Export Pricing and Costing

INTERNATIONAL MARKETING

Section 2 – H

Export Pricing and Costing

Price:

a. Business person’s point of view:

- it provides for the recovery of costs of the elements of the marketing mix.

- it generates revenue for the firm.

- the monetary figure for which he sells his products to his customers.

b. Consumer’s point of view:

- the value placed by consumers for the amount they pay for the goods and services.

- it is what the consumer is willing to pay and not what the business person is willing to charge.

Two basic concepts associated with price:

1. profit maximization for the firm

2. satisfaction for the consumers

Factors Affecting Price:

          Several factors must be considered which can internal and external. These factors can be classified as controllable factors (those that you can manipulate or do something about) or uncontrollable (those that you cannot influence but must accept and adapt to).

CONTROLLABLE	UNCONTROLLABLE
· Cost · Volume · Company Objectives · Profit Margins	· Market Demand · Competition · Others (exchange rate, economy, etc.)

1. Cost – sets the basis of the price. It sets the floor or the premium possible price. Cost here refers not only to production cost, but also to selling and distribution cost, as well as marketing support cost such as sales promti8on, advertising, etc.

2. Demand – refer to the customer’s reaction to your product and price which is an important factor for it will help you set the ceiling or the maximum price of your product. Basically, demand depends on customer needs, wants, buying power and the perceived satisfaction derive from the product.

3. Competition – the strength and behavior of competition, particularly the price and quality competitors offer, are key factors that must be taken into account when setting export price. Competition can be both domestic and foreign.

4. Channel of distribution – this pertains to how the product will reach the target customer. In setting price, it is important to know where your buyers are situated in the channel.

5. Company objectives – these are the goals you want to achieve in pricing. If clear about its objectives, the firm will find it easy to set the price. This can be short term or long term pricing objectives.

Other Factors Affecting Price

These include economic situations such as inflation, boom, recession, interest and exchange rates which can impact the effectiveness of different pricing strategies as they affect both the cost of production and the customer’s perception of the product’s price and value.

Pricing Policies

Two Main Pricing Policies

1. Cost-Oriented Pricing – this is a simple approach to pricing. To a given cost, you simply add a percentage in absolute margin or rate of profit to determine the selling price. One weakness of this approach is that no account is taken of the demand side of the equation. Thus, price may be higher or lower than what the market can truly afford.

2. Market Oriented Pricing – the opposite of cost plus or cost oriented pricing. It treats the export price of the product in the context of the market and the demand for the item. The components of this approach are;

Demand-oriented pricing. Companies relate the intensity of the demand to price. A high price is charged when the customer’s interest is high, and a low price is charged when the interest is low.

Market-oriented pricing.This method takes into consideration the actual and anticipated behavior of the competition.

Pricing Procedures

Steps in Price Setting

1. Establish pricing objectives

2. Analyze the market situation

3. Analyze cost structure

4. Select the pricing method

5. Establish price structure and specific price quotes

Cost is:

- theamount of expenditures incurred on, or attributable to a specified thing or activity.

- the pesos that must be paid for goods and services.

Elements of Product Cost

Product cost is divided into three elements:

1. Direct Material. This is the cost that can be directly identified, as it becomes a physical part of the finished product.

2. Direct Labor. This represents the wages paid to factory employees.

3. Production Overhead. These are all costs incurred in the manufacturing process other than direct materials and direct labor

PRIME COST = direct material + direct labor

PRODUCTION OVERHEAD = indirect labor + indirect material + expenses

TOTAL PRODUCTION COST = PRIME COST + PRODUCTION OVERHEAD

Overhead can likewise be further subdivided into:

· Sales and administrative overhead

· Financial overhead

· Marketing overhead

Combining all these cost elements will give you the total cost of the product as follows:

TOTAL COST OF PRODUCT = PRIME COST + PRODUCTION OVERHEAD

                                                              + SALES AND ADMINISTRIVE OVERHEAD

                                                                  FINANCIAL OVERHEAD

                                                                  MARKETING OVERHEAD

         COST can likewise be classified in relation to its tendency to vary with production:

a. Fixed Cost – tends to be relatively affected by the increase or decrease in production.

b. Variable Cost – tends to vary directly with the changes in production volume.

c. Semi-variable Cost- contains both fixed and variable elements and is therefore, affected by changes in quantity. Example is the cost of electricity in the production area. Normally, such changes would have a fixed component for a period of time. The manufacturer has to pay irrespective of the electricity used. The amount of payment, however, depends on the electricity consumed for a certain period.

Pricing Strategies

Four approaches to pricing:

1. Cost-Plus Pricing. A pricing method using a base cost figure per unit to which a markup is added to cover unassigned cost and to provide a profit.

It has remained popular for the following reasons:

1. exporters are more certain about costs than demand

2. when all exporters use this method, price tends to be similar and competition is minimized

3. it is fair to both buyers and sellers as sellers earn a fair return but do not take advantage of buyers when consumer demand becomes great

Example:

Suppose an exporter has the following costs: Variable Cost = USD 10.00; Fixed Cost =  USD 1,500.00; Expected Unit Sales = 1,000 pieces

The exporter’s cost per unit is:

Unit Cost = Variable +

                 = USD 10 +=  USD11.50

Suppose the exporter wants to earn a 10% markup on sales, the exporter’s markup price is:

Markup Price =  =  = USD12.78

The exporter can charge the importer USD12.78 for every unit and earn a profit of USD1.28 per unit.

