PRICING STRATEGY

OF
EXPORT

Submitted to

Dr. Rajeshwanath

Submitted by

Arijit Datta

PG-09-18
Pricing Strategy for Export

The price charged for the export product, should cover all the various costs
involved in producing and marketing it. Sometime, an exporter may be satisfied
with just breaking even or even incurring a loss - with a view of getting
established in a new market.

It is tempting to sell products at a price that covers only the variable costs of each
unit sold to make some contribution to the fixed costs or factory overhead.

There is always the risk that the exporter can be accused of dumping its products
abroad and are required to pay anti-dumping import duty.

An exporter should calculate and determine all the costs involved in selling its
product in the foreign market, including:

1. Foreign agent's commission.

2. It's own required profit, and then quote a price on that basis.

Any pricing strategy must be flexible to take advantage of: special discounts for
quantity purchases or special introductory prices

. 
How to price your product

"How much to charge for a product or service?" - this question is a typical

starting point for any discussions about pricing. When preparing an export
price list, in many cases, a range of costs may apply, such as: 

 Fixed costs such as salaries or rents, etc.

 Custom duty, customs clearance, import duty and taxes
 Sea or air freight and insurance
 Custom broker's fee, agent's commission or importer's mark-up
 Ex ship, transportation from port of entry to customer
 Break-bulk fees (if third party warehouse applies)
 Warehousing fees, packaging and labelling to local standards
  Product certification, if required and product liability insurance
 Advertising and promotional costs, etc.

When you export something, usually an overseas wholesaler buys your

products and sells them to some retailers. The retailers later adds a mark-up on
your product. While exporting, it is important to consider this mark-up so that
you can understand what the retail price of your product would be to the end
user. It is also important to analysis at what price your would-be competitors
are offering your type of products in the target market and whether the market
can bear your price.    
The Setting of Export Prices

Customer Purchase Factors Pricing Policies Factors

 Ability to pay Profit maximization

 Price-quality relationship market share

 Reaction to marketing mix survival

 Market support return on investment

competitive policies

copy competitive pricing

follow competitive pricing

price to discourage competitive entry

Export Pricing Strategy

 Cost-oriented pricing :- Standard worldwide price- regardless of buyer’s

location in the market(s)

Dual pricing differentiates between domestic and export prices:-

 Cost-plus method allocates domestic and foreign costs to the

product .

 Marginal cost method considers direct costs of producing and

selling exports as floor (lowest) price

Market-differentiated pricing

 based on the dynamics of the marketplace

 changes in competition, exchange rates, etc.

Export-Related Costs

 Export-related costs

Cost of modifying a product for a foreign market

Operational costs of exporting

Cost incurred in entering the foreign market

 Price escalation for exports results from

Clear-cut and hidden costs

 Methods for combating price escalation

─ Reorganize the channel of distribution

─ Product adaptation

─ Change tariff or tax classifications

─ Overseas assembly or production

Export Pricing Strategies

• Average pricing strategy: A set profit margin is maintained globally with one
price for domestic and international buyers
• Dual pricing strategy: One price for domestic, one for international buyers
• Market differentiated pricing: What can the market bear considering all
landed costs. Offer different price for each global market.
NOTE: It is illegal to sell a product at a lower price abroad than domestically
= “dumping”
• Global pricing is not easy. Your company objectives such as the desire for
long term vs short term market share, can influence your global marketing
and pricing schemes.

Your business objectives can influence your strategy.

 Breaking Into A New Market. If you are trying to break into a new market
where the competition is fierce, you should adopt a pricing plan that adjusts
your price to beat the competition. In some instances this may mean
lowering your price to gain a long-term market share. You may need to
sacrifice profit in the short term to reach long-term goals.
 Increasing Your Market Share. You may need to set your prices slightly
lower than the competition to do this. Cutting your marketing costs may be
the way to go. Another way to allow you to drop price is to cut your freight
costs.
However, your objectives may not always match the market situation. You need to
also evaluate competition and consumer demand in each market before setting a
price that meets your company’s objectives. In the end, You must be able to quote a
competitive price on your product.

