Export Pricing & Costing

Prepared by:
Janelle Ann Espinosa
April Jane Gabijan

Source: International Marketing by Luz T. Suplico,

Leonardo R. Garcia, Jr., and Renato S. Esguerra
DEFINITION AND SIGNIFICANCE OF PRICE

What is PRICE?

 From the businessperson’s point of view, it is the monetary figure for which
he/she sells his/her product to his/her customers.
 Price as the value placed by consumers for the amount they pay for goods and
services must be considered. It is, after all, what the customer is willing to pay
and not what the businessperson is willing to charge.

This definition suggests that the two basic concepts associated with price are:

1. Profit maximization for the firm

2. Satisfaction for the customers
FACTORS AFFECTING PRICE

CONTROLLABLE UNCONTROLLABLE

 Cost  Market Demand

 Volume  Competition
 Company Objective  Others (Exchange
 Profit Margins PRICING DECISIONS rate, economy, etc.)
PRICING POLICIES

TWO MAIN PRICING POLICIES

COST-ORIENTED PRICING
- simple approach to pricing. To a given cost, you simply add a percentage in absolute
margin or rate of profit to determine the selling price.

MARKET-ORIENTED PRICING
- the opposite of the cost-plus or the cost-oriented pricing. It treats the export price of the
product in the contest of the market and the demand for the item.

Components of this approach:

Demand-oriented pricing. In this mode, companies relate the intensity of demand to
price. A high price is charged when customer’s interest is high, and a low price is charged
when interest is low.
Market-oriented pricing. This method takes into consideration the actual and anticipated
behavior of competition.
 IS THE PRICE RIGHT? Pricing depends on the company’s objectives.
However, prices have to be competitive in the global market.

PRICING PROCEDURES

Pricing is not purely mathematical formula and cost calculation because, if this
is so, it may give rise to an extremely limited view of the concept. The market and
the potential in the market should be the starting point for pricing decision, and cost
information should only be used to determine whether that market could be satisfied
at a profit.
STEPS IN PRICE SETTING
ESTABLISH PRICING OBJECTIVES

ANALYZE MARKET SITUATION

ANALYZE COST STRUCTURE

SELECT PRICING METHOD

ESTABLISH TARGET PRICE

STRUCTURE AND SPECIFIC
PRICE QUOTES
DEFINITION OF COST

COST is:
 the amount of expenditures incurred in, or attributable to a specified thing or activity.
 the pesos that must be paid for goods and services.

ELEMENTS OF PRODUCT COST

1. DIRECT MATERIAL. This is the cost that can be directly identified as it becomes a
physical part of the finished product.

2. DIRECT LABOR. This represents the wages paid to factory employees.

3. PRODUCTION OVERHEAD. This is identified as all costs incurred in the

manufacturing process other than direct materials and direct labor.
Total Manufacturing Cost of the Product. Thus:

DIRECT MATERIAL + DIRECT LABOR = PRIME COST

INDIRECT LABOR + INDIRECT MATERIAL + EXPENSES = PRODUCTION

OVERHEAD

Then:

PRIME COST + PRODUCTION OVERHEAD = TOTAL PRODUCTION COST

OVERHEAD can likewise be further subdivided into:
- Sales and Administrative Overhead
- Financial Overhead
- Marketing Overhead

Combining all these cost elements will give you the total cost of the
product as follows:

SALES & ADMINISTRATIVE

OVERHEAD
PRIME COST + PRODUCTION OVERHEAD + FINANCIAL OVERHEAD
MARKETING OVERHEAD

= TOTAL COST OF PRODUCT

COST can likewise be classified in relation to its tendency to vary with
production. This is the distinction between fixed cost and variable cost (Kotler
et al., 2005).

A fixed cost tends to be relatively unaffected by increase or decrease in production.

It is normally incurred through the passage of time and for this reason, it is termed
“period cost”.

A variable cost tends to vary directly with changes in production volume. It can
easily be seen that all prime costs are variable costs.

