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Export pricing: SMEs must be watchful
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Bikky Khosla | 11 Oct, 2011
For a small firm, getting an export order is always exciting, but the temptation to accept it may result in losses. Poor pricing decisions are the most common reason behind it. Pricing is a tough thing, and when it comes to exports, making pricing decisions gets even tougher. Factors like demand, price and competition need to be analysed from a broader angle as they vary greatly from the domestic market.
In international trade, there may apply a range of costs, which do not apply to domestic marketing, and knowledge about which can be acquired only gradually through experience. For a starter or an infrequent exporter, therefore, it is very difficult to avoid some unforeseen cost components, which typically include costs arising from last minute product modification, delays in custom clearance due to improper documentations, expensive legalization of invoices, misunderstanding of trading terms, etc.
Besides the aforesaid ones, some other cost elements that must not be overlooked by an exporter include transportation costs, government tax policies, price controls, trade regulations, and comparative rates of inflation in different countries. Exchange rates and foreign currency exposure is another concern area that demands adequate attention.
While it comes to choosing a pricing method, there are again some watch-points. Most of our small and medium enterprise (SME) exporters find it comfortable to set prices based on the market. In other words, they just rely on their observations about how the market competitors are charging for similar goods and services. The method is quite simple but while following it exporters often show a tendency to price to close a deal. This is a very negative approach, which undermines confidence in prices.
In cost plus method of pricing, on the other hand, the fact is often forgotten that customers hardly care about the production costs. What matters most to them is the value -- the prices must be able to reflect the value which the customers perceive in the products. Also exporters need to think beyond allocating costs into their pricing calculations, and put continuous efforts on achieving high utilization, without which it can be very difficult to drop prices to meet a similar move by your competition.
An export firm's pricing strategy can also be adjusted smartly over its business objectives. For example, if you are targeting a new market and want to divert customers from a regular channel of supply, you may quote a low prices initially. Later, after gaining a strong foothold in the market, you may start charging premium prices.
Concluding, I feel that reality can never be so clear cut as theories suggest, but at the same time, I strongly believe that success in export business depends to a large extent on the pricing strategy. Therefore, it is crucial for an exporter - small or big - to identify the key areas where things can go wrong, and take extreme care about export pricing decisions.
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Export pricing: SMEs must be watchful
Anand | Wed Oct 19 06:22:51 2011
In todays market conditions, it is not possible to price your products on a cost plus basis. While it is important to know what the cost of production is to remain profitable, prices are decided mainly by the market trends, unless you have a very unique product with a high value add for the customer. Your comment of charging low prices intially and raising them at a later stage is no longer valid. Once a price level is set, it is nearly impossible to get any price increases (other than marginal increases in line with inflation) from the customer.
Pricing - Consultancy Service Provider
Valolution - Validation Revolutors | Thu Oct 13 15:33:47 2011
Of course this article was useful and an eye opener too. But i need to know something about pricing to be done by a consultancy service provider. Additionally i would like to know any additional taxes if applicable when someone tries to export the consultancy services.
Export pricing - staraight forward approach.
Anil Gokhale | Thu Oct 13 06:57:09 2011
There are two prime factors for a business to go in the exports market.
1.Expansion of business
2.Cushioning of shocks and variations of local market demand
Every business has some form of cost based approach in place.I suggest a simple arithmetical model should be helpful in price determination of exported commodity or goods. Let me look at some of the additional costs involved in exports activity.
1.Additional marketing cost: Cost of travels and communication. It is prudent to reduce local marketing overheads at this point.
2.Additional packing and dispatch costs. (Should include fumigation,excise expenses.)
3.Additional inventory holding required due to container size / weight being higher than local truck transport. Also must include finished container load inventory holding. Container demurrage is higher than cost of such additional inventory and “goods-await-container” is better than “container-awaits-goods”
4.Additional inventory cost for stuffed container to reach the ship.
5.Of course there are many advantages which will reduce per piece cost such as bigger production runs and reduced cycle time and lower buying overheads.
6.Also impact of cheaper bank credits, reduced overheads, improved discipline and payment receipt cycle are to be given the credit points.
So why overrate export price?
And do the business in Indian Rupee. Why seek dollar when a rupee can buy all the inputs. Do the business in INR and keep away from Dollar fluctuations!
Export Pricing
Sudha | Wed Oct 12 11:48:20 2011
This is very useful article and would be helpful if there is a session arranged for new exporters and SMEs for half a day. pretty useful info.
SMES Inexperience and losses
Vivek Prabhakar | Wed Oct 12 03:22:50 2011
Yes Mr. Vicky
You are very right. We are a small exporter based in China. When we started exporting our sample products because of inexperience we had many files turning into losses from profit. Generally when we did shipping on FOB basis and the cost for documentation and sudden custom inspection which always comes as a surpise lead to the losses and for small exporter its very important to get new customers and its makes very difficult to make money recoverable.
Thanks a lot for the editorial and hope to learn more from your coming columms.
Regards
Vivek Prabhakar
Director
Beijing VINI Blue Ocean International Trade Co. Ltd.
Value
Lance | Tue Oct 11 23:01:07 2011
You are correct about value, it is very important. However you are not fully correct about starting with a low price. A low price can be perceived as low value and then to try and raise the price later become impossible. The value has been lost. It is better to account for the value in the initial pricing. Lowering a price is easy raising a price is very hard.
Low pricing to gain business is a risky proposition.
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