EXPORTING ESSENTIALS: SELLING PRODUCTS AND SERVICES TO THE WORLD SUCCESSFULLY (2014)
Chapter 10. Pricing and Preparing Quotations
A company’s job is to find the market’s acceptable price.
—J. Willard Marriott Jr., founder, Marriott International and Robert G. Cross, Robert G. Cross, chairman and chief executive of Aeronomics Inc.1
Pricing a product or service for the export market, determining its landed costs (the total cost of a product once it has arrived at your buyer's door, for example), and presenting the costs in quotation form are critical steps in the international sales operation. Price determines revenue. Presenting the pricing and providing the quotes for your goods or services in the right way are both crucial for a successful and ongoing export business. Prices must be high enough to generate and sustain a reasonable profit, yet low enough to penetrate a market, gain market share, attract customers, and be competitive in export markets.
In this chapter, I’ll discuss several pricing strategies: how to establish an exporter’s markup; how to develop export pricing (which differs from the preceding strategy); and how to work with a freight forwarder, logistics specialist, or fulfillment operation to arrive at good shipping rates that will please your customers. I will also show you how to use these figures to put together a pro forma invoice, a key document in every export transaction.
There are differences in pricing a product when you are a manufacturer’s rep vs. when it’s your own manufactured product. There is also a difference in pricing a product vs. a service. Be sure to distinguish between each of these pricing tactics as you read through the following pages.
Pricing for Product Exports
Let’s look at the three areas of concern related to pricing for exporters.
Representing Exports for a Manufacturer: Product Markup
When you represent exports for a manufacturer, you must determine your breakeven points, where your exporter’s commission on a product shipment covers your business operating costs. Theoretically, of course, if you have a customer, say Jane Doe Importing Wholesaler, willing to buy, you can price your product at almost any level, provided it doesn’t exceed what the customer is willing to pay or what the market will bear. This assumes the manufacturer has granted you authorization to set any price. Just keep in mind that you don’t want to alienate the customer or make it easy for your competitors to undercut you!
Typically, exporters take between a 10 and 15 percent markup on top of the cost the manufacturer charges them for the product. In other words, if your supplier charges you $1 per unit for his product, you might mark it up to anywhere from $1.10 to $1.15 per unit. That markup becomes your profit or commission. Consider the following criteria to determine just how high or low you can go on your markup. This also applies when you manufacture your own product for export, which I will cover later.
1. Uniqueness: If the product is a market “first,” you can afford to charge a higher price.
2. Quality: Is the product’s quality upscale? Or marginal? Price up or down accordingly.
3. Your cost. If the manufacturer has already priced the product high, keep your markup low. If a major manufacturer (which are those that achieve considerable economies of scale in production) is able to give you a low offering price, then you can afford to set your commission slightly higher. Be careful here, as this scenario can be deceptive. If your cost is low to begin with, it might mean that the product is a mass commodity rather than a specialty offering, and that the market is already flooded with similar “me-too” items. If so, you have to keep your profit margin very tight.
4. Newness: Is the product already established or is it new to market? Sometimes you can price higher when a product is new to market just because your customers need and want novel product offerings. But novelty also has its downsides. A new-to-market product doesn’t have the brand recognition, image, and popularity that overseas customers tend to look for when they want a product with surefire consumer appeal.
5. Customer contact: Who’s calling the shots, you or the customer? Did the customer ask you to find the product or did you approach the customer and offer it? This makes a difference. A customer who has asked you to source a product is usually more receptive to a slightly higher price because she really needs the item. Don’t lose your head here, though; never, ever get greedy. Your customer knows a rip-off when she sees one.
6. Product positioning: Positioning your product in the best possible light determines the price at which you will be able to sell it. Use the product’s pricing in the equivalent sector of the domestic market as a guide to your overseas profit margin. For example, if your price for a product is $1 and you are targeting the upscale specialty market overseas, the suggested retail price at a local upscale store could be $8.99, so you take a higher profit margin.
Caution Export and domestic pricing always differ due to a variety of factors. The difference in overseas market conditions, costs, volume, quoting formats, and currencies all affect what you should charge for your products or services in a foreign market.
