Flower 1 Petal – 4
Export Costing – Pricing
Export is a process in which products are shipped or sent from one country to another country for the purpose of trade or sale; it is the opposite of import. For example, Company A located in India sells and sends its products from India to Company B located in Germany; in this case, Company A is said to exporter, whereas Company B is said to importer (buy from another country)
Export is not restricted to only physical goods; services can also be exported. Examples of Export Costing Services are more difficult to communicate with consumers and require adaptation to the specific needs of customers. Export and import are important components of international business, as the two together compose international trade. Export is actually is a very popular and relatively easy way to expand into foreign markets. Therefore, it is an important element of global business.
Export has many advantages. Through export, companies can increase their sales and profit margin as the sales price can be higher in foreign countries. As production volume increases in line with export demand, companies are able to decrease their unit cost. Export also provides a kind of spreading of risk, since the exporting company will not anymore depend on only its domestic market; dependence on a single country can be risky in case of an economic or political crisis. Export also decreases the cost of foreign expansion.
However, export also has various disadvantages. As the exporting company does not have physical existence in the foreign market, its knowledge about the foreign market is limited. Therefore, it can miss potential opportunities in the foreign market. Export is also very susceptible to trade barriers and if these barriers increase, companies may have to cancel their export activities. Another fact is that companies themselves do not have power to influence these trade barriers, some of which are tariffs and quotas.
Companies internationalize their operations through different ways (called entry modes) such as sending their goods to other countries (export), establishing sales offices in foreign countries, giving production permission to foreign companies (licensing), partnering with foreign companies (joint venture), acquiring a foreign company, and establishing production and sales facilities from scratch in a foreign country (Greenfield investment).
Export does not require much expense and knowledge of the foreign market as much as other entry modes do. Therefore, export is one of the simplest and the least risky ways of internationalization and is usually preferred by small and medium sized enterprises. The production of the goods generally takes place in the exporter company’s country (called domestic market or country); however, marketing, distribution, and customer service activities take place in the foreign country to which the goods are shipped.
There are various issues companies need to consider to be successful in their export activities. First of all, the management needs to have a firm and long term commitment toward export. Export should not be thought of a daily activity because it requires long-term planning and focus. Second, not every product sold in the domestic market can be sold in other markets. Therefore, companies need to first assess whether their products have potential in foreign markets. Similarity in needs, tastes, preferences, and conditions between the domestic market and the foreign market may be an indication of sales potential in the foreign market. When the products of a company have unique features not available in foreign markets, then this may also indicate the sales potential of the product in foreign markets. Third, demand characteristics also play important roles; the demand for a particular product may be low in the domestic market but very high in a foreign market. In this situation, the product may also have sales potential in the foreign market.
Finding out the sales potential for products in foreign markets may not mean much unless the company is ready for export. As the export operations require additional resources and commitments, companies need to determine whether they are able to commit the required resources for export and whether export operations are in line with the company goals. If the company is ready for export, then a thorough export plan should be made, including the products to be exported and product modifications, if any, export pricing, target market characteristics, and resources necessary for export.
In addition, export requires shipment of products to foreign countries. Therefore, managing logistics in export is an important success factor .because the competitiveness of price is also affected by the cost and effectiveness of shipping. In this regard, the parties in the whole logistics process need to be managed well under close and long term relationship with an understanding of shared goals and mutual benefits.
Companies differ in terms of how they plan and implement their export activities. Some companies use a systematic approach to exporting whereas others do not. The more experienced managers utilize a systematic approach in order to increase the likelihood of success in their export. Such a systematic approach involves assessing global market opportunities, organizing export activities, acquiring needed skills and competencies, and implementing the export strategy.
Types of Exports
As to the organization and implementation of export activities, companies have different approaches classified as indirect and direct exporting. In indirect exporting, some companies buy products from producers in their own domestic market and then export these products. In this case, there is no risk for the producer as its buyer is also a domestic company, which then takes risks and exports the product.
In another form of indirect exporting, some companies export their product through intermediaries. In this approach, the domestic company uses another company that can construct relationships with foreign buyers; export management companies, export trading companies, international trade consultants, export agents, merchants, and remarketers are examples of such intermediary firms. Small and medium sized enterprises with no or little knowledge about foreign markets often prefer this type of export, and as they gain more knowledge about foreign markets and construct closer relationships with foreign companies, they can switch to direct exporting.
In direct exporting, the producer directly sells or exports the products to the foreign buyer. This type of exporting is the riskiest since the exporter assumes all responsibilities; however, it is the best approach to get highest profits and long term growth.