There is, however one type of cost, the semi-variable cost, that contains both fixed
and variable elements and is therefore affected by changes in quantity.
PRICING STRATEGIES
There are at least four approaches to pricing. These are:
1. COST-PLUS PRICING. This is the simplest pricing method using a base cost figure per
unit to which a markup is added to cover unassigned cost and to provide a profit.

Example: Suppose an exporter has the following costs for his/her dining chair:
Variable Cost USD 10
Fixed Cost USD 1500
Expected Unit Sales 1000 pieces

The exporter’s cost per chair is given by:

Unit Cost = Variable Cost + Fixed Cost = USD 10 + USD 1500 = USD 11.50
Expected 1000
Unit Sales
Suppose an exporter wants to earn a 10% markup on sales, the exporter’s markup is as
follows:

Markup Price = Unit Cost = USD 11.50 = USD 12.78

1 – Desired Return 1 - .10
on Sales

The exporter can charge the importer USD 12.78 for every dining chair and make a profit of
USD 1.28 per unit.
2. BREAK-EVEN POINT PRICING. In the course of pricing your product for
export, it is important to know at what volume of sales the company will start to
make a profit. This volume of sales is known as the break-even point. The break-even
point is reached when the income line (sales) crosses the total cost line, so that
income and total costs are equal and neither a profit nor a less is made, and thus, the
enterprise breaks even.

Example: Suppose the dining chair exporter wants to know the number of unit he/she
has to sell to break even, he/she can use the following formula:

Break-even Volume = Fixed Cost = USD 1500 = 539.75

Price - Variable USD12.78 - USD10 or 540 chairs

Cost
If the exporter wants to make a profit, he/she must sell more than 540 chairs at USD
3. MARGINAL COST PRICING. When fixed costs are already recovered by current volume
of output sale, the company has the option to sell additional volume at lower prices. Marginal
cost is determined on the basis of additional variable costs. This is usually arrived at by the
formula:

PRIME COST + VARIABLE OVERHEAD = PRICE

4. RETROGRADE PRICING. This is a common export technique which takes into

consideration both demand and competitive influences, and works backward to determine what
ex-factory price is needed to achieve a competitive price in the target market (International Trade
Center, 2022).

As an example, assume that the exported dining chair has a CIF (Cost, Insurance and Freight)
price of USD 29 per piece in the U.S. Using the Free on Board markup price of USD 12.78 as
reference, assume that the difference of USD 16.22 (USD 29 – USD 12.78) will cover the freight
and insurance costs. Shown below are the calculations on the selling price to the American
consumer:
 TABLE 20: COMPUTATION ON THE DINING CHAIR’S CONSUMER SELLING PRICE IN THE U.S.
USING MARKUP PRICING

INDEX USD
CIF Price 100 29
Custom’s Duty (20%) +20 (20% x 100) +5.80 (29 x 20%)
Landed Price 120 (100 + 20) 34.80 (29 + 5.80)
Importer’s Markup (35%) +42 (120 x 35%) +12.18 (34.80 x 35%)
Price to Wholesaler 162 (120 + 42) 46.98 (34.80 + 12.18)
Wholesaler’s Markup (25%) +40.50 +11.75 (46.98 x 25%)
Price to Retailer 202.50 58.73 (46.98 x 11.75)
Retailer’s Markup (50%) +101.25 +29.37 (58.73 x 50%)
Price of Dining Chair to U.S. Consumer 303.75 88.10

Source: International Trade Center (2002). Handbook on pricing and quoting Switzerland
In retrograde pricing, the reverse calculations are performed as follows:

TABLE 20: COMPUTATION ON THE DINING CHAIR’S CONSUMER SELLING PRICE IN THE U.S.
USING RETROGRADE PRICING
INDEX USD
Selling Price to U.S. Consumer 100 81.09
Retailer’s Markup (50%) -33 -22.36
Price from Wholesaler 67 58.73
Wholesaler’s Markup (25%) -14 -11.75
Price from Imported 53 46.98
Importer’s Markup (35%) -13 -12.18
Landed Price 40 34.80
Custom’s Duty (20%) -6 -5.80
CIF Price 34 29.00

Source: International Trade Center (2002). Handbook on pricing and quoting Switzerland
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Thank You!