EXPORT PRICING

A. K. Sengupta Executive Director Jagannath Internationa !anage"ent Schoo Ka #a$i% Ne& De hi.

Right Price An important determinant of business success. Right price does not always mean low price. Right price depends upon factors like nature of the market, costs, competition, buyers purchasing power, foreign exchange fluctuations etc. Pricing Approache' Major pricing approaches are Co't ( )a'e* pricing and !ar#et ( )a'e* pricing. Concept of !argina ( co't pricing is!a! s +u co't pricing Pricing Deci'ion' +or +ir"' in Deve oping Countrie' "nability to influence prices. #ower production technology ! base because of marginal supplier. $xport as commodities %with marginal alue addition& 'iercely competiti e market ( margin is low $ssential to formulate appropriate pricing strategies with inno ations ( preconditions for success. 2

Pricing O)$ective' A firm)s pricing policy may be guided by any one or more of the following objecti es* %i& !ar#et Penetration* Market penetration may be a ery important objecti e, particularly for new exporters. A firm may attempt to penetrate the market with a low price.

%ii& !ar#et Share* +he price may be manipulated to increase the market share. %iii& !ar#et S#i""ing* +his is often the case with inno ati e products. +he product is introduced with a high initial price to skim the cream of the market. +he price may be subse,uently reduced to achie e greater market penetration. %i & ,ighting Co"petition* -ometimes price is a tool to fight competition. A price reduction by the competitor may ha e to be countered by price cuts. -ometimes price cuts may be affected to discipline the competitor or to compel the competitor to reduce prices so that his cash flows will be affected. % & Preventing Ne& Entr-* A firm may charge a low price e en when there is scope for high price so that the industry does not look ery attracti e to new entrants. 3

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Shorten Pa-.)ac# Perio** .hen the market is uncertain and risky because of factors like swift technological changes, short product life cycles, political reasons, threat of potential competition etc., recouping the in estment as early as possible would be an important objecti e. Ear - Ca'h Recover-* A firm with li,uidity problem might gi e priority to generate a better cash flow. /ence, it would adopt a pricing that might help it to li,uidate the stock and0or encourage prompt payment by the channel members or buyers.

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% iii& !eeting Export O) igation* A company with specific export obligation may be compelled to adopt a pricing policy that enables it to discharge its export obligation. -ometimes it may e en imply a price lower than the cost. %ix& %x& Di'po'a o+ Surp u'* A company confronted with a surplus stock may resort to exporting to dispose of the surplus. Opti"u" Capacit- /ti i'ation* $xporting is sometimes resorted to enable the firm to achie e optimum capacity utilisaton so as to minimi1e the unit cost of production. "n such a case, achie ing the re,uired ,uantity of exports could be the objecti e of export pricing. Return on Inve't"ent* Achie ing the target rate of return is the most important pricing objecti e in a number of cases.

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%xii& Pro+it !axi"i'ation* "n many cases, the primary pricing objecti e is maximi1ation of profits. 4

T-pe' o+ Co't in Export !ar#eting 'ixed Cost 2roduction cost 3ariable Cost -elling and deli ery costs. Pro*uction Co't' ,ixe* Co't 'ixed costs are costs which remain fixed upto a certain le el of output %in estment in land, building, rent, plant 4 machinery& $ en if there is no production, some people are paid salary, minimum fixed expenses like electricity cost etc. 0aria) e Co't' 3ariable costs are costs which ary with the ariation in the le el of output and include cost of factors like labour, material etc.
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Se ing an* De iver- Co't' "nclude the cost of holding stocks, packaging, transport, documentation, preshipment inspection, insurance and cost of ad ertising, personal selling etc. -alesman)s salary ( fixed cost Commission and tra eling 4 incidental expenses are ariable costs. !argina co't Pricing 2ricing on Marginal cost ( direct costs are co ered i.e. the ariable costs. Point' in 'upport o+ u'e o+ !argina co't $xport sales are additional sales ( need not be burdened with o erhead costs, reco ered from domestic market. 2roducts less known in foreign markets. Markets with low purchasing power. Competition is se ere.
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1o& to recover the +ixe* co't 5omestic market $xtra loading ,ea'i)i it $xistence of large domestic market Adoption of mass production technologies which will remo e the gap between full cost and the marginal cost 2i"itation' "mporters become used to low price 6ot applicable to industries mainly dependent on export market. .here o erheads are insignificant. !argina co't 'et' the o&er i"it +he idea is not that direct cost should be charged e ery tune. Marginal cost pro ides the lower limit upto which a firm can reduce the 7 prices without in any way affecting its o erall profitability.

