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Guide to pricing for export
Familiarising yourself with the issues covered in this guide will help you plan your international market strategy. self-sustaining business.This is one of three practical guides to the more important and technical aspects of the export process. . and ensure that the first export sale you make develops into long-term.
as your opening price is often perceived as a base level from which future discounting is anticipated. product modifications. Austrade’s EMDG program provides a level of rebate for these costs. A marginal costing example has been provided within this guide. 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. labeling and compliance with foreign standards. Checklist Exporting will place different demands on your finances. Matching market price is essential to gain market share. These also include export packing.Why is export pricing different? Pricing for any market requires an understanding of relative costs.’ Entering new markets always poses higher risks due to unforeseen factors. 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. being a “price taker” provides the buyer with a negotiating advantage. This method establishes the base price of a product or service using the direct costs of production and sales. Your knowledge of these costs will only be developed through experience. export documentation. Plan for ‘surprises. It is critical at the outset that you recognise these costs and include realistic values for them. packaging. determine whether you can be competitive and write profitable business. Options for calculating export price The traditional method of price calculation is the “cost-plus” approach. international communications. Calculate your ex-works price on a ‘top down’ basis to determine how you can be competitive – and be profitable. In offshore markets these factors vary greatly from those in Australia. demand and competition in that 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. insurance. export financing charges and training of an overseas distributor’s staff. Unfortunately. 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. Operating in this manner requires an agile ‘on the ground’ presence to capture new business and combat your competitors’ response. production of export literature (including translation). ‘Cost plus’ is the traditional approach to pricing in any market. . Other pricing techniques are more emotive and can involve predatory pricing at a loss to gain market access. The price calculation will include the components of domestic price. freight forwarding and other logistics charges. Some of the costs specific to export transactions include market research. credit checking. It can set your base prices in the buyers mind. Beware of aggressive pricing to gain market entry. Full details are available on the Austrade website. travel. Marginal costing is a standard export pricing technique – but it assumes you have stable revenues in your domestic business. but the addition of costs that are specific to export transactions can render a price constructed on this basis uncompetitive. with fixed costs apportioned to the volume of the sale. Careful analysis of prevailing conditions in the markets you choose. Marginal (or ‘differential’) costing is a technique commonly employed in export and produces a more competitive price to assist market entry. and an accurate assessment of the way to structure your export price.
remember that the wording on all documents must be precise and matching contractual requirements. Terminology in many countries can be different and result in misunderstandings in areas such as warranties. Use an expert. Insurance (including credit insurance). Packaging and labeling requirements (language. Other export pricing watch points > The temptation to accept an order. Ensure that the understanding with your buyer is clear and well documented. The 13 Incoterms are the basic language governing international transactions. Getting an order is exciting. Ensure that your liabilities for delivery are worded explicitly to avoid unanticipated demurrage and other logistics charges. Stress product or service benefits wherever possible. export transactions that initially appear attractive may prove unprofitable and/or unexpectedly resource-intensive. documentation and labeling requirements as rejection of your product at the port of entry can result in high expenses in remediation or product return. Delays in customs clearance at port of discharge if documentation. often under time pressure. All Australian banks offer foreign exchange risk management products. Services exporters are often faced with different issues.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. But take extreme care about your costs. > > > > > > . vaguely worded contracts or agreements where the buyer can enforce clauses which require after sales service or implied warranties. Take care with packaging. For service exports. where it is imperative to maintain close control and monitoring of fixed costs. Simple mistakes in clauses in documentary credits can cause extensive delays in receiving payment. These factors can have a critical impact on your pricing. finance and banking charges. Take time to understand them. Take time to understand pricing behaviours. performance bonds and the handling of contract variations. packaging and labeling is not in order. 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). Pricing behaviour varies widely. Last-minute product modifications to meet an export standard. Get a good feel for price behaviour in the markets of interest. Having your product rejected at a port of entry can result in heavy losses. Documentation requirements such as certificates of origin and expensive legalisation of invoices by embassies. Get good advice on your foreign currency exposure. use-by dates). A ‘handshake on the deal’ sometimes works well – but is the exception. bargaining is expected as a matter of course. Delays in customs clearance are common in many markets. ingredients. can result in losses unless you are closely monitoring your finances. Costs of production can change. Export documentation may be complex. before accepting demands for a lower price. Avoid promises from agents or buyers that ‘all will be OK’ unless you are confident that you have fully complied with local regulations. 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. as well as fixed costs. In some countries. When dealing with documentary credits (such as a letter of credit). Get good local advice and experience of the market environment first-hand. notably for marginal costing.
based in France. 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 Forwarder’s Fees Loading On Vessel Ocean/Air Freight Charges On Arrival At Destination Duty. Mistakes and misunderstandings can be costly. . The chart provides a clear assignment of responsibility for both buyers and sellers in international transactions. Taxes & Customs Clearance Delivery To Destination Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer/ Seller* Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller Buyer Buyer Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller * There are actually two FCA terms: FCA Seller’s Premises where the seller is responsible only for loading the goods and not responsible for Inland Freight. For precise definitions of the 13 Incoterms. and FCA Named Place (International Carrier) where the seller is responsible for Inland Freight. The latest version (Incoterms 2000) covers 13 terms and defines the responsibility between the buyer and seller for each component of an export transaction. is responsible for the administration of Incoterms. The International Chamber of Commerce. consult the ICC website (http://www.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.iccwbo.org/incoterms ) and study carefully the liabilities of both buyer and seller.