Market Demand—As in the domestic market, product demand is the key to setting
prices in a foreign market. What will the market bear for a specific product or
service? What will the estimated consumer price for your product be in each
foreign market? If your prices seem out of line, try some simple product
modifications to reduce the selling price, such as simplification of technology or
alteration of product size to conform to local market norms. Also keep in mind that
currency valuations alter the affordability of goods. A good pricing strategy should
accommodate fluctuations in currency, although your company should quote
prices in dollars to avoid the risks of currency devaluations.
Competition—As in the domestic market, few exporters are free to set prices
without carefully evaluating their competitors’ pricing policies. The situation is
further complicated by the need to evaluate the competition’s prices in each
foreign market an exporter intends to enter. In a foreign market that is serviced by
many competitors, an exporter may have little choice but to match the going price
or even go below it to establish a market share. If, however, the exporter’s product
or service is new to a particular foreign market, it may be possible to set a higher
price than normally charged domestically.

You may want to set a price range for your product, based on the specific customer
level you want to capture. Positioning your product or service at the upper end of
the market can call for a higher price. Using a moderate price will lower your risk
factors. Pricing at the lowest range is possible if you want to reduce inventory and
don’t have a long-term commitment to the market.
Common Pricing Methods
Once you’ve considered the best price strategy you need to determine the best
pricing method.
There are two common methods of calculating product price Cost-Plus and
Marginal-Cost

1- Cost-Plus: This method looks easy, but be careful. The Cost-Plus accounting
rationale revolves around maintaining the domestic profit margin. It uses the
domestic price as a base price, adds export costs, and deducts any domestic
marketing costs from the total. You may run into trouble with it, as variable costs
connected with marketing in a foreign land are not taken into account. As such,
your price may end up too high to compete in your foreign market. Cost-plus
calculations look like this:
Domestic Price
+ Export costs
- Domestic Marketing costs
= Price on Product
Table 4 
Sample Cost-Plus Calculation of Product Cost

Domestic
  Export Sale
Sale

Factory price $7.50 $7.50

Domestic freight .70 .70

subtotal 8.20 8.20

Export documentation   .50

subtotal   8.70
Ocean freight and insurance   1.20

subtotal   9.90

Import duty (12 percent of landed

  1.19
cost)

subtotal   11.09

Wholesaler markup (15 percent) 1.23  

subtotal 9.43  

Importer/distributor markup   2.44

subtotal   13.53

Retail markup (50 percent) 4.72 6.77

Final consumer price $14.15 $20.30

2- Marginal-Cost: The Marginal-Cost method sets a "floor price" based on fixed

costs, variable costs of foreign marketing, and profit. Floor price marks the point at
which your company starts taking a loss on the sale of its product. Some deem the
marginal-cost method a more realistic approach to setting product prices.

Floor price is calculated thus:

Fixed costs =
 Production costs
 Overhead
 Administration
 Research & Development
+ Product modification costs =
 Special labelling, translated instructions required under regulations.
  Foreign market research
 Advertising and marketing, promotion to establish product recognition in
the new market
 Translation, consulting and legal fees for translating documentation
 Company in-service training for foreign distributors/agents
 After sales service warranty costs
 Direct costs (freight, insurance, handling)
 Tariffs
+ Unexpected variable expenses:
 time cyle of export sales
 change in supplies or components
 complications in filling orders
 risk coverage in case of payment default
 extra sales and administrative costs

+
Profit Margin (usually 12-15%, depending on financing and credit terms)
Floor Price
=

Terms of Sale

In any sales agreement, it is important that there is a common understanding of

the delivery terms since confusion over their meaning can result in a lost sale or a
loss on a sale. The terms in international business transactions often sound similar
to those used in domestic business, but they frequently have very different
meanings. For this reason, the exporter must know the terms before preparing a
quotation or a pro forma invoice.