Di'a*vantage' 5e eloping countries might be charged of dumping. Competition among exporters from de eloping countries lead to undercutting each other resulting in loss of foreign exchange. 3ery often low prices may be ,uoted in the absence of ade,uate information about pre ailing prices in foreign market.

E e"ent' +or Export Price 3uotation +he following chart gi es the arious elements of costs. %a& 'or export price based on marginal cost. %b& 'or export price based on full cost* Export Price 4a'e* on !argina Co't 5a6 5irect costs %b& 3ariable costs* 5irect material 5irect labour
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3ariable production o erhead %for example, special dies and jigs& 3ariable administration o erheads %for example, salary of export clerk& %c& 7ther costs directly related to exports* -elling cost ( ad ertising support to importers abroad -pecial packaging, labeling etc. Commission to o erseas agent $xport credit insurance 8ank charges "nland freight 'orwarding charges "nland insurance 2ort charges $xport duties if any .arehousing at port, if re,uired 5ocumentation and incidental "nterest on funds in ol ed0cost of deferred credit Cost of after!sales including free part supply 2re!shipment inspection and loss on rejects After!sales ser ice

Tota Direct Co't' #ess* duty drawback Direct Co't Net 9'.7.8. price at marginal cost "". 'reight % olume or weight whiche er is higher& """. "nsurance C.I.,. price 5)a'e* on "argina co't6 7. Export Price 4a'e* on ,u Co't i& ii& 5irect cost as in %:& 'ixed cost0 common cost 2roduction o erheads Administration o erheads 2ublicity and ad ertising %general& ,.O.4. price 5)a'e* on +u co't6 iii& i & 'reight % olume or weight whiche er is higher& "nsurance
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C.i.+. price )a'e* on +u co't 2art of the abo e cost sheet gi es the lower limit of the export pricing. As would be clear from the cost sheet, all cost directly related to export are taken into account for fixing the lower limit. "f some incenti es are allowed on the export of the product concerned the lower limit would be further reduced by the amount of incenti es. "n the case of export houses purchasing their supplies from supporting manufacturers, the cost price of supplies obtain would constitute the lower limit. !ar#et Oriente* Export Pricing +he following chart gi es the nature of analysis for market ( oriented pricing

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Ana -'i' +or "ar#et oriente* export pricing Market price ;;;;;;;;; #ess retail margin on selling price ;;;;;;;;;; Cost to the retailer ;;;;;;; #ess whole sellers mark up on his cost ;;;;;;;; Cost of the wholesaler ;;;;;; #ess importers mark up on his cost ;;;;;;;; Cost of the importer ;;;;;;; #ess import duty ;;;;;;;; C.".f. price ;;;;; #ess freight and insurance charges ;;;;;;; '.7.8. reali1ation of the exporter ;;;;;;;;;;;
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To.*o&n Ca cu ation +or Internationa Pricing

Consumer 2rice* 3A+> Market price minus 3A+* Margin retailer* 2rice to retailer* Margin wholesaler* 2rice to wholesaler* Margin to importer #anded!cost price* "mport duties* 7ther costs %storage, banking&* C"' %2ort of destination&* +ransportation costs* "nsurance costs* '78 %port of shipment& +ransportation costs factory to port* $xport price ex!works %$@.&* 'actory cost price* $xport profit %per unit&* :,:A? :A? :,??? BF? EF? G? AA? << ABE ::? :E>> F?? :<?>> A>> <A= <=>> <<? <??>> <? D :AC>>

9 D D D

BFC>> :BC>> FC> B?C>>

>6ote that 3A+ is calculated as a percentage of the price without 3A+. +rade margins are usually calculated as a percentage of the trade selling price. +he trade margins for some sectors are calculated as a percentage of trade buying prices. 13 >>'igures based on assumptions.

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