Seek further advice from a local financial adviser. . FOB Sydney. B/L) BAF (Bunker Adjustment Factor)** Transport contingency# CFR or CPT (Named Place) CIF COST. airport) Customs clearance (ECN) Additional packing/labour for transport Agent’s 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. *** Please note in some markets that sales taxes/VAT/GST may be applicable.‘Cost plus’ export pricing model All terms must be followed by a named place eg CIF Tokyo. 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) # $ 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. 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. ** May be charged by shipping/airfreight company (fuel surcharge).
the company would need to manufacture 25. direct material and variable manufacturing overheads.50 (1.00 4.00 AUD $146 AUD $1. UNIT SALES TOTAL $ Revenue Variable costs Contribution Fixed costs Net profit/(Loss) 400.000 80. wine.000 40.000 (30. the selling price per unit is $10. In this case. In this example. Marginal costing enables you to calculate the break-even point – the minimum price at which you can profitably sell to an overseas customer.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 1 2 4 3 Deduct Marine Insurance VAT and sales taxes are applied in many overseas markets. 3 Assumes an exchange rate of AUD $1 to HK $4.00).000 PER UNIT $ 10.60 305 – 183 122 /1. 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. 4 Assumes a freight rate of AUD $1200 for 20 foot FCL.00 6.000 240. .20 TOTAL $ 200.000 150.000 160.000 units at a selling price of $10 to break even.000 90.000 150. It is particularly useful where a company has excess production capacity and needs to reduce its export prices to be competitive.00.80 2.000 PER UNIT $ 10.00 AUD $144 305 x 0.00 3. and price points to negotiate with your agent.000 120. Examining the prices of competitive wines will give you another part of the jigsaw in understanding the market. The contribution margin is the difference between selling price and variable costs ($6. 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% 2 1 Quick Tips HK $305 HK $0 HK$305 HK $183 HK $122 HK $ 88 HK $1056 HK $587 AUD $146. In this example there are no VAT or Sales Taxes in Hong Kong.000) 20. Retailers take a full margin on the selling price not the buying price. 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).38 88 x 12 1056 / 1.00 7. In this case the margin is 60%.‘Top down’ export pricing model In overseas markets it will usually be the market place that will set your retail price.00) divided by the sales price ($10.00 6. 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.50) To determine the minimum price that this company can sell to overseas buyers it is necessary to calculate the break-even point.00 AUD $1. sea freight container that packs 1200 cases.00 4.
gov. paper-based transactions are now executed electronically at a low cost and high efficiency.nsw. The Australian Industry Group (AIG) provides extensive services to members operating in export markets.exportsa.austrade. A good forwarder will help you avoid many pitfalls ranging from freight rates and terms to documentary requirements.export911.Useful websites and links Austrade’s site www.au and follow the links: Statistics -> By Catalogue Number -> Chapter 1 .gov.biz/dted provides a link to ‘Export South Australia’ www. www.au and click on ‘Export and Trade’. The Tasmanian Department of Economic Development includes a well-arranged series of modules on exporting.au brings together companies who specialise in freight and logistics for international trade.business.gov. A US site from University of North Carolina adds some useful background on export pricing and quotations.General -> 12 .gov.0. HSBC. The Australian Bureau of Statics (ABS) maintains this list and can be found at their website www. www.afif. State governments provide a range of services for exporters. with details of the range of services for small and large businesses.au. Consult the Business Victoria website www. The New South Wales Exporters Network includes practical advice.au. Trade and Innovation at www. This website incorporates an excellent ‘Export Road Map’ which will take you through the export journey. www. all with useful links.vic.au.aigroup.org/business/international/export. There is good information on pricing and quotations in the ‘Finance’ module.html. For more information on Austrade phone 13 28 78 or visit www.gov. including grants and finance – access it through the main website of the Queensland Department of State Development.au.smallbiz. the section of the site catering for exporters.gov.au provides a wealth of information on exporting as well as links to other organisations involved in facilitating export.sdi. The Government of Queensland has some good modules for exporters.development.gov.gov. All of the major banks (ANZ. www.southaustralia.com.au and find the heading ‘Export and International Trade’.australianbusiness.sa. The Export 911 site has some useful data on pricing formats.cecunc. Click on ‘Trade and Export’ on their homepage. www.au October 2006 . This site includes advice on export pricing.asn.qld. The first step in researching import duties for overseas markets is understanding the Australian Harmonised Commodity Classification (AHECC) code for your product.au. Learn more about the Export Market Developments Scheme (EMDG) from the Austrade website. NAB. Australian Business Limited (ABL) provides a range of international trade services to its members. Start at the homepage www. Many complex.asn.austrade. online forums and links to other service providers.wa. The South Australia Department of Trade and Economic Development home page www.com. Western Australia’s Department of Industry and Resources offers a most useful ‘Online Guide to Exporting’ that includes a module on pricing.doir. Commonwealth. Westpac) include extensive information on their websites for exporters.tas.gov.Classification and Work Manuals -> 1233.abs. www. The Australian Federation of International Forwarders (AFIF) www.au for excellent advice and templates – and follow the link to Vic Export.
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