Flower 1 Petal – 5
Foreign Market Objectives
An important aspect of a company’s pricing analysis is determining market objectives. For example, is the company attempting to penetrate a new market, looking for long-term market growth, or looking for an outlet for surplus production ? Many firms view the foreign market as a secondary market and consequently have lower expectations regarding market share and sales volume. This naturally affects pricing decisions. Marketing and pricing objectives may be general or tailored to particular foreign markets. For example, marketing objectives for sales to a developing nation where per capita income may be one tenth of that in the United States are necessarily different from the objectives for Europe or Japan.
The computation of the actual cost of producing a product and bringing it to market is the core element in determining if exporting is financially viable. Many new exporters calculate their export price by the cost-plus method. In the cost-plus method of calculation, the exporter starts with the domestic manufacturing cost and adds administration, research and development, overhead, freight forwarding, distributor margins, customs charges, and profit. The effect of this pricing approach may be that the export price escalates into an uncompetitive range. It clearly shows that if an export product has the same ex-factory price as the domestic product; its final consumer price is considerably higher once exporting costs are included.
Marginal cost pricing is a more competitive method of pricing a product for market entry. This method considers the direct, out-of-pocket expenses of producing and selling products for export as a floor beneath which prices cannot be set without incurring a loss. For example, additional costs may occur due to product modification for the export market that accommodates different sizes, or labels. On the other hand, costs may decrease if the export products are stripped-down versions or made without increasing the fixed costs of domestic production.
Additional costs often associated with export sales include:
- Market research and credit checks;
- Business travel;
- International postage, cable, and telephone rates;
- Translation costs;
- Commissions, training charges, and other costs involving foreign representatives;
- Consultants and freight forwarders; and
- Product modification and special packaging.
After the actual cost of the export product has been calculated, the exporter should formulate an approximate consumer price for the foreign market.
For most consumer goods, per capita income is a good gauge of a market’s ability to pay. Some products may create such a strong demand such as popular goods like petrol , that even low per capita income will not affect their selling price. Simplifying the product to reduce its selling price may be an answer for the exporter to most lower per capita income markets. The firm must also keep in mind that currency fluctuations may alter the affordability of its goods. Thus, pricing should try to accommodate wild changes in the markets and /or foreign currency. The firm should anticipate the type of potential customers. If the firm’s primary customers in a developing country are expatriates or belong to the upper class, a higher price might be feasible even if the average per capita income is low.
In the domestic market, few companies are free to set prices without carefully evaluating their competitors’ pricing policies. This situation is true in exporting, and is further complicated by the need to evaluate the competition’s prices in each potential export market. If there are many competitors within the foreign market, the exporter may have little choice but to match the market price or even under price the product or service in order to establish a market share. On the other hand, if the product or service is new to a particular foreign market, it may actually be possible to set a higher price than in the domestic market.
In summary, here are the key points to remember when determining your product’s price:
- Determine the objective in the foreign market.
- Compute the actual cost of the export product.
- Compute the final consumer price.
- Evaluate market demand and competition.
- Consider modifying the product to reduce the export price.
- Include “nonmarket” costs, such as tariffs and customs fees.
- Exclude cost elements that provide no benefit to the export function, such as domestic advertising.
Quotations and Pro Forma Invoices
Many export transactions, particularly initial export transactions, begin with the receipt of an inquiry from abroad that is followed by a request for a quotation. The preferred method for export is a pro forma invoice, which a quotation is prepared in invoice format. A quotation describes the product, states a price for it, sets the time of shipment, and specifies the terms of the sale and terms of the payment. Since the foreign buyer may not be familiar with the product, the description of it in an overseas quotation usually must be more detailed than in a domestic quotation. The description should include the following 15 points:
- Seller’s and buyer’s names and addresses.
- Buyer’s reference number and date of inquiry.
- Listing of requested products and brief description.
- Price of each item (it is advisable to indicate whether items are new or used and to quote in U.S. dollars to reduce foreign-exchange risk).
- Appropriate gross and net shipping weight (in metric units where appropriate).
- Appropriate total cubic volume and dimensions packed for export (in metric units where appropriate).
- Trade discount (if applicable).
- Delivery point.