2. Break-Even Point Pricing. In the course of pricing, it is important to know at what volume of sales the company will start to make profit. This volume of sales is the break-even point. This point is reached when the income line (sales) crosses the cost line, so that income and total cost are equal and neither a profit nor a loss is made.

Example:

Suppose the exporter wants to know the number of units he has to sell to break-even:

Break-Even Volume =  =  = 539.57 or 540 units

If the exporter wants to make a profit, he must sell more than 540 units at USD12.78 each.

3. Marginal Cost Pricing. When fixed costs are already recovered by current volume of output sales, the company has the option to sell additional volume at lower prices. Marginal cost is determined on the basis of additional variable costs. This is usually arrived by the formula:

PRIME COST + VARIABLE OVERHEAD = PRICE

4. Retrograde Pricing. This is common export marketing technique which takes into consideration both demand and competitive influences, and works backward to determine what ex-factory price is needed to achieve a competitive price in the target market. The technique here is to start with the final price in the target market and to deduct from it all expenses, markups, taxes and duties in order to arrive at a net back at the factory gate figure.

Example: Assume that an exporter’s product has: CIF (Cost, Insurance and Freight) price of USD 29 per piece in the US. Using the Free On Board markup price of USD12.78 as reference, assume that the difference of USD16.22(USD29 – USD12.78) will cover the freight and insurance costs. Shown below are the computations on the selling price to the American consumer:

Table 2H1: Computation on the Consumer’s Selling Price in the US using Markup Pricing

	INDEX	USD
CIF Price	100	29
Custom’s Duty (20%)	+20 (20% x 100)	+5.80 (29 x 20%)
Landed Price	120 (100 + 20)	34.80 (29 x 5.80)
Importer’s Markup (35%)	+ 42 (120 x 35%)	+ 12.80 (34.80 x 35%)
Price to Wholesaler	162 (120 + 42)	46.98 (34.80 + 12.18)
Wholesaler’s Markup (25%)	+ 40	+ 11.75 (46.98 x 25%)
Price to Retailer	202	58.37 (46.98 x 11.75)
Retailer’ Markup	+101	+ 29.37 (58.73 x 50%)
Price to US Consumer	303	88.10

In retrograde pricing, the reverse calculations are performed as follows:

Table 2H2: Computation on the Consumer’s Selling Price using Retrograde Pricing

	INDEX	USD
Selling Price to US Consumer	100	88.09
Retailer’s Markup (50%)	-33	-22.36
Price from Wholesaler	67	58.73
Wholesaler’s Markup (25%)	-14	-11.75
Price from Imported	53	46.98
Importer’s Markup (35%)	-13	-12.18
Landed Price	40	34.80
Custom’s Duty (20%)	-6	-5.80
CIF Price	33	29.00

If the exporter’s price is USD29 or below, he is competitive with his price. However, if the exporter’s price is higher than USD29, he has to recompute his CIF price to be more competitive.

Export Price Structure

A typical export price structure appears as follows:

1. Manufacturing Cost of Goods

2. Packing, Marking and Labeling

3. Manufacturer’s Profit

1 to 3 = Ex-Works Price

4. Stuffing and Containerizing

5. Forwarding Costs

6. Arrastre Costs

7. Wharfage Fees

8. Customs Clearance Charges

9. Facilitation Charges

10. Bank Charges and Interests

11. FOB Insurance (optional)

12. Communication Charges

13. Miscellaneous Expenses

Ex-Works Price + (4 to 13) = FOB COST

    + Profit

                                                    FOB Price

14. Ocean Freight Cost

15. Destination Delivery Charges

FOB COST + (14 to 15) = CFR COST

   + Profit

                                                           CFR Price

16. Insurance Premium

CFR COST + 16 = CIF COST

  + Profit

CIF Price

17. Import Duties and Taxes

18. Clearing Agents and Fees

19. Storage Fees

CIF PRICE + (17 to 19) = IMPORTED/LANDED PRICE

20. Inland Transportation Cost

21. Advertising Promotion

22. Distribution Expenses

23. Interest Charges

24. Wholesaler’s Profit

25. Stock Expenses

IMPORTER’S PRICE + (20 to 25) = WHOLESALER”S PRICE

26. Selling Expenses

27. Interest Charges

28. Retailer’s Profit

29. Stock Expenses

WHOLESALER’S PRICE + (26 to 29) = REAILER’S PRICE

          Note that it is very important where the profit is placed. As a businessperson your first instinct is to recover, at least, all the expenses incurred in the business transaction. Whether you profit from all expenses or not is a matter to be decided by your personal or company objectives.

          If your objective is to get the highest possible profit, then, by all means, profit from all expenses. But in exports, you have to be competitive in order to sell your product. Jacking up the price because you feel that all expenses have to be profited from may mean a selling price higher than the market price.