A complete list of important terms (including many new terms and

abbreviations)and their definitions is provided in Incoterms 1990. This booklet is
issued by ICC Publishing Corporation, Inc., 156 Fifth Avenue, Suite 820, New
York, NY 10010; telephone 212-206-1150.

The following are a few of the more frequently used terms in international trade:

 CIF (cost, insurance, freight) to a named overseas port where the seller
quotes a price for the goods (including insurance), all transportation, and
miscellaneous charges to the point of debarkation from the vessel. (Used
only for ocean shipments.)
 CFR (cost and freight) to a named overseas port where the seller quotes a
price for the goods that includes the cost of transportation to the named
point of debarkation. The the buyer covers the cost of insurance. (Used only
for ocean shipments.)
 CPT (carriage paid to) and CIP (carriage and insurance paid to) a named
place of destination. These terms are used in place of CFR and CIF,
respectively, for all modes of transportation, including intermodal.
 EXW (ex works) at a named point of origin (e.g., ex factory, ex mill, ex
warehouse)where the price quoted applies only at the point of origin. The
seller agrees to place the goods at the buyer's disposal at the specified place
within the fixed time period. All other charges are put on the buyer's
account.
 FAS (free alongside ship) at a named port of export where the seller quotes
a price for the goods that includes the charge for delivery of the goods
alongside a vessel at the port. The seller handles the cost of wharfage, while
the buyer is accountable for the costs of loading, ocean transportation, and
insurance.
 FCA (free carrier) at a named place. This term replaces the former "FOB
named inland port" to designate the seller's responsibility for handing over
the goods to a named carrier at the named shipping point. It may also be
used for multimodal transport, container stations, or any mode of
transport, including air.
  FOB (free on board) at a named port of export where the seller quotes the
buyer a price that covers all costs up to and including the loading of goods
aboard a vessel.
 Charter Terms:
o Free In is a pricing term that indicates that the charterer of a vessel is
responsible for the cost of loading goods onto the vessel.
o Free In and Out is a pricing term that indicates that the charterer of
the vessel is responsible for the cost of loading and unloading goods
from the vessel.
o Free Out is a pricing term that indicates that the quoted prices
include the cost of unloading goods from the vessel.

It is important to understand and use sales terms correctly. A simple

misunderstanding may prevent exporters from meeting contractual obligations
or make them responsible for shipping costs they sought to avoid.

When quoting a price, the exporter should make it meaningful to the prospective
buyer. For example, a price for industrial machinery quoted "EXW Saginaw,
Michigan, not export packed" is meaningless to most prospective foreign buyers.
These buyers would find it difficult to determine the total cost and might hesitate
to place an order.

The exporter should quote CIF or CIP whenever possible, as it shows the foreign
buyer the cost of getting the product to or near the desired country.

If assistance is needed in figuring CIF or CIP prices, an international freight

forwarder can help. The exporter should furnish the freight forwarder with a
description of the product to be exported and its weight and cubic measurement
when packed. The freight forwarder can compute the CIF price usually at no
charge.
If at all possible, the exporter should quote the price in U.S. dollars. This will
eliminate the risk of exchange rate fluctuations and problems with currency
conversion.

Negotiating Terms of Payment

 Considerations

─ The amount of payment and the need for protection

─ Terms offered by competitors

─ Practices in the industry

─ Capacity for financing international transactions

─ Relative strength of the parties involved

Terms of Payment

Types of Payment

Cash in Advance

 Not widely used except for first time transactions

Letter of Credit

 Promise to pay

 Irrevocable, confirmed, revolving

 Drafts

 Similar to personal check

 Must obtain shipping documents prior to delivery

Documentary collection

 Bank acts as collection agent

 Draft may be sold at discounted rate for immediate cash

Open account

Common of doing business in the domestic market

No written evidence of debt exists

No guarantee of payment

Exporter puts full fait

 Consignment Selling

Most favourable to the importer

Allow the importer to differ payment until goods are sold

Places all the burden on the exporter

Objective entry to specific markets through intermediaries