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Export
101 – Export Pricing & Quoting
Introduction
Establishing an appropriate export price is the
most important part of the international marketing mix, as it is the only one that
generates revenue. The product, promotion and distribution of your product are all costs
that need to be evaluated and incorporated into your price in order to recover them, and
make a profit. Export pricing is a bit more complicated than pricing domestically, due to
the following conditions you must accurately manage:
- Your company’s motivations, concerns,
experience and level of managerial commitment. Whether you are being proactive or
reactive may govern your pricing policy. Proactive exporting with higher levels of
management support may allow you to price more aggressively for long-term success. Limited
levels of exporting experience generally means more concerns regarding information on
mechanics, communications, sales effort, delivery and regulations. Often, support from
international trade facilitators (like Food Export USA) can help you lower your costs of market
entry.
- The effect of export expansion on the overall
cost of production. It is true that increased use of capacity may help spread out your
fixed costs, and you may also consider eliminating your domestic price expenses from the
international component. You must also consider what the additional costs of international
trade may have on your product. In addition, higher commissions, lower prices, increased
communications and travel, educating staff, and obtaining information may all have an
impact on your overall pricing strategy.
- The effect that regional, country or local
characteristics of the destination market may have on your ability to price your product
effectively. The buyer’s government or market may require you to add translations
to your labeling, or adapt it in some other way. Of course, the applicable duties
(tariffs) on your products usually have a significant impact on the overall cost, and
therefore price, of your product. The most significant foreign market "wildcard"
is culture. In other words, the preferences, expectations and attitudes of the consumers
may require you to spend additional funds to adapt your product to meet their tastes. Some
overseas markets may require less product modifications than others, but even in these
countries, the effects of culture cannot be overlooked.
- The cost of maintaining or adapting your
products’ integrity through the export process. This includes the added values
that export price escalation will have on the landed cost. This is where understanding how
to properly use INCOTERMS, service providers, and quote precisely with pro-forma invoicing
come into play. It is not uncommon for the price of a product to be much higher for the
buyer to land the goods than it is for you to ship it off your dock. Those factors, added
to the countries’ tariff and non-tariff barriers, usually have a significant impact
on your customer’s ability to resell at a profit.
Essentially, export pricing breaks down into two
categories. First is the price at which you are willing to sell your product to a given
buyer in a given market (when it is still on your dock). Second is the price of the
product when it has arrived on their dock. This is known as the "landed cost"
and includes the export price escalation factors.
FAQ’s
Why can’t I just sell my product at one
price all over the world?
Although some firms use a "standard
worldwide" price approach, this approach may limit a company’s ability to
penetrate individual foreign markets. You might be able to use this approach with certain
products that may be in higher demand than others. It may also be possible if you leave
all the other costs and responsibilities to the buyer to get the product to market.
However, there are so many variables that affect the price in exporting (i.e., quantity
and value sold, destination, foreign currency, intermediaries and mode of transport), that
it is unlikely that a company could price their product’s appropriately without
taking all of these factors into account. An adjustment that a company could make to their
global price might be to implement an "average pricing" strategy, where a
certain profit margin would be maintained globally (domestic and international).
What are some common export-pricing strategies?
Many companies employ a "dual pricing"
strategy, which means they have both domestic and international pricing for the same
products. This would indicate an appreciation for the flexibility that is required in
determining export versus domestic prices.
Others take that a step further and use market
differentiated pricing. With this strategy, firms work with their distributors to decide
what the market may bear in local sales, and to comprehend the differences in landed costs
for the same products in different markets.
Exporters need to be concerned, however, with one
element in this more creative pricing process. If you are found to be selling your product
at a lower price in the destination market than you are domestically, with the intent of
gaining market share at the expense of the local producers, you may be cited for
"dumping" your product. In this case, your buyer may be charged with
anti-dumping duties, which would raise the tariff rate to the value of the market price,
rather than the export price. This penalty would raise the landed cost and potentially
prohibit the import of your product.
What is export price escalation?
Price escalation is the difference between the
price of your merchandise before it has begun its journey to its final destination, and
the "total cost" of the product. The "total cost" is affected by a
variety of factors, including the size and nature of the product, the destination market,
mode of transport, financing, tariff and non-tariff barriers, service provider fees,
handling and documentation costs, and other charges. For example, it is not uncommon for a
$25,000.00 shipment in New York City to "cost" the buyer another $5000.00 to
"land" it in their facility. Anything that adds to the value of the product
raises its price. In most countries, tariffs are applied on the cost of the goods, as well
as all costs incurred in getting the products to the port of importation. If you are adept
at controlling the price escalation for your buyer, you may obtain more business from them
in the long run. That is why it is so important to be efficient at issuing your pro forma
invoices as a quotation mechanism.
What is a "pro forma" invoice and when
is it used?
The term pro forma is from the Latin term,
which translates "as a matter of form.’ This document is very important in the
quotation process, and a company often includes it in their response to a potential
buyer’s trade lead.