7. Direct (includes e-commerce) or indirect sale: If you are selling directly to an end user, you can afford a higher profit margin. If your product is handled by a series of intermediaries—say, an export trading company, an importer, and a wholesaler—before it gets to the retailer and end user, remember that each of these middlemen will tack on his due percentage, and most likely without your consent, which can jack up the price substantially. If you price high at the beginning, your product will be priced right out of the market by the time it gets to the end user. Nobody wins.
8. How desperate are you for income? Are you in a mood to see what you can get away with? If this is the case, I won’t stop you. But realize you may be making a big mistake from which you won’t be able to recover—and thereby losing a customer altogether. You may really need income and feel you have nothing to lose, but don’t forget the priorities of a successful exporter: the customer relationship comes first.
9. Competition: Price your products to stay in the global game. If you’re up against unlimited competition, make sure you’re offering comparable prices along with some extra form of value for your customers.
10.Government policies: Government policies can have both direct and indirect impact on pricing policies. Examples of factors that have a direct impact are taxes and tariffs. Examples of factors with an indirect impact are country deficits (spurring high interest rates) and currency fluctuations.
11.Are you associated with an internationally known celebrity? That makes a world of difference! No matter what you are offering, fans will buy your product at any price just because star power is attached. Stars whose meteoric success has allowed them to launch successful enterprises (with the help of enterprising people like you) include Jennifer Lopez with her perfume and clothing line sold through Kohl’s, Jay Z with his Rocawear, and Jessica Alba with the Honest Co. The more popular your celeb is and the more difficult it is to get the product, the higher you can price it. Mainstream pop culture is the best marketing tool there is—look at Mickey Mouse and Andy Warhol! Consider yourself fortunate to be working with a celebrity, and go for the higher price!
How Pricing Works: Example Where I Represented the Exporting of a Chocolate Manufacturer
Here’s an example of how I set pricing when representing a chocolate manufacturer in Chicago: I looked at my American supplier’s pricing schedule and saw that a box of chocolates cost $3.00 wholesale (with a US retail price of $15.95 a box). I wanted to make a substantial profit right from the start.
First, I asked the supplier for a 25 percent discount off its standard domestic-price schedule based on a minimum order of a thousand boxes (with twelve units to a box). Hence, the supplier (manufacturer) could achieve economies of scale in production (large production runs that reduce per-unit costs) whenever it produced our overseas orders. It agreed to the price discount.
Next, I conducted market research to determine what the market would bear (including a thorough assessment of competition). Because there was nothing like our chocolates that existed in the market we were entering—Dubai—I decided to keep it clean and simple and price the product 10 percent lower than the standard domestic wholesale pricing or $2.70 per unit ($32.40 per case), even though we were actually getting a 25 percent discount from the supplier. That meant the price to the customer now included our 15 percent commission.
The price still could have been considered high, but the product had unique characteristics—the chocolate was of superb quality and would be available in an exotic flavor. Because I knew that most overseas consumers would love to try it, the packaging was beautifully done, and the retail price point was equally high here in the States, I was convinced that the product could be put into a luxury category. In addition, the product was ideally suited for special occasion celebrations and gift-giving seasons such as Christmas and Valentine’s Day, or the equivalent in other parts of the world. All of these reasons assured me that upscale, affluent consumers overseas would be willing to buy such a product whatever it cost. The truth of the matter is that price is important, but it is not the only selling point in a deal.
I contacted a freight forwarder and asked how much it would cost to ship a container-load of boxed chocolates (about a thousand cases) overseas. I was given an estimate of $3,600 (a refrigerated container would be needed during summer months, making the transport price higher than usual), plus another hundred dollars or so for transaction costs. I figured in these transportation costs along with the cost per box to the customer and realized the landed cost of the chocolates was now up to $3.44 per box or $41.24 per case. I’ll thoroughly cover how I arrived at this later on.
Then, I made an offer to my foreign customer on behalf of the manufacturer, and he agreed. I had a sale and was delighted that my research had paid off. Now, it was a matter of exceeding the customer’s expectations in all respects and developing a great relationship that would grow into other opportunities to export to the same customer in the future.
