Introduction Export marketing in particular requires extremely careful pricing as generally the orders are bigger and repeat buys will not happen if the exporter overcharges the foreign buyer even once. Similarly under pricing will cost the exporter .

Pricing for export is different than domestic pricing. Additional considerations needs to be given to cost of modifying product or support material for foreign market, the logistics for getting the product to foreign market, insuring the product, financing costs, transportation and other costs unique to exports such as – long distance communication costs and exchange rates etc.

Pricing products in foreign markets can be a big challenge as prices suited in one market may be disastrous in another. As such an exporter must thoroughly evaluate all variables that have a bearing on the price of the product offered in the foreign target market. It is also important that the exporter obtains as much information as possible on foreign market prices as part of his export market research.

Factors Affecting Price of any Product




1. Costs

Costs serve the basic purpose of arriving at the minimum price also known as the floor price. These are basically bounded to production and other related costs.

Costs serve as the foundation of any pricing as the objective of every business is to make profit, even for non-profit organization, it is not to incur any losses. Profits will commence as and when one is able to recover all the incurred costs.

2. Competition

Competition plays a very vital part in any pricing decision as it defines the price ceiling or the maximum price. Based on ones costs and competitor’s price the exporter has to work out its own prices.

3. Customer Expectation

Here one must take into account the customer demand at various price levels. Pricing is done for customer acceptance and it should be an optimum price to suit customer expectations.

In addition to above factors the Government Tax Policies, Transportation costs, Distribution costs, and miscellaneous other costs also need due consideration.

Pricing Strategies

1. Penetration Pricing Strategy

Penetration or low price strategy refers to volume policy. Products are priced low to gain speedy acceptance in the market.

2. Skimming Pricing Strategy

Under the skimming pricing strategy products are priced high where the product is an innovation, unique in market, set-up costs are high and demand is relatively inelastic.

3. Holding Pricing Strategy

Market holding is a strategy intended to hold market share. Products are priced based on what market can take.

Methods of Export Pricing

1. Cost Plus Pricing This method is based on adding the desired markup on costs – including domestic costs and exporting costs (documentation expenses, freight charges, custom duties, and international sales and promotional costs) to arrive at the price for export markets. However domestic marketing and promotional costs are not taken into account. This method permits the exporter to maintain his desired profit percentage to set a suitable export price. However, this price may or may not suit the foreign markets


Cost of producing a pair of shoe 120.00 (FC + VC)  Domestic marketing cost included in price 15.00  Export related costs 20.00 --------------------------------------------------------------------------

As such Cost of export will be


-------------------------------------------------------------------------- 

Mark up 20% Export price

125.00 + 25 = 150.00

 

While fixing markups following options are available : High Price Option

This approach will use higher markups to produce big profits. It may work if a company is selling a new and unique product targeted at the upper end of the market.

Moderate Price Option

This is a middle path focusing on a lower risk as compared to high or low price option. The emphasis is on matching competition, building a market position, and earning a reasonable profit margin.

Low Price Option

This route is generally taken to impede the competition to penetrate a market, suitable in case one is trying to reduce inventory and does not have a long term commitment. Such pricing will result in low profit margins.

2. Marginal Cost Pricing
An improved version of cost plus method is called marginal cost pricing. The fixed cost including expenses incurred on modifications to the product for producing an additional unit for export is determined first. Variable costs are then added to arrive at realistic total costs for exports. Such costs invariable include Packaging, Foreign Market Research, Advertising & Marketing, Exchange Conversion/Fluctuation Costs, Foreign Agent/Distributor Product Information & Training, After sales service costs etc. Margins are then applied to arrive at the export cost. This method is more realistic determination of cost of producing products for exports.

3. Competitive Pricing
Costs are important in pricing decisions. However, they should be looked at alongside the prices of competitive products in the target markets. Prices need to be set in tune with the competition. Most customers compare prices of alternatives before coming to a final decision. If one's prices are set in isolation, these may not find favor with the customer, except in cases where there is no competition.

