Export profit (per unit):

250 750 90 660 33

627 110 17** 500 130** 6** 364 34** 330 300** 30

=
+ + +

25%**
12%** 5%* 20%**

*Note that VAT is calculated as a percentage of the price without VAT. Trade margins are usually calculated as a percentage of the trade selling price. The trade margins for some sectors are calculated as a percentage of trade buying prices. 13 **Figures based on assumptions.

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