Strategic export pricing is one of the most important factors in achieving financial success in your export business. It can also be quite complex and should therefore be given priority consideration when approaching a new market. Refer to your market objectives when setting your price. For example, are you trying to penetrate a new market? Looking for long-term market growth? Or pursuing an outlet for surplus production? And be sure to investigate the competition.
In addition to all domestic costs (including production and product adaptation), you must also consider all other costs (transport, customs duties, insurance, labelling, packaging costs, freight forwarders’ fees etc.) and risks (competition, market demand – what price will the market bear?) associated with moving your products onto the international market. Essentially, you must study all of your costs, as well the conditions in your target market, to determine the right balance of a realistic export price that will deliver an appropriate profit margin.
Here are some variables of the target market to be considered:
Market demands and conditions:
Per-capita income (idea of consumer wealth in the market);
Flexibility to adjust your strategy to market demands and conditions;
Exchange rate fluctuations (Try to accommodate currency fluctuations and the comparative value of your country’s currency);
Competition’s pricing strategy (Note: If you have many competitors in a foreign market, you may have to match or undercut the going price to win a share of the market. If your product or service is new to a market, though you may be able to set a higher price.)
Tariffs;
Level of control over price (Exclusivity? No competition? High demand?);
What price/sales volume required for profits?;
Different prices into different markets?;
Can you maintain prices over time?;
Quantity sensitive prices?;
Product/service modifications?;
Credit checks.
Other export-related costs that must be considered include:
Market research;
Product or service modification and special packaging;
Receivables/ risk insurance;
Business travel;
Communications: International postage, internet and telephone rates;
Translation;
Commissions, training charges, and other costs involving foreign representation;
Freight forwarders and customs brokers.
Methods of Export Pricing
A number of methods are used to determine export pricing. Here are a few main techniques:
Full cost-based pricing
Covering both fixed and variable costs of the export sale. This method allows for the recovery of total cost, including all domestic costs. It begins with domestic price, but it does not deduct purely domestic costs. Nor does it take into account competitive factors in the market place.
Domestic Costs Plus Markup
This technique involves starting with your domestic price, eliminating domestic costs which do not apply to your exporting activity and adding costs directly related to your export activity. Examples of export costs are transportation, export labels, export packing etc. The main advantage of this method is its simplicity. However, it ignores the competitive conditions of the market place.
Static Pricing
Charging the same price (perhaps modified by freight cost differences) to all to all customers regardless of volume.
Flexible Pricing
Adjusting prices for different types of customers, for example offering discounts for larger volume orders.
Penetration Pricing
Keeping your price low to attract more customers, discourage competitors and capture quick market share.If you price below cost, however, you run the risk that a competing domestic manufacturer may file a complaint (anti-dumping, etc.). You should also be aware that it is difficult to raise prices in today’s market.
Marginal Cost
Covering only the variable costs of production and exporting, while you pay overhead and other fixed costs out of domestic sales. The price for the new market is determined by adding the marginal (or additional) costs incurred for the production and marketing of the portion of production to be exported to the new market. This formula is used mainly by companies with a substantial production for an existing market or markets.
Market Skimming
pricing the product high to make optimum profit among high-end consumers while there is little competition.
Export Pricing Worksheet
Note: Costs in your currency – except final line
After you’ve determined your costs and chosen your pricing strategy, establish a competitive price for your product that gives you an acceptable profit margin. Here is an Export Pricing Worksheet (as an example) that may be useful in determining you export price:
Quoting a Price
When quoting your price in your export offer, determine what currency the customer wishes to be quoted in. As a general rule, quotes are provided in the currency of the target market or in US currency. Provide a Price List with item, code, description and corresponding pictures (See example below). Provide dates of validity for the prices quoted. This will avoid an importer being dismayed by the fact that your product may no longer be offered at the price they were expecting.
NOTE: For more regarding export offers, see the following sections of this Guide:
Market Entry: Implementing the Export Plan
Initiating and Managing Customer Relations