4. Market Pricing / Target Pricing
Extensive competition and availability of variety of products have necessitated market pricing also known as target pricing. Here, the exporter has to work on a price that the customer is wiling to pay and focus shifts on managing costs as efficiently as possible. This has happened because the customer today is highly informed – he knows most costing and is ready to pay only what suits him. The exporter needs to work backward from the target price down to the costs and find margins for him by managing his overheads and other costs better.

Target price in foreign market (-) 30% retail margin on SP 25.00 7.50

 

------------Retailer Price 17.50

(-) 7.5% Distribution Markup Distributor Price (-) 12% Import Duties/Levies CIF Price (-) Freight & Insurance Target FOB Price

1.31 ------------16.19 1.94 ------------14.25 1.60 ------------12.65 -------------

If the exporter cannot match 12.65 with his margins, he must consider either of the following :

Refuse to export. Find an alternative supply source to bring the costs down. Find ways to reduce costs by modifying the product or shortening the channel of distribution.

Export Payment Terms

Refer to INCO Terms

While negotiating an export order it is essential that the payment terms are also discussed and finalized. These include methods or mode of payment, that is, how and when the payment will be made by the buyer and received by the exporter. Generally following available for exports :
     

Methods of Payments for Export Transactions



Advance payment Open Account Consignment Sale Documents against Acceptance (D/A) Documents against Payment (D/P) Letter of Credit

1. Advance Payment
It is the safest payment option where the importer sends the payment in advance to the exporter either through cheque or demand draft. This is normally done after acceptance of the order by the exporter. The exporter is safe as he will ship the goods only at a later date. He also gets a ready solution to his liquidity problem as he can use the funds towards production of export order. This method, however, is not safe for the buyer and therefore is not generally preferred. This method is least expensive as no interest / commission is required to be paid anywhere and it is also the least complicated as it does not involve any procedural formalities.

2. Open Account
This is an arrangement between the buyer and exporter where goods are shipped without the guarantee of payments. Both the parties agree on the sales terms but no documentary evidence is created. The odds are heavily loaded in favor of importer as the payment will be released at a later date. The accounts between the exporter and buyer are settled periodically. Chances of default or delay in payments are very high under this system. The exporter must deal with only trustworthy buyers under this scheme. This system suits the importer as he obtains delivery of goods without having to pay for them. He need not arrange any finances, thus saving on expenses, time and effort. For him it is totally convenient and trouble free. In most of the cases Open Account system is used by firms having dealings with each other for long periods of time or between firms and their associates.

Open Account Transaction Flow

Shipment Exporter Contract Payment
nt me pay


Exporter Bank


Importer Bank

Payment After Receipt of Goods


3. Consignment Sale
Under this method goods are shipped by the exporter but he transfers the ownership to the importer only when the goods are actually sold. This means the entire risk here is borne by the exporter. If importer is unable to find an actual buyer, the exporter is stuck with the unsold stock and he cannot claim the payment for the same from the importer. The exporter’s funds are blocked throughout this period and he is responsible for additional expenses such as interest, warehousing costs, commissions, insurance charges etc. this arrangement is full of uncertainties as the exporter is not sure of the actual sale, timeframe and the price realization.

Consignment exports offer a chance of earning higher prices in markets abroad. Ideally this system is suited to exporters who have their own affiliates abroad and sizeable control over sales. The exporters using this method must also be financially sound to manage longer periods of uncertainty and bear additional expenses. An interesting example of this method in India is found in the area of agro exports. Normally in trade of agro exports (except onion, rice, and other cereals, mango pulp), the importer never provides LC. Such export is done on a consignment basis, and the payment as per actual sales is made.

4. Documents Against Acceptance (D/A) This system is based on documents and thus falls under the category of Documentary Credit. The exporter does not want to part with ownership of goods unless he is certain about the receipt of payment of the same. The importer on the other hand does not want to pay unless he is sure about the receipt of goods. Banks function as intermediates, providing assurance to both the parties on the other’s behalf and use documents as a tool for this assurance.

Under the D/A method the exporter sends the shipment documents along with the draft (bill of exchange) through his bank to the importer’s bank that gets the draft accepted by the importer before handing him the title documents. The importer thus gets the title to the shipment against his acceptance of bill of exchange for the value of shipment. These drafts are normally readied for presentation after 30/45/60/90 days from the date of acceptance. The exporter presents the same on the due date to the buyer’s bank through his bank and gets the payment. The system provides for delivery of ownership documents against acceptance of an instrument of debt.

