What is Export Pricing?
Determining the right price to sell your export product (or service) at seems like a very simple task – just follow the market sentiment/pricing model, right? Export pricing could be one of the most complicated – and crucial – decisions you will take when starting out as an exporter. Market prices may not always accurately depict the true value of your product and setting a price that helps you stand out from other suppliers is also important. Additionally, finding out the total cost of manufacturing your product is comparatively easy, but many more considerations come into play when you try to decide on the mark-ups to include in your final cost. There can be a plethora of factors that influence the final price of a product, like:
The manufacturing cost of the product
The demand for the product in the target market
The amount the buyers are willing to pay in their domestic currency
Your competitors’ pricing
The importing country’s tariffs
The supply chain involved in the trade
Internal factors like procurement frequency, delivery speed, product range, etc.
The objective of the exporter concerning the product
Let’s look at some of these key factors in detail:
Cost of the Product - How is it Calculated
As an exporter, you will have to add up all the expenses that you bear, up to the point your product reaches your buyer. If you are a merchant exporter, for example, this will start with the price you paid to buy the product and include all the costs you have borne along the way to your buyer receiving the final delivery, including storage, shipping and transportation, customs, duties, tariffs, etc. In the case of manufacturer exporters, the cost starts with the production of the product. Production costs can be fixed (cost of assets like machinery, wages, etc.) or variable (seasonal storage costs, transportation, etc.). If you decide to include the (often-capital-intensive) fixed component into your product’s price, your final figure might shoot up significantly. But not including it might also mean you’re not recovering your investment fast enough. You need to pick the strategy that you feel works better for your product based on your market demand, expected volumes, sales and revenue expectations, etc.
Thus, your product will have a base price at which you purchased or manufactured it (the ex-factory price in the latter case, for example). During the export process, you are likely to face many additional costs, as seen in Fig. 1 below.
Fig. 1: Costs involved in an export cycle.
However, your costs may also reduce thanks to facilities and assistance in the form of rebates, cashback, exemption of taxes and excise duties, cheap import options, export credit, etc. These savings will eventually reduce your final “cost of goods sold”, so this can impact the pricing of your product. However, several of these benefits are post-facto in nature, so whether you should incorporate them you’re your pricing strategy beforehand should be a carefully thought-out and considered option.
The final cost of the product will also significantly be influenced by the incoterms chosen for the trade, for instance an export transaction under DAP is likely to cost far lesser as compared to an export transaction under CIF as the responsibilities for cost, insurance and freight is borne by the seller under the latter.
Pricing Strategy - Methods
Various pricing strategies are adopted by exporters – yours will be shaped by your profit expectations and other factors that could influence your product’s price. Some export pricing strategies that you can consider are:
Market-driven pricing is the most common approach to export pricing. Under this strategy, you keep your product’s price flexible and responsive to market conditions like demand and supply, inflation etc. This is particularly useful for commodities/products for well-established and stable markets; but remember too much exposure to market forces can also cause instability in your pricing.
Skimming pricing involves you charging a higher price for your product to recover preliminary expenses and reap high profits but decreasing it to increase market share. Again, this is better adopted with products with established markets or high demand, as customers in a new market might not be open to paying high prices initially.
Penetration pricing requires you to charge a low price to penetrate the market and weed out competition. This policy is often used for items of mass consumption and is also called ‘dumping’.
Pre-emptive pricing is like penetration pricing, except the exporter’s sole aim here is to discourage competition. Pre-emptive pricing may mean fixing your price lower than the cost of the product, on the assumption that in the long run, market domination will help generate profits. Both penetration and pre-emptive pricing are high-risk strategies, but if effectively managed, they can have high payoffs in the form of market domination and virtual monopolies.
Marginal cost pricing is best adopted when the exporter considers only variable or direct costs in determining the price. If you have no plans of recovering fixed and/or preliminary costs from your sales and shipments, you can adopt marginal cost pricing which allows for lower product prices at the risk of a slower journey to breakeven and profits.
Competition-based pricing is a variant of market-based pricing useful in markets with a ‘price leader’. Here, ‘price followers’ fix their price based on the leader’s pricing policy. This is a relatively easy pricing strategy to adopt but can leave you vulnerable to sudden fluctuations in the leader’s prices.
Balancing Strategy with Influencing factors
Pricing strategies make the exercise of export pricing clear and methodical. However, as an exporter, you cannot limit yourselves to the specific guidelines of just one pricing strategy while turning your back on the dynamics of the international market. Customer expectations, demand-supply positions, fluctuations in purchasing power of the local currency, changes in the supply chain, etc. are all aspects that need your attention on an ongoing basis. These will influence your strategy’s optimization over time.
Remember – charging too much can alienate your buyers, while charging too low may drive your business into heavy losses. Finding the right balance involves constant monitoring of market factors and tweaking your price accordingly. Also remember to have a buffer in your mark-up so that you can offer a special price in case of bulk orders.
Use these factors and strategies to determine an optimal price for your product and gain a hold on your target market, essential factors in ensuring the success of your export business.
Export pricing is a great opportunity to identify duplicate and unnecessary expenses in your supply chain and find opportunities to streamline distribution channels.
For certain products, a slab-based pricing strategy may also make sense (where you offer varying prices in different volume-based slabs of purchase orders). Generally, being willing to lower the price on bulk orders is a sound strategy to adopt – so long as your importers don’t try to abuse it.
Currency fluctuations may also be a good factor to consider in your pricing strategy when selling to high-risk markets, to protect you from sharp falls in your trading currency and cover possible losses.
Don’t base your export price on your commodity’s domestic selling price. The two are inherently different, and not necessarily linked.
Don’t rigidly follow a pricing strategy, as that could make it difficult to adjust to changes in the market or to adopt a different strategy.
Although not directly related to pricing, make sure your terms and conditions are clear and you understand your cost components thoroughly. Overlooked components can force you to unexpectedly raise your price, adversely affecting profitability.
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