Going It Alone: Establishing Product Pricing and Markup for Your Manufactured Product for Export
There’s a big difference between pricing a product as an export representative and pricing your own manufactured product for export. When you represent a company for export, the company has already factored in all its direct and indirect costs related to the production of the product. You merely add on your commission in order to offset your operational costs and generate a profit. However, when you price a product that you manufacture for export, you must take into consideration all of the above plus factor in middlemen and apply the following accounting methods:
· Add in all the direct material, labor, and overhead costs involved in producing the goods. Isolate and allocate all the costs.
· Deduct all costs unrelated to an export order (marketing and legal, for example).
· Add in all of the out-of-pocket costs related to making the export sale happen (including but not limited to an export manager’s salary and benefits, travel, legal, market research, promotional material, logistics fee, product modification, and translation costs).
· Set a slim margin (a minuscule percentage of the total costs) of error. Meaning, mistakes will happen when you are dealing in uncharted territory. Anticipate them by buffering your pricing to absorb fluctuations (such as higher shipping fees, currency fluctuations, fees for a payment method or early discount).
Caution Don’t forget to factor fluctuations in currency into the price. If you plan to sell in currencies other than US dollars, although the exchange rate percentage may be small for converting to US dollars, it can add up over multiple shipments on a regular basis and erode profit margins.
· Make money. You are in the export business to grow and be profitable. Allow a reasonable markup and profit margin, but never lose sight of getting the best market penetration as fast as possible (revisit point number nine in the “Exports for a Manufacturer” section).
Tip Many small business owners use what is called a cost-plus method of pricing. That’s when you add up the total costs involved in producing a product, including all expenses related to getting export ready, and then add on a markup to cover an appropriate share of overhead costs plus a fair profit margin that will yield an adequate return on investment. Other business owners use penetration pricing, which is based on standard domestic pricing with a slight discount predicated on the anticipation of volume purchases. When doing penetration pricing, be sure to state an expiration date on your price schedule and indicate that prices are subject to change due to market conditions and the final pricing proposal. In either scenario, monitor results after the fact to ensure you make money.
A good international accountant is always helpful in determining the type of accounting data that should be used in planning and implementing a pricing strategy for the export activity of manufactured products. Your goal is to analyze and control costs to ensure you make a profit. The five key drivers in determining the best export price are: cost, demand (customers), distribution, competition, and government policies.
Test your price out on one of your customers (just as I did with the chocolates) with whom you have cultivated a strong relationship and to whom you’ve presented your product’s positive sales attributes. See what reaction you get and then negotiate from there. If you priced the product with only a slim margin built in for yourself—so slim you cannot afford to go any lower—and your customer still balks at the price, consider renegotiating with your supplier. Oftentimes, if you explain that the only way to sell the product overseas is to price it more competitively, the supplier will agree to go back to the drawing board and see if it can rework the numbers. Don’t attempt this too often though, because if you continue to have price problems the supplier will sooner or later catch on that you haven’t properly checked out what the foreign market will bear.
Small business owner Caron Beesley, who also serves as the community moderator for the Small Business Administration, says, “Not charging enough is a common problem for small businesses simply because they often don’t have the operational efficiencies of larger companies and frequently find that, whatever they sell, their costs are higher than they anticipated. Small businesses do have one advantage, though, and it’s one that justifies charging a higher price–service!”2 Keep this advice in mind as you price for export.
Complete Your Quotation with a Competitive Shipping Rate
Let’s say you’ve given your product a markup of 15 cents on the $1 total cost per unit. By the time it lands at your customer’s port, it costs her $1.25 per unit. How does that happen?
Just as in a domestic sale, you will be billing your customer for the costs of shipping when exporting your product. To finish your price quotation, you must first contact a freight forwarder, which will provide you with a competitive shipping rate. But before you contact the freight forwarder, collect the information in the sidebar and keep it right at your fingertips. If you don’t have this information when you call, e-mail, or submit your inquiry online (a capability that most of them provide you), the company will require that you get it.
FOURTEEN QUESTIONS YOU WILL BE ASKED BY A FREIGHT FORWARDER
1. What is your commodity? Is it perishable or nonperishable?
2. What is your product’s commodity number? You can look this up in the appropriate directory at your local international Small Business Administration office. A commodity number, generally known as an “HS/Schedule B product description,” allows for easy classification by customs officials. It’s important to be as specific as possible in determining your product classification, because transportation rates vary widely, even among products you would expect to fall under the same category. For example, there’s a big difference between the transportation rates for computer hardware and computer software. If you are unable to determine the appropriate number, the freight forwarder will calculate an accurate shipping quote based on your product description.
If your product is already a standard export but you are sending it to a new market, a freight forwarder will take your commodity number and assign an appropriate tariff number. That number will then be filed as the industry standard for all subsequent exports of that commodity to that location. Every time you export that product to that country, you must use the assigned tariff number to ensure the same rate.
3. Are you shipping by air or by ocean?
4. How many cartons do you plan to ship?
5. What are the size of the cartons? This needs to be assessed both in linear dimensions (height, length, width) and in cubic meters.
6. What are the net and gross weights of the cartons in kilograms? (The net weight is the weight of the product on its own; the gross weight adds the weight of the cartons to that of the product.)
7. Do you plan to stack the cartons on pallets? If so, how many will be loaded on each pallet? Your freight forwarder should be able to guesstimate how much weight and cubic space each pallet will take up and calculate the total weight and volume of the shipment accordingly.
8. Do you have enough product to fill a container? Full loads of cargo are generally known as “containers” (see Chapter 9) and average between twenty and forty-eight cubic feet. Once you have your total number of cases and total weight calculated, your freight forwarder should be able to tell you if you have enough product to fill a container. If you do, it’s an advantage. Your product will be loaded into the container all by itself rather than being consolidated with other companies’ products in order to fill the container, and a seal will be put on the door of the container. This means that nobody else will have access to your goods when they arrive at the port of destination, except your customer and his designated agent. This safety measure guards against potential theft, pilferage, and product tampering.
9. From what location will the product be moved? Usually, this is the manufacturer’s factory door.
10.To what port does your customer want the goods delivered?
11.Will your shipment require an export license? (See Chapter 13 for a complete discussion of export licensing. To avoid shipping delays, it’s best to make this determination as soon as you know what kind of product you’ll be selling.)
12.Are there any time constraints involved in getting the product to a customer?
13.Is insurance required for the shipping of your product, and, if so, who will be responsible for it?
14.Who will collect the payment on the transaction, and is there a preferred method?
Having given the company all this information, you can expect a bit of a wait for its response. Generally, an efficient freight forwarder can get back to you with a quote within a few hours. If it’s a large firm and a busy time, expect a callback or e-mail the next day. The forwarder should give you a very detailed analysis as to how it arrived at its rates. If there is anything you don’t understand, stop and ask about it. Also, ask for a rate confirmation number so that when you call back, whether in a week or several months, the company will have a record of the quote and a way to access it. And don’t forget to ask how long the rates are valid! After you’ve called a few forwarders, sit down and compare quotes.
Tip Many international shipping companies (UPS, for example) have a designated area on their site for calculating shipping costs and estimated delivery times to targeted countries. You will need to provide information about your shipment in required online fields, including destination, origin, shipment date and weight.
How Does the Freight Forwarder Arrive at a Rate?
Besides the physical logistics of your actual shipment, here are some extraneous factors that will affect how your freight forwarder calculates your shipping rate:
1. The tariff on your product: Unless the company files a new rate for your product and destination, as discussed in the second item of the sidebar, freight forwarders use rate books to determine the tariff.
2. The amount of traffic to and from your destination point. Competitive container port areas such as China and Singapore, for example, can create overcapacity situations in the container port sector, shipping delays, and higher prices on transportation.
3. How the industry as a whole is performing: One factor the freight forwarder might look at is whether demand is exceeding available transportation services or the other way around.
4. Exchange rates: These rates are a major factor in the transportation calculation. They will be reflected in your quote as the CAF, or currency adjustment factor. Let’s say a freight forwarder quotes you a rate of $1,800 for shipping a twenty-foot container-load from a West Coast port in the United States to Tokyo and lists the CAF as 57 percent. That means you must add 57 percent onto the base rate to arrive at a total rate of U.S. $2,826.
Selecting the Best Freight Forwarder for Your Needs
Once you’ve got a few quotes, you’ll need to compare more than the numbers to determine which freight forwarder offers the best value. Ask your customer which of the following should take priority:
1. Low-cost transportation
2. A timely delivery
3. Safe handling of product
4. Choice of transportation method
5. All of the above
Try to select a couple of forwarders that offer the last choice, all of the above, are always pleasant to talk with, and are financially solvent—and then stick with these companies through thick and thin. You do want to double-check the company’s financial solvency, because if it goes out of business during the transit of one of your shipments, you are liable for the consequences. If, on the other hand, your customer needs a timely delivery to happen, then select the forwarder that specializes in speed, and so on.
Every time you have a customer who wants a quote, it pays to shop through your list, because you never know when the quality of service might change, the prices might go up, or the company might discontinue service to certain ports. Check and double-check on behalf of your customers. Always offer them the absolute best value you can find because it makes them want to keep coming back.
Reading Your Quotation
When your freight forwarder gives you a quote, the total charge will be broken down into line items, as shown in Figure 10-1:
Figure 10-1. Export quotation worksheet. Inland transport refers the cost to move the product from a factory door to a port of exit within the same country. Ocean transport is the cost to move the product from the port of exit to the port of entry of the country of destination. CAF stands for currency adjustment factor, which is the going rate of exchange from one currency to another; for example, from the US dollar to the Chinese yuan. Documentation represents the freight forwarder’s fee for handling all documentation associated with the shipment, including letters of credit.
Terms of Shipment
You should also familiarize yourself with the following terms of shipment, which are the ones that are the most commonly used. These are known as Incoterms, and according to the International Chamber of Commerce, “have become an essential part of the daily language of trade.”3 They have also been incorporated in contracts for the sale of goods worldwide. These terms of shipment will affect the final numbers on your export quotation as well as your financial responsibility for the shipment:
You are responsible for paying the cost, insurance, and freight (CIF) costs in advance to a named overseas port. You will collect these later, at the point when you invoice your customer. Normal practice is to insure a shipment for 110 percent of its CIF value. Let’s say you are insuring a shipment to the Far East (Japan, Korea, Taiwan) at a rate of $0.6175 per $100 (which includes war risk insurance and “special perils” coverage). The details are shown in Figure 10-2:
Figure 10-2. Calculating CIF (cost, insurance, and freight) totals
Here’s how you arrive at the CIF total: Add the invoice value (cost of the product), freight charges (typically includes fees for both inland/ocean shipping and CAF), and clearance/handling charges. Multiply this total by 110 percent for the cost of the insurance, and then divide by 100. Take the resulting figure and multiply it by $0.6175, which will result in your insurance charge of $90.34. Add this to your previous total of $14,630 for a CIF total of $14,720.34. It’s good to know how this is done, but you won’t have to concern yourself with this calculation or the actual issuance of the certificate if you use a freight forwarder. All you have to do is ask the freight forwarder to quote you insurance coverage at the 110 percent CIF rate.
The CNF refers to the cost and freight. The exporter is responsible for paying the freight costs to the named port of destination and collecting the charge from the customer later on.
Note An import duty is payable based on CIF prices, or what is considered the transaction value of invoice. For further clarification, check with the “Technical Information on Customs Valuation” page on the World Trade Organization’s Web site (http://www.wto.org/english/tratop_e/cusval_e/cusval_info_e.htm)
FAS, or free alongside ship, refers to getting the goods shipside and ready to be loaded, all of the costs of which are the exporter’s responsibility. The costs of loading the goods into transport vessels at the specified place and all other costs from that moment onward are the customer’s responsibility.
The exporter must take care of all paperwork and/or expenses necessary to collect the goods from the supplier and place them on an international carrier. The buyer is responsible for all costs from the moment the goods are placed on board the vessel and onward, which is known as FOB, or free on board.
Terms beginning with “ex,” such as ex-factory or ex-dock, indicate that the price quoted to your customer applies only at the specified point of origin (either your own location, your supplier’s factory, or a dock at the export point). This term means that you agree to place the goods at the disposal of the customer at the specified place within a fixed period of time. As the seller, you do not need to load the goods on any collecting vehicle. That is also the responsibility of the buyer.
In order to accommodate the ever-increasing use of the electronic data interchange (EDI), Incoterms have been revised to reflect new shipping methods, such as carrier paid to (CPT), carriage and insurance paid to (CIP), delivered at terminal (DAT), delivered at place (DAP), and delivered duty paid (DDP). Be sure to ask your freight forwarder how each of these terms of the transaction affect the ultimate price of the shipment as well as the logistics of shipping or contact the International Chamber of Commerce (ICC) for additional guidance.
Preparing the Cost Analysis and Pro Forma Invoice
Your next step is to add the itemized charges that appear on your invoice form, which becomes a pro forma invoice.
Your document will have all the familiar components of an ordinary domestic invoice: a description of the product, an itemized listing of charges, and sales terms. Let’s say you want to get your customer a landed-price quote for a shipment of candy to her port of entry, in this case “CNF Tokyo.”
If you have one hundred cases of candy, packed twelve units to a case, and each case is priced at $120, or $10 per unit, the total cost for the order would be $12,000. Figure 10-3 shows the invoice you would make up:
Figure 10-3. Pro forma invoice for a shipment of candy to Tokyo
The selling price is your cost to buy the product from the manufacturer plus your markup. Add to that figure the total shipping costs and divide that amount by the number of cases of candy. That gets you your landed price per case. Then, divide that figure by the number of units in a case. This will give you your landed price per unit.
So, if the total landed price for shipment were $15,875 (CNF Tokyo as shown above), and you divided this amount by one hundred cases of candy, you’d come up with $158.75 as the landed price per case. You’d then divide that price by the number of units in a case (twelve) to come up with $13.23 as the landed price per unit. Remember, the selling price is your cost to buy the product from the manufacturer plus your markup.
You have now finalized your price quotation and created a pro forma invoice. Don’t forget to specify a precise time period during which your quote is valid (by including, “This quote expires on __/__/__,” for example), and to add the freight forwarder’s quote reference number.
Three additional critical steps on the pro forma invoice are: (1) Make a statement certifying that the pro forma invoice is true and correct, (2) make a statement that indicates the country of origin of the goods, and (3) mark your invoice clearly with the words “Pro forma invoice.”
Once your customer approves the pro forma invoice, it will become your actual invoice for the order. The customer will also use the pro forma invoice to obtain any necessary funding (payment) or import licenses. Your customer should communicate acceptance (usually via fax or e-mail) in a short written sentence or two with a signature, as is done in the following: “We accept your pro forma invoice No. 1234 against our Purchase Order number ABCD.” You will then respond: “We acknowledge and confirm your P.O. number ABCD against our pro forma invoice number 1234.”
Tip Regardless of whether it has been requested or not, it is wise to prepare a pro forma invoice showing the cost of getting the product to the overseas buyer for any international quotation. Use the Incoterms correctly when quoting. You don’t want to get stuck absorbing shipping costs only because you didn’t understand how to use the sales terms correctly.
Pricing for Service Exports
Now, at this point, you might be saying, “That’s all well and good, but I’m exporting services.” Selling a service successfully requires even more people power than does product sales. Pricing a service, such as one that is professional, technical, financial, or franchise or insurance oriented, entails a somewhat-different approach because a service requires direct interaction with your customer, not just initially but for the duration of the service contract. And for some services, the quality of your interaction with your customer is exactly what they’re paying for.
Whether pricing a product or a service for export, the fundamentals remain the same: you need to first conduct market research on the competition, the ease of entering a new market, the maturity of the industry, the uniqueness of the offering, and so forth.
But let’s not get ahead of ourselves. Here’s a look at the other factors that are important to consider concerning pricing a service export:
· You need to differentiate your service offering from existing offerings or convince a prospective customer to hire you to do something that’s never been done before.
· Make sure you look at all costs associated with the service offering, including taxes, establishing a foreign branch office, sales visits, translation, IP protection, and so forth.
· Examine and factor in the amount of time that will be spent on the proposal (presales effort) and allocate your schedule accordingly.
· Pay close attention to cultural business practices specific to a country. Will you be pricing your service per hour, on a fixed-project basis, or in some other negotiated format that fits the protocol of the country’s standards?
· Make sure to determine how you will account for after-sales nurturing and follow-up costs.
· You’ll need to comply with applicable international standards. Learn the tax and legal implications for providing your service in an overseas market well in advance of submitting a proposal to a client.
· Make sure you factor in any promotional costs associated with supporting your services in the overseas market.
· Determine what the impact on your domestic business will be in terms of hiring additional staff, whether it be on the ground in the country in which you wish to conduct business or locally to support the new business.
Tip Set a benchmark price that reflects your brand and capabilities. Tuck away a slim margin that can be used later for negotiating purposes if need be (offering a new client a one-time courtesy discount, for example). Bear in mind you might be competing against more well-known and well-heeled competitors, but if your offering is unique, you’ve got as good a chance as anyone to land the business.
Pricing Model for a Service Export
I’ve said it before, but I’ll say it again: consult with your international accountant to determine your best service export pricing strategy, especially one that favors healthy profits and minimal tax exposure.
Tip There are other pricing methods, such as variable cost pricing, skimming, and penetration (as touched upon earlier). The decision of which pricing model to use is largely based on the level of competition, innovation, market conditions, and available resources. Consult with your international accountant and also conduct a web search to learn more about each method.
Calculating “cost plus” pricing requires a complete understanding of your total costs (hence, the consultation with your accountant) for delivering your service into a target overseas market. To do that you must:
1. Know all costs, margins, and expenses to get the service export out the door. Don’t forget to allocate for the after-sales service part of the contract.
2. Realize you might not be competitive in all markets. (Adjust your pricing accordingly, but if you find you can’t be profitable, go someplace else where you can be).
3. Align your service export price with its perceived benefits in the target market. This holds true whether you are pricing a product or a service.
Once you establish the cost, add a margin (return on your investment) to cover profits and to reflect a price that is in line with your perceived market position (think along the lines of Apple providing a technology-export-service proposal vs. ABC Tech House doing so. Apple’s pricing will be higher due to its prestige in the marketplace, and ABC Tech House’s will be lower due to its unknown name and desire to get a foot in the door.) It is important that you have an understanding of the average margin in the export market for your industry and that you price your service offering competitively to guarantee two things—that someone will purchase the product or service you are offering and that you make money.
Just as on a product export, you need to finalize your pricing by preparing a pro forma invoice. You don’t, however, have to concern yourself with Incoterms because you are not shipping products. The pro forma invoice will come in handy later when you discuss with your client how you will get paid (refer to Chapter 11).
Last Thoughts on Market Differences
Here are a few final thoughts on export pricing. Calculating a different price for each overseas market and segment of a market can be a seemingly daunting experience, but it might be necessary because:
· Customers vary. In Ireland, for example, you might be selling to distributors that sell to end users, while on your e-commerce site you sell directly to end users. In Dubai, you might sell to small independent retailers and a handful of big box retailers directly. Each of these examples calls for developing specially tailored pricing that meets the needs of the marketplace and provides profits for your business.
· Markets vary. Some countries have a five-step distribution method (where the product changes hands five times before an end user purchases it) and others might only have a door-to-door sales concept.
· Competitors vary. Tracking your competitors is not only prudent; it’s beneficial for determining just how high or low you can set your pricing.
The bottom line is: you need to adapt and adjust.
In the export marketplace, you can never compete on price alone. While price is important, it is seldom the only factor in the buying decision. You need to compete on several different levels. The majority of customers worldwide take into account a combination of factors and look for the whole package before making a purchasing decision. Do your homework. Because the whole purpose of an export business is to gain new business, you need to have the winning combination in overlooked and unlikely market spaces and make money. Use pricing strategy as a spark to enhance export performance, and don’t forget to charge what your products are worth.
You have learned how to coordinate a sale. You are now ready to enter the export business. From this point on, no additional changes should be made to the transaction by you or your customer until after the expiry date given on the pro forma invoice. Before you release the order for your product or the contract for your service, though, you and your customer must negotiate terms of payment. Read on for an overview of the most common—and the most secure—methods of arranging a payment for export goods and services as well as an array of export financing sources.
1. Peter Krass, The Book of Management Wisdom. New York: John Wiley & Sons, Inc., 2000.
2. “How to Price Your Small Business’ Products and Services,” Caron Beesley, SBA.gov, last modified November 28, 2012, http://www.sba.gov/community/blogs/how-price-your-small-business%E2%80%99-products-and-services.
3. “The Incoterms® Rules,” International Chamber of Commerce: The World Business Organization, accessed October 28, 2013, http://www.iccwbo.org/products-and-services/trade-facilitation/incoterms-2010/the-incoterms-rules/.