The arrangement seems fine as a concept. However, there is a great risk for the exporter, as the bill may not be honored by the buyer on presentation. The buyer certainly is safe as he gets the delivery of shipment much before the due date for payment. The exporter will have to face a lot of difficulty and losses, in case the buyer does not honor his commitment.

Documents against Acceptance (D/A) Flow
Sales Contract Exporter / Drawer 1. Goods Importer / Drawee 4a. Accepts Drafts

2. Documents Drafts, Instructions

4c. Documents

4b. Trade Acceptance

3. Documents, Draft, Collection Order 6. Payment

Remitting Bank

Collecting / Presenting Bank

5a. Trade Acceptance 5b. Payment (Debit)

7. Payment (Credit)

5. Documents against payment (D/P)
Like in D/A arrangement, here too the documents are sent to buyer’s bank with a draft (bill of exchange). However, this draft is a sight draft and not a usance draft. This draft has to be paid immediately on sight and only after the receipt of payment the shipment title documents are released. It means that the importer gets possession of ownership documents of the shipments only after making payment for the same. The exporter on the other hand, releases possession of shipment title papers only against the receipt of payment. No credit is involved here.

Documents against Payment (D/P) Flow
Sales Contract Exporter / Drawer 1. Goods Importer / Drawee

2. Documents Drafts, Instructions

3. Documents, Draft, Collection Order 5. Payment

Remitting Bank

Collecting / Presenting Bank

4b. Documents

6. Payment (Credit)

4a. Payment

6. Letter of Credit
A letter of credit is a very popular form of documentary credit. In fact majority of international business transactions use LCs. The letter of credit is a letter established by importer through his bank to the benefit of exporter promising payments of drafts drawn against this letter if the exporter complies with the specific conditions prescribed in the LC. The conditions are usually the same as stipulated in the purchase order or export contract. As such LC acts as a substitution of importer’s promise to that of his bank's to the exporter to honor its commitment to pay for the export bills provided all conditions are satisfied. In this way LC works as an independent contract between exporter (designated beneficiary) and the issuing bank.

More formally letter of credit can be defined as “A binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit provides reassurance to the seller that he will receive the payment for the goods. In order for payment to occur, the seller has to present the bank with necessary shipping documents confirming the delivery of goods within a given time frame. It is often used in international trade to eliminate the risks such as unfamiliarity with the foreign country, customs, or political instability”.

Letter of Credit (LC) Flow
1. Purchase Order US Importer in New York
10. Shipping Documents Forwarded 2. LC Application

5. Goods Shipment

Indian Exporter in New Delhi
6. LC, Draft, Shipping

4. LC Notification

11. LC Paid on Maturity

3. LC Delivered 7. LC, Drafts, Shipping Documents Delivered 8. Draft Accepted & Payment (Funds) Remitted

Citi Bank, New York

PNB, New Delhi, India

9. Payment


Types of Letter of Credit

1. Documentary and Clean LC
A Documentary LC is one that requires the exporter to submit certain documents like commercial invoice, packing list, customs invoice, inspection certificate, certificate of origin etc, together with draft to issuing bank. Most of the LC used in export/import fall under this category. A Clean LC on the other hand, is one that does not require presentation of any documents. Clean LC are normally used for bank guarantee.

2. Revocable & Irrevocable LCs
The term revocable and irrevocable refers to instructions received by the advising bank (exporter’s bank) from the opening bank (importer’s bank). A LC is revocable when it is used only as a means of arranging payment and carries no guarantee. It can be withdrawn without any notice at any time up to the presentation of drafts under LC for payment to the issuing bank. As such there is no protection for the exporter. For instance he could ship the goods, take the documents to the advising bank and find that the bank will not accept the documents and pay him because the letter of credit has been revoked. However the opening bank is responsible for any operation on the revocable credit effected prior to the receipt by the negotiating bank of any cancellation or modification advice. An Irrevocable LC, to the contrary, carries both a payment arrangement and a guarantee of payment and therefore can not be revoked. Most international transactions use irrevocable LCs