In actuality, the pro forma is a
"snapshot" of your commercial invoice, lacking some finishing details. The buyer
may decide to accept your pro forma offer as is, or request a different trade term, such
as eliminating insurance or even transportation, if they have a better price than you.
They may even ask you to add to the order, if they are satisfied with all of your prices
quoted to them. That is another reason why being flexible in your export pricing is so
important.
The pro forma is especially important when it is
used as a formal quotation. In a formal quotation, the buyer is using your offer to obtain
import permits and currency exchange. This means that if the buyer’s government
allows them to buy your product, it may only be at the exact amount and price that you
quoted. If you have made a mistake on your pro forma invoice, you may not be able to
renegotiate at a later date. Proper understanding of INCOTERMS, and obtaining a
competitive quotation from the service providers, is paramount to success. With our major
trading partners, formal quotes are rare because they can easily obtain dollars to pay
you, and they have fewer restrictions on imports.
To issue a correct pro forma, and to make an
effective quotation, you need accurate and competitive costing information from your
service providers, as well as a realistic "price" for your product.
Understanding INCOTERMS, and having a good relationship with your service providers, is
vital at this point.
What are INCOTERMS?
INCOTERMS are published and periodically updated by
the International Chamber of Commerce (ICC). The most recent update from the year 2000 is
known as ICC Pub. 560. They are one of many publications the ICC publishes in order to
standardize and increase international trade between countries. They are designed to
eliminate miscommunication and other obstacles that may arise between buyers and sellers
in different countries, and they thus help the parties clearly understand their
responsibilities regarding the transfer of title and assumption of loss and risk.
Although not law, they are often used legally to
settle disputes that have occurred in the exporting and importing process. You are not
required to use them, but strongly encouraged to do so in order to be more efficient in
your export operation, as well as your pricing and quoting. Many of the export links
provided below explain the INCOTERMS in much more detail.
In order to obtain an official copy of the 2000
INCOTERMS, you can contact the ICC Publishing Corporation in New York. www.iccwbo.org
How are these INCOTERMS broken down?
INCOTERMS are divided into four main components.
E-Terms, also known as "origin" terms,
have only one term:
"EXW" is the acronym, which means
"ex-works." This represents the least amount of responsibility on the part of
the exporter in moving the goods to the destination.
F-Terms, also known as pre main carriage terms,
have three terms:
These terms represent some responsibility upon
the buyer to quote the price of making the goods available at an airport, usually with
FCA, or a seaport, with FAS and FOB.
FCA Free Carrier
FAS Free Alongside Vessel
FOB Free on Board Vessel
C-Terms, also known as main carriage terms, have
four terms:
These terms include the price of freight
charges as well as all other incidentals, including insurance in the case of CIF and CIP.
CFR Cost & Freight
CIF Cost, Insurance & Freight
CPT Carriage Paid To
CIP Carriage & Insurance Paid To
Typically, an exporter would not quote beyond the
main carriage terms. The exception is DAF (see below), where it is a common procedure with
Mexican customers, who prefer you consign their goods to their customs broker on the U.S.
side of the border. These terms mean that the seller is responsible for paying for the
freight, and you need to be sure to include those costs on your pro forma invoice so you
are paid back for them. The bill will come to you, as the freight is pre paid using
C-Terms.
D-Terms, also known as post main carriage or
arrival terms, have five terms:
DAF Delivered at Frontier
DES Delivered Ex Ship
DEQ Delivered Ex Quay
DDU Delivered Duty Unpaid
DDP Delivered Duty Paid
DDP represents the greatest responsibility on the
part of the exporter, who is quoting to pre pay and be responsible for everything in
getting the goods delivered to the buyers facility, including customs clearance and the
payment of duties. This is the international equivalent of "door to door"
shipping, which should be avoided in most cases as it is a truly "American"
invention.
I ship everything "FOB Factory."
Isn’t that good enough?
"FOB Factory" is an American Foreign
Trade Definition from 1941, and is part of our Uniform Commercial Code of the United
States. Its closest equivalent INCOTERM is EXW. Your buyer may even ask for FOB Factory,
and exporters may use this term, as long as both parties clearly understand what their
respective responsibilities are in the export transaction. Generally speaking,
however, it is recommended that both parties agree on an INCOTERM to be used before the
first export leaves your dock. (Note: Make sure that you document this in writing!)
What role does the freight forwarder play in
this process?
International freight forwarders are involved in
over 80% of the commercial transactions in international trade and are an invaluable asset
to exporters. They can help you with almost all the costing you need in assembling your
pro forma invoice. They can help you understand and determine what pricing is needed
depending upon the trade term used, the mode of transport, and the destination and service
level required. If a letter of credit is being used, (they often revolve around a specific
INCOTERM), they also can assist with the processing fees (in conjunction with your bank),
so you may incorporate those costs into your final pricing decision. You can find a list
of freight forwarders from the Foreign Agricultural Service Web Site at http://www.ams.usda.gov/tmd/freight/index.htm.
Export Pricing and Quoting Links
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