- Terms of sale.
- Terms of payment.
- Insurance and shipping costs.
- Validity period for quotation.
- Total charges to be paid by customer.
- Estimated shipping date from inland . port or airport.
- Currency of sale.
In addition to the 15 items previously mentioned, a pro forma invoice should include two statements. One that certifies the pro forma invoice is true and correct and another that gives the country of origin of the goods. The invoice should also be clearly marked “pro forma invoice.”
Pro forma invoices are models that the buyer uses when applying for an import license, opening a letter of credit or arranging for funds. In fact, it is a good practice to include a pro forma invoice with any international quotation, regardless of whether it has been requested or not. When final commercial invoices are being prepared prior to shipment, it is advisable to check with the domestic Department of Commerce or another reliable source for any special invoicing requirements that may be required by the importing country. If a specific price is agreed upon or guaranteed by the exporter, the precise period during which the offer remains valid should be specified. Additionally, it is very important that price quotations state explicitly that they are subject to change without notice.
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.
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 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:
- 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.
- 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.
- 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 is , 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 need for a formal costing process
. The purpose of this costing exercise is to:
- Ensure that you have identified all of the costs likely to impact on your final export price
- Estimate as realistically as possible the actual costs associated with each cost item
- Determine the export pricing strategy you will follow based on your costs, your expected final price, the demand and competitive factors you face, and the flexibility you have with your export price setting
- Find ways of cutting costs (by reducing expenditure in certain areas, for example)
- Decide on a final export price
There are many costs involved
One of the major challenges in exporting is ensuring that you remain competitive yet still make a profit. Bear in mind that the channel between your firm and your customer is much longer than in the domestic market and that there are many intermediaries along the way. You need to account for the wide variety of additional costs you will encounter, such as distribution costs, documentation costs, the cost of additional channel intermediaries, as well as the taxes and tariffs that you will encounter when doing business with overseas markets. Indeed, you will find to your dismay that there is a cost around every corner.
The price at home will not be the price abroad
These costs all contribute to either a higher price or to lower margins (i.e. lower profits)..One way of overcoming these obstacles is to undertake a thorough costing exercise and to think carefully about the pricing strategy you plan to follow. There is no fixed formula for successful export pricing. It differs from exporter to exporter depending upon whether the exporter is a merchant exporter or manufacturer exporter or exporting through canalizing agency. Exporter has to assess the strength of his competitor and anticipate the move of competitor in the market of operation. Exporter can still be competitive with higher prices with better delivery package or added advantage.
Following are few examples of such factors:
- Range of product offered
- Prompt deliveries and continuity in supplies
- Product differentiation and brand image
- Frequency of purchases
- Presumed relationship between quality and price
- Credit offered
Pricing Vs Costing
There is a lot of confusion between the price and the cost. Many consider these synonymous. A few differ are :
- Price is what we offer to the customer. Cost is the price that we pay incurred for the product?
- Price includes our profit margin. Cost only gives the expenses we have incurred.
- Costing is the Cost Accountant’s privilege. Pricing is the Marketing man’s privilege.
In order to withstand international competition, the Government offers certain exemptions and incentives/ benefits. These are additional realizations which tend o reduce the cost of your product. the following are few of them:
- There is no sales tax applicable on the final product
- There is no excise applicable on the final product
- Duty free import of raw materials, components and consumables is permitted under the advance licensing scheme.
- Income tax benefit
- Special import license
- Credit of duty under the duty Entitlement Pass Book Scheme
- Any other special subsidy announced by the government
Special Factors for Exporting Pricing
There are many unique factors relating to goods to be sold abroad. These factors influence their determination in comparison to those having bearing on pricing for domestic products. These factors may be delivery schedules, terms of payments, motivation of pricing, size of order etc.
Factors that increase price of Export Products
- Special packing , marking and labeling
- Additional supervision and effort for Export product
- Export Transaction cost
- Cost of Export Procedure
- Marketing cost
- Additional Insurance cost
Factors that reduce price of Export Products
- Export Assistance and Facilities
- Refund or exemption from excise duty
- Lower price due to Imported components and spares
- Import of raw materials at International price
- Benefit of economy of scale
- Cheaper Export credit
……. Will Continue