3. Confirmed & Unconfirmed LCs
If an irrevocable LC is opened by a bank in buyer’s country, the seller may require the credit to be confirmed by a bank in his own country as he may be unaware of the standing of opening bank, or may otherwise like to ask for additional protection of his interest. In such cases, the opening bank requests its correspondent (say SBI in the LC flow chart) in the seller’s country to add its confirmation which in effect means that the confirming bank undertakes the liability to honor the seller’s drafts under the credit. It bears an unequivocal undertaking that drafts confirming to the terms of credit will be honored notwithstanding any change in the position between the person or the bank opening the credit and the confirming the same. It ensures double protection to the seller since it already irrevocable on the part of the opening bank and additionally on the part of confirming bank in his own country.

For better understanding let us go back to flow chart of LC. If the LC issued by Citi bank if confirmed by SBI’s local branch in New Delhi, and if Citi bank does not honor the LC, our Delhi exporter can always go to SBI’s confirming branch and claim payment. Under Unconfirmed LC this obligation i.e. the obligation to make payment lies only on the issuing bank. Most exporters usually insist on a ‘Confirmed’ ‘Irrevocable’ letter of credit. Under all circumstances they will receive payments for their goods, as long as they keep to the conditions specified in letter of credit.

Special Letter of Credit

1. Revolving LC
Such credit stipulates automatic restoration of the amount already drawn (under the credit) as soon as bills are paid, thus obviating the necessity of opening a fresh credit for each dispatch / shipment. Revolving credit can be of two types :

Cumulative – cumulative revolving LCs will automatically apply / add the unutilized amount during a given time and the same will be carried over to the next period. Non-cumulative – non cumulative LCs will consider the unutilized amount in a given time as lapsed and will not add this to be carried over to the next period.

2. Transferable/Assignable/Transmissible LC
Transferable LCs are those under which the beneficiary is given the right to transfer the benefits available under LC to one or more secondary beneficiaries. No LC can be transferred unless it specifically authorizes the beneficiary to do so. The LC itself has to contain a transferability clause. Transferable LC has functional advantage. The exporter can use the LC transfer to enable his supplier to raise working capital on strength of the LC. This saves him the entire process of arranging finance to pay his suppliers to buy goods for them. As such this LC is very practical and convenient. The supplier can make use of the credit worthiness of original buyer.

3. Back-to-Back or Countervailing LC
This credit is usually opened to finance an intermediary who is short of capital but is not willing to disclose his overseas buyer the name of actual supplier. A banker issues such a credit in favor of actual supplier on the strength of a credit established by overseas buyer in favor of intermediary. A back to back credit naturally stipulates an earlier validity date and a smaller amount to enable beneficiary (intermediary) to replace the actual suppliers invoice by his own and earn a margin of profit. While granting such facilities, a banker requires to ensure itself that the documents to be submitted by the actual supplier and the substituted ones confirm precisely to the term of credit established by the overseas buyer.

Benefits of LC (Advantages)

To Exporters

LC minimizes the credit risk, provided the issuing bank is reputed and carries a sound track record. LC eliminates the risk of payment delays due to uncertain factors like political instability. LC affords financing for exporter. All nationalized banks in India are more than willing to finance an exporter who has an export order backed by LC from a reputed bank. LC normally have a stabilizing effect on production by the exporter as the exporter is bound to ship by a certain date as per the LC, failing which the order will stand cancelled. LC minimizes uncertainty and provides a clear picture to the exporter regarding all requirements for payment.

To Importers

The importer placing orders to exporters backed by LC commands a great respect and bargaining power. He is in a position to ask for better prices and faster deliveries. Use of LCs will attract a large number of good suppliers, offering the importer a lot of choice. The importer is assured of timely shipment of the specified quality and quantity of ordered merchandised. Documents under LC like Bill of Lading and Inspection Certificate by the buyer nominated agency serves the purpose well. The importer can refuse payment if finds any and even a very minor mistake/oversight (referred as documentary discrepancy) in any of the required documents. This affords him a very tight control over the exporter, ensuring accuracy of shipment and related paperwork. Importer’s risk of losing money, in case the supplier is unable or unwilling to effect a proper shipment, is totally eliminated.

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