In This Chapter
Pricing your product properly, giving complete and accurate quotations, choosing the terms of the sale, and selecting the payment method are four critical elements in selling a product or service overseas. Of the four, pricing can be the most challenging, even for an experienced exporter. (Methods of payment are covered in Chapter 14.)
These considerations will help you determine the best price for your product overseas:
As in the domestic market, the price at which a product or service is sold directly determines your firm’s revenues. It is essential that your company’s market research include an evaluation of all the variables that may affect the price range for your product or service. If your firm’s price is too high, the product or service will not sell. If t he price is too low, export activities may not be sufficiently profitable or may actually create a net loss.
The traditional components for determining proper pricing are costs, market demand, and competition. Each component must be compared with your company’s objective in entering the foreign market. An analysis of each component from an export perspective may result in export prices that are different from domestic prices.
It is also very important that you take into account additional costs that are typically borne by the importer. They include tariffs, customs fees, currency fluctuation, transaction costs, and value added taxes (VATs). These costs can add substantially to the final price paid by the importer, sometimes resulting in a total that is more than double the U.S. domestic price.
An important aspect of your company’s pricing analysis is the determination of market objectives. For example, you may ask whether your company is attempting to penetrate a new market, seeking long-term market growth, or looking for an outlet for surplus production or outmoded products.
Marketing and pricing objectives may be generalized 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 than marketing objectives for sales to 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 that 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. Table 13.1 provides a sample calculation. It clearly shows that if an export product has the same ex-factory price as the domestic product has, 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 because of product modification for the export market to accommodate different sizes, electrical systems, or labels. Costs may decrease, however, if the export products are stripped-down versions or made without increasing the fixed costs of domestic production. Thus, many costs that apply only to domestic production, such as domestic labeling, packaging, and advertising costs, are subtracted, as are costs such as research and development expenses if they would have been spent anyway for domestic production.
Other costs should be assessed for domestic and export products according to how much benefit each product receives from such expenditures. Additional costs often associated with export sales include the following:
After the actual cost of the export product has been calculated , you 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 create such a strong demand (for example, Levi’s denim jeans) 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 your company in markets with low per capita income. Your 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 U.S. and foreign currencies. A relatively weak dollar makes the price of U.S. goods more competitive in many markets around the world, thereby enabling you to compete with domestic producers as well as with other foreign competitors whose production costs are suddenly reflected in their inflated domestic currencies. Your firm should also anticipate the kind of customers who will buy your product. If your firm’s primary customers in a developing country are expatriates or are local people with high incomes, 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 (see Box 13.1).
If there are many competitors within the foreign market, you may have little choice but to match the market price or even underprice the product or service in order to establish a market share. If the product or service is new to a particular foreign market, however, 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:
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. A pro forma invoice is a quotation prepared in the format of an invoice; it is the preferred method in the exporting business.
A quotation describes the product, states a price for it, sets the time of shipment, and specifies the terms of sale and terms of payment. Because the foreign buyer may not be familiar with the product, the description of the product in an overseas quotation usually must be more detailed than in a domestic quotation.
The description should include the following 15 points:
Pro forma invoices are not used for payment purposes. 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 indicates 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. When final commercial invoices are being prepared before shipment, it is advisable to check with your local Export Assistance Center for any special invoicing provisions that may be required by the importing country.
If a specific price is agreed on or guaranteed by your company, the precise period during which the offer remains valid should be specified.
In any sales agreement, it is important to have a common understanding of the delivery terms because confusion over their meaning may result in a lost sale or a loss on a sale. Terms of sale define the obligations, risks, and costs of the buyer and seller involving the delivery of goods that make up the export transaction. 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 and understand the terms before preparing a quotation or a pro forma invoice.
The most commonly applied terms of sale in the global marketplace are the international commercial terms, or Incoterms. A complete list of these important terms and their definitions is provided in Incoterms 2000, a booklet issued by the International Chamber of Commerce (ICC). To purchase the booklet, contact ICC Books, 1212 Avenue of the Americas, 18th Floor, New York, NY 10036; call (212) 703-5066; or go online at www.iccbooksusa.com.
Following are a few of the more frequently used terms in international trade:
Some of the more common terms used in chartering a vessel are as follows:
It is important to understand and use sales terms correctly. A simple misunderstanding may prevent you from meeting contractual obligations or make you responsible for shipping costs that you sought to avoid.
When quoting a price, you 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. The buyers might find it difficult to determine the total cost and, therefore, might hesitate to place an order. You should quote CIF or CIP prices whenever possible because such quotes show the foreign buyer the cost of getting the product to or near the desired country.
If possible, you should quote the price in U.S. dollars. This will eliminate the risk of exchange rate fluctuations and problems with currency conversion.
If you need assistance in figuring CIF or CIP prices, an international freight forwarder can help. You 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.
FACT: A common misperception of many company owners is that their prices are too high for foreign markets.
INSIGHT: What makes your product sell domestically can help it sell abroad. Price is important, but it is not the only selling point. Other competitive factors are need, utility, quality, service, credit, and consumer taste. Don’t assume your price is uncompetitive. Your products could still be a bargain in countries with a strong currency, even after adding overseas delivery costs and import duties.
FACT: Pro forma invoices are the preferred method of quoting prices.
INSIGHT: It is a good practice to include a pro forma invoice with any international quotation regardless of whether it has been requested.