Export Pricing

Bottom up and Top Down Models (Cost Plus and Target Pricing)

by Gnter Schranz

Export Pricing - why

Prices are depending on Relative costs

Demand Competition

How to get the right price

Relative Costs Export Costs* Demand Competition Price Relative Costs Export Costs* Demand Competition Price Relative Costs Export Costs* Demand Competition Price

* export literature, translation, freight forwarding,

logistics, export packing, product modifications, packaging, labeling, compliance with foreign standards, insurance, credit checking, export documentation, export financing, charges and of an overseas staff training

Some Pricing Strategies

Bottom Up Pricing applying the traditional Cost Plus approach to get the right price Top Down Pricing Target Pricing to become competitive at a given price level on a price sensitive market Skimming Get what you can!

Bottom Up - Pricing

Export Price is calculated on base of domestic price Cost for export is just added to domestic price Pros & Contras ?

Bottom Up - Pricing
Variation: Marginal Costing
direct cost of procuction and sales fixed costs apportiond to sales volume

Conditions for Marginal Cost-Pricing

Stable Volumes Marginal price is aplicable to new market

Marginal Costing may allow to find a more agressive price on a competitive market

Ex Works (EXW) Wholesale Price

Bottom Up - Pricing (1/2)

% US$ 100 EXW (Named Place) 100 US$ 100 +8 +4 +5 +12 US$ =129 129 +25 +8 +2 +2

Free On Board (FOB) Wholesale Price (EXW Named Place) + Transport to carrier (airport, wharf) + Customs clearance + Additional packing/labor for transport + Agents commission (Based on FOB price)

Cost and Freight (CFR) % FOB (Named Place) FOB Price (FOB Named Place) + Sea/air freight charges to wharf/airport + Sea/air document fees (Airway Bill, B/L) + BAF (Bunker Adjustment Factor) + Transport contingency

Bottom Up Pricing (2/2)

Carriage Paid To (CPT) % US$ 166 +1 =167 US$ 167 +2 =169 US$ 169 +32 +5 +12 =218 CFR (Named Place) + Cost for off-loading at destination CPT (Named Place) Cost, Insurance Freight (CIF) %

CPT (Named Place) + Cost Insurance premium / agio CIF (Named Place) Delivery Duty Paid (DDP) CIF (Named Place) + Import duty, taxes (% on CIF price) + Customs clearance fees + To door delivery DDP (Named Place) %

Top Down - Pricing

Calculate backward from a given market price to an EXW price Compare with your EXW - price Take Actions:
Change / Develop your EXW price using such tools as supply management, reengineering, lean production, outsourcing Go for other strategies, i.e. maximizing volumes, profit, market share Back out?

Top Down - Pricing

Trading Stage Price Per Calculation unit (%) Tip
117 17 117 (117/1,17) 117/1,17 100 x 0,52 100-52 48-(48/1,37) 48-13 35-(35/1,2) 35-6 Quotation Quotation 29-4-4 Quotation 21-2

Glass of honey at Dutch retail store Deducting VAT (here: 17%)*

Retail price excluding VAT 100 Retailer Margin (52%)* 52 Retailer buys at / Importer sells at 48 Importer Margin (Profit and Cost: 13 here37%)* Importer buys at (including a 20% duty on 35 CIF)* Duty 6 CIF Price at Importer 29 Deduct your of target cost fright market 4 *See local rates ** Deduct Broker / Agent commission Deduct your insurance cost if 4 applicable FOB Price 21 Deduct FOB cost 2 EXW Price ** 19

Export Costs
Problem: Export costs are not always calculable or known right from the beginning However it is crucial for the outcome to determine them as exact as possible Sometimes only export experience can help you out

Typical reasons for cost explosion

Wrong trading terms applied or terms not understood => fright / logistical costs Packing (labeling requirements are not met For any reason: Last minute product modifications / last minute product adaption => additional, not calculated costs Wrong /incorrect / incomplete documentation Unforeseen delays (check reason for delay: document / certificate / label?)

Also have a look at

Fixed or variable costs are changing after accepting an order Currency changes - cover foreign exchange risk Rapid change of market prices forecasting Changing conditions: legal / state of the art / other requirements

Assignment
Prepare a price analysis for your company Use quotations & calculation tables as tools Give recommendations on actual pricing Prepare small presentation