Export pricing - SMEs should be extremely careful

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Writuparna Kakati | 09 Jan, 2009

Pricing is a very important and sometimes the most complex area in export business. As prices, distribution margins and tariffs & duty vary from market to market, foreign exchange fluctuations interfere with costs and margins, export terms and conditions involve a lot of complexities and export itself adds its own costs to the product, pricing in export business often turns to be a Herculean task for exporters, especially for SMEs (small and medium enterprises) which are new to exports.

Pricing for any market requires an understanding of relative costs, demand and competition in that market. In overseas markets, these factors vary greatly from those in the domestic market and therefore, careful analysis of prevailing conditions in the target market, and proper assessment of the way to structure your export price, is very important to ensure that your first export sale develops into long-term, self-sustaining business.

How to price your product

"How much to charge for a product or service?" - this question is a typical starting point for any discussions about pricing. When preparing an export price list, in many cases, a range of costs may apply, such as:

Fixed costs such as salaries or rents, etc.
Custom duty, customs clearance, import duty and taxes
Sea or air freight and insurance
Custom broker's fee, agent's commission or importer's mark-up
Ex ship, transportation from port of entry to customer
Break-bulk fees (if third party warehouse applies)
Warehousing fees, packaging and labelling to local standards
Product certification, if required and product liability insurance
Advertising and promotional costs, etc.

When you export something, usually an overseas wholesaler buys your products and sells them to some retailers. The retailers later adds a mark-up on your product. While exporting, it is important to consider this mark-up so that you can understand what the retail price of your product would be to the end user. It is also important to analysis at what price your would-be competitors are offering your type of products in the target market and whether the market can bear your price.

Methods of price calculation

Cost-plus method: In this method, all the expenses including direct costs, indirect costs, and fixed costs irrespective of whether these costs are related to the production and sale of the product or service or not. Then these costs are converted to per unit costs for the product and a predetermined percentage of these costs is added to provide a profit margin.

Marginal cost pricing: This is the most commonly used pricing method in export business as produces a more competitive price than that by the cost-plus method. In this price calculating method, the direct, out-of-pocket expenses of producing and selling products for export are considered and depending upon that a base price of a product or service is determined.

Besides the above, there are some other methods of pricing such as value-based method or competition-based method which are more psychological than based on economics. These methods require an agile 'on the ground' presence to combat the competitors’ response.

Export business can involve a range of costs such as market research, international
communications, logistics charges, production of export literature, export packing, product modifications, credit checking, export documentation, training of an overseas distributor’s staff, etc. that do not apply to domestic sales. Your knowledge of these costs will only be developed through experience.

Certain tips

Due to a lot of unforeseen cost components, exporters often find some initially attractive export transactions unprofitable or unexpectedly resource-intensive later. Some typical cost elements that are frequently overlooked by exporters include:

Additional transport and transit insurance costs due to a misunderstanding trade terms.
Documentation requirements and expensive legalization of invoices by embassies.
Delays in customs clearance at port due to incomplete documents.
Product modification, packaging and labeling requirements that are required to be met for exporting.
Credit insurance, shipping insurance , finance, banking charges, etc.

Inexperienced SMEs which are new to export business easily fall into the temptation of accepting an order, often under time pressure, without considering some of the most important factors that can have a critical impact on their pricing. It may result in heavy losses.

It is therefore necessary for exporters, especially those who are new to international trade, to be extremely careful and identify the areas where things can go wrong and costs escalate.