Pricing the products to be exported is a difficult task because companies need to be price competitive and at the same time consider many factors affecting the price. Of course, the export price, like pricing of any product, should be determined so that the company gains profit. There are internal and external factors affecting the export price. The cost of the product is the major factor that is internal to the firm. Other major factors internal to the firm are market search, credit checks, travel expenses, product adaptation, different packaging, transportation, and commissions. The choice of distribution system also has impact on the price; long distribution channels increase costs, lowering profit margins. If products require adaptation or modification, this also adds costs, as the companies need to change their existing production system. However, such modified or differentiated products offer companies opportunities to increase prices.
Some factors external to companies in their export price setting are supply and demand, location, and environment of the foreign market, such as climatic conditions, exchange rate fluctuations, and governmental interventions and regulations. If there are many factors affecting the price in a market at the same time, then adoption of a single export pricing (called ethnocentric pricing) is difficult.
Another fact is that a particular product in a country may not be at same product life stage as in other countries. Companies generally charge high prices at the introduction and growth stages. Therefore, if the product is at the introduction or growth stage in the export destination, export price can be high. In most cases, export price is determined according to local conditions (called polycentric pricing) such as demand and supply, competition, and the market price level in the foreign market.
With respect to export pricing, there are various trade and shipping terms that explain who bears various costs associated with the transportation of export products. Ex Works (EXW) means that the price covers only the sales price of products and the buyer assumes all the responsibility and cost of transport when the products are ready at the seller’s factory. That means that the buyer needs to come to the seller’s factory and get the products.
Free carrier (FCA) means that the price covers the sales price of products and the costs associated with loading the products into a transportation means determined by the buyer; the rest belongs to the buyer. Free alongside ship (FAS) means that the price covers the sales price of products and the costs associated with carrying the products to the port and unloading and warehousing them. Free on board vessel (FOB) means that the price covers the sales price of products and costs associated with carrying products to the vessel and loading them into the vessel. Cost and freight (CF) means that the price covers the price of products and costs associated with all transportation; when the seller includes the insurance in the sales price as well, then cost and freight (CF) becomes cost, insurance, and freight (CIF).
There are various conventional methods of getting paid in export: Cash in advance, letter of credit, open account, consignment, and countertrade are payment methods. In the cash in advance method, the payment is received before the products are sent to buyers and in this case the exporter does not need to worry about the payment. However, buyers in this case may have worries as to their cash flow and timing of the shipment because they already paid for the products and if there are delays in the shipment, their sales or production will be delayed too. Therefore, since it creates some pressure in export, the cash in advance method is not a popular method of payment.
As the most commonly used method in export payment, the letter of credit is a kind of agreement between the banks of buyers (importers) and sellers (exporters) that guarantees the payment from the buyer to the seller when the export shipment is obtained. The open account method of payment involves payment from the buyer on account at some time in the future; in this method, the buyer needs to be credible.
In the consignment method of payment, the seller sends the products to an intermediary firm in the foreign country and this intermediary sells the products on behalf of the exporter. However, this method is not appropriate if the seller does not have a good and trustworthy intermediary. The last payment method is countertrade, in which the payment is actually made through other products instead of money.
In the era of Global Market Economy and fierce competition, importance of accurate costing of product need not be over – emphasized. In accurate costing can lead to either losing of orders or losing of profits. Export pricing is most important tool for promoting sales and contesting international competition. Exporter has to face domestic producers in the export market, producers in other competing supplying countries and domestic producer’s in one owns country. Cost, Demand and Competition are the three important factors that determine price. The price for export should be as realistic as possible..
Pricing for export involves many additional considerations to pricing for the domestic markets. These considerations could include, but not limited to, market conditions, comparative price of similar products in your target market, additional transport costs and bank fees associated with reaching an overseas destination. The Incoterm used in an export contract will bear on what costs are included in the export price and the method of payment used. Many exporters have suffered loss by failing to account for all the costs involved.
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.
Why is export pricing different?
Pricing for any market requires an understanding of relative costs, demand and competition in that market. Careful analyses of prevailing conditions in the markets you choose, and an accurate assessment of the way to structure your export price, 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. The price calculation will include the components of domestic price, but the addition of costs that are specific to export transactions can render a price constructed on this basis uncompetitive. Marginal (or ‘differential’) costing is a technique commonly employed in export and produces a more competitive price to assist market entry. This method establishes the base price of a product or service using the direct costs of production and sales, with fixed costs apportioned to the \ volume of the sale. 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.
……. Will Continue