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Export Costing Pricing
Export Costing Pricing
Background:
Costing and pricing for international business is not always easy. The
exporter often finds himself doubting whether to charge high prices to
wealthy customers (forming a niche market), or to accept roc-bottom prices
in order to penetrate into the markets at all. Although he is right to consider
pricing of utmost importance, the exporter should handle it as he does all
other tools: as a market instrument to achieve export success.
Reason 1: Your price into the target market may be too low, enabling the
importer to make a huge profit without sharing it with you.
The general trend shows that two-third of all SME exporters are dictated
upon on prices by the buyers. “Produce this at the price of $ 2.-a piece, or
else I will go to the competition”. In such cases you better do what the
buyer asks and try to find your unique selling proposition (USP) in other
instrument of the marketing mix. In delivery reliability, for instance, since
that asset weighs heavily on the buyers conscience.
This is a critical nine-step approach to set your final price in the export
market. It will prove a lengthy and difficult process, but it is an essential
one. Below are two examples, all using the same hypothetical cost data:
**) Assumptions
The outcome of this calculation will be that you could export your product,
provided it will not cost more than the hypothetical factory cost price (255);
if yours is lower, then your chances to export are high.
The next step is the reverse of the first: you will be calculating “bottom-
up”. This method you can use:
(a) To establish the possible market prices when you
have no other way of knowing them
(b) To double-check if your efforts to bring down the
cost price, will effectively bring the market price
down.
From here on, the calculations are done on unit basis, i.e. broken down to
smaller sales units: boxes for the distributive trade, or items for the
consumer price setting.
11. Calculate sales price of the importer (assume his margin 5% of his
sales price).
12. Calculate sales price of wholesaler (assume his margin 12% of his
sales price).
13. Calculate net sales-price (excl. VAT) of the retailer (assume his
margin 25%);
14. Calculate consumer price, or retail price including VAT
(assume VAT is 18% per) unit.
*) Don’t forget the cost of currency and credit and the agent’s commission.
The calculations for industrial goods are less complicated, since there are
fewer intermediate levels between supplier and customer; frequently there
are none at all when supplying directly. That does not mean that you
should refrain from calculating, because you could have insight in the
market pricing in order to strengthen your position during negotiations.
Never allow a customer to catch you on lack of market know-how as that
weakens your bargaining power.
For industrial quotations VAT can be left out, since only end-consumers
pay this tax.
For survival, the supplier to such markets should dedicate a lot of effort to
decreasing cost and prices. For a proper pricing several aspects require
special managerial attention.
a. The level of your cost-price is very important to your market
price. Adding one dollar to your cost-price means that your
market-price (in the calculation example) will increase with 4
dollar! The multiplying factor can be established via your “top-
down calculation”. Therefore, you should always try to keep your
cost price as low as possible. Management should continuously
look for ways to decrease their costs. Just claiming low labour
costs is usually not sufficient for price-matching: don’t forget that
in industrialized countries labour has largely been replaced by
automation. So in that respect their production costs can be as
low as yours. The technique of bench marking (comparing your
performance with those of your nearest or strongest competitors
with the help of Total Quality Management (TQM) could help you
out.
Break-even point
Total revenues
Variable costs
Fixed costs
Amount sold (time)
The reverse policy is called skimming, but that will only be used when
offering a unique product with obvious customer benefits – and
unfortunately only few exporters can offer such a product.
Try to find a balance between the quality and the price of your product.
In fact you should try to price it at the “perceived value level”. Market
research will tell you how consumers perceive that level to be. A
penetration price will probably lie somewhere between 5 and 20% below
the current price.
Never confuse the buyers. Try to create stability and reliability in your
pricing as well. Your importer will judge your performance by it.
Having gained a certain foothold in the target market, you gradually may
want to increase your profit by increasing your price. That is logical, as
long as the customer accepts it. That goes for your trading partner too.
He has a vital task in your price-setting policy.
How do you know if the customer will accept that price-increase? That
depends upon the “price-elasticity of the demand”. Essentially, price-
elasticity describes how much the price can be changed before
customers begin to react by buying less when the price is increased or
by buying more if the price is decreased.
You can actually calculate the price elasticity of the demand by using the
following formula:
:
a. Market Prices go up
Whatever your (forced or voluntary) changes in your prices you may be,
always make sure that your customer and your trading partner understand
the reasons for it. Those reasons should be made acceptable and
justifiable in their minds.
Your advantage when invoicing and getting paid in your currency are: