PRICING & QUOTING. Learning Objectives. Learn how best to price your products for export You will learn what determines an export price You will learn how to present your export price How to respond to enquiries. Introduction.
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Price is one the of the key variables in the any international trade deal and should incorporate:
Many factors affect the setting of the right price!
Some of these factors are controllable some not!
Export pricing must be FLEXIABLE!
All of the above give rise to setting the right price for your company
However price in only one of several factors influencing demand and therefore sales.
Take into consideration: Quantity, quality, time and cost
Cost of product = the costs incurred to manufacture and package the product (including: direct materials, labour, factory overheads, administrative & management costs)
Selling & distribution costs
In international trade especially transport and other distribution costs play a major role. The export must have a complete understanding of these costs
Cost of marketing support. In developed markets advertising & sales promotion is necessary to bring initial sales
Product quality. A unique product can demand a higher price
Product communication & image. Advertising & other communication can strengthen the appeal of the product
Prevailing price levels in the target market.
In some instances the price is set by the existence of similar products in the target market
Market supply & demand. This is dependant on the intensity of demand for the product. Example: Seasonal variations imported vegetables vs. locally grown
Competition. Intensive competition puts pressures on prices. In some instances you have to align your prices with those of your competitors.
Foreign Exchange. Prices often fluctuate because of exchange rates. It is wise to consult the foreign exchange division of your bank for assistance when quoting in a foreign currency.
There are two main pricing policies:
Cost-oriented pricing:is the simplest. The cost is calculated for each unit of production. A percentage or mark-up is added to this base cost to determine price.
The most common methods of applying the cost plus approach:
This takes into account all the variable costs & fixed overheads that are directly attributable to production, & a pre-determined profit margin.
Weaknesses: No account is taken of the demand side this could result in the firm producing products they cannot sell
Direct cost pricing is represented by a formula:
Direct cost = raw materials + direct labour + variable factory overhead
A mark-up is added to the direct cost to cover estimated overheads and leave a profit, so identifying the costs directly attributed to each specific output & using those costs to set prices.
Marginal costing is an accounting technique whereby a marginal cost is determined on the basis of additional variable costs only.
It is the amount by which the total cost is changed if the volume of output of a product is increased by one unit.
For example: If spare manufacturing capability is available, export prices at marginal costs may be quoted as the fixed costs are already being covered by domestic sales revenue.
Break-even pricing allows a firm to compare the profit outcome of alternative sets of prices.
Firms can set prices to achieve maximum profit by concluding the price for given volumes.
Verifying the volume that will deliver the most profit.
This implies that a high price is charge where customer interest is high and a low price is charged where customer interest is low, despite that fact that the cost may be the same in both cases.
Based on the customer’s perceived value.
This is based on the actual or anticipated behaviour of competitors. Exporters would peg their price to that of their competitors. The main forms are: going rate pricing and sealed bid pricing.
Going rate pricing = The price is determined by market leaders who know what price the market will bear
Sealed bid pricing = Used when firms have to compete for contracts on the basis of tenders.
The costs to consider are:
The size and nature of the market
Knowledge of competitive price patterns
How much room is their for price changes
Are market shares changing?
Is there a price leader?
What is the relationship between price & volume?
Constant re-view of prices
Factory cost of product & profit = EXW/EX Works
Export packing & marking, loading, in-land transport, documentation =
FCA Free Carrier At….
Transport charges & handling fee = CPT Carriage paid to..
Insurance = CIP Cost insurance paid.
Transport to importer’s warehouse, duties, taxes & clearing agent’s fees =
DDP Delivered Duty Paid
Importer’s mark-up, wholesaler’s mark-up
and retailer’s mark-up =
Price to consumer.
Landed duty = 100%
Importer to wholesaler = 115%
Wholesaler to retailer = 150%
Retailer to consumer = 250%
INCOTERMS, determine which prices are paid by the exporter and which prices are paid by the importer.
EXW = importer pays most of the costs
DDP = exporter pays most of the costs
Useful tool which services as a check list to ensure that no cost has be omitted
A substantial amount of information will be supplied by your freight forwarder
(transport rates, cost of documentation, insurance, packing and labelling costs etc.)
Most freight rates are based on weight or volume which ever is the greater of the two.
Example: a parcel weights
1 metric ton the dimensions are 2 cubic metres, the freight rate would be based on the greater namely: 2 cubic metres
Freight rate quoted by shipping line:
USD 110.00 per weight or measure (freight ton)
Weight of consignment = 2 metric ton
Dimensions Length 2.5M X Width 1M X Height X 2 M = 5 cubic metresusing the greater of the two amounts:
5 cubic metre X USD 110.00 =
USD 550.00 freight rate payable
Container/Sea Freight is quoted: per container (FAK) = freight all kinds regardless of contents
Example: USD 1000.00 for a 6 metre (20ft) container regardless of the weight, volume or contents.
Un-foreseen increases in fuel, exchange rate fluctuations, out break of war etc, effect the sea freight rate. These increases are called surcharges. They include:
Bunker Adjustment Factor (BAF) (fuel price increase)
Currency Adjustment Factor (CAF) (currency fluctuations)
War & port congest surcharges
Airfreight rates are expensive and only include the cost of freight from the air port of loading to the air port of discharge.
Airfreight rates are based on a weight to volume ratio, which ever yields the greater amount of income for the airline.
1 mt = 6 cubic metre
Step 1 - measure the parcel
100cm (L) X 100cm (W) x 100cm (H)
= 100 000 cm3 now divide this by 6000 = 166,66Kg
(you have converted cms to kgs) round up = 167Kg
Step 2 compare to actual mass = 150Kg
Step 3 the volumetric mass of 167 Kg is greater than the actual mass of 150 Kg
The airline would calculate the freight on 167 Kg
It is important to record the details of the customer, weights, dimensions, exchange rates and freight rate quote.
THESE ARE THE COSTS INCURRED AT YOUR FACTORY ADDED TOGETHER WILL GIVE YOU THE TOTAL EX WORK PRICE FOR YOUR PRODUCTS
THESE ARE THE COSTS TO BRING A CONTAINER TO A PORT OF LOADING READY FOR SHIPMENT
ADDING THE ABOVE AMOUNTS TO YOUR FCA WOULD GIVE YOU A CIP PRICE. THE CONTAINER WOULD BE DELIVERED TO A PORT OF DISCHARGE (INCLUDING INSURANCE)
Communication is one of the most important aspects of any international trade transaction. Most transmission of information/
communication is done through the issuance of documentation - Documents drive trade!
The key element that can turn an enquiry into an order is the price quotation - setting out of the price and terms and conditions of sale under which the exporter agrees to supply the buyer.
Speed: Respond quickly to show the you are keen and efficient.
Clarity: Be clear and include the relevant details requested by the customer
Quality: Back up all claims made, present a professional quotation
Follow-up: The wheel that makes themost noise gets the most attention