The price of your product should be high enough to generate a suitable profit but low enough to be competitive. Ideally, the importer or exporter should strive to buy at or below factory prices. This can be done by eliminating the manufacturer’s cost of domestic sales and adver- tising expenses from the overseas price.
Each step along the market channel has a cost. If a product is entirely new to the market or has unique features, you may be able to command higher prices. On the other hand, to gain a foothold in a very compet- itive market, you can use marginal cost pricing. Marginal cost pricingis the technique of setting the market entry price at or just above the threshold at which the firm would incur a loss. [Under GATT (General Agreement on Tariffs and Trade) rules, now an integral part of the WTO, it is illegal to dump—that is, gain market share—by incurring a loss.]
Channel
Product price
Typical markups/
commissions
20% 40% 100%
Manufacturer
$10.00
Agent
$12.00
Wholesaler
$17.00
Retailer
$34.00
End user
Buyers Buyers Buyers
Buyers
Sellers Sellers Sellers
Figure 2.4 Market Channel
Most new importers/exporters simply use the domestic factory price plus freight, packing, insurance, and so on. Depending on the volume and value of the transaction, the buyer and seller may mutually agree on which currency they will use. However, there are a number of countries where the seller or buyer will prefer to use U.S. dollars or Euros for their transaction or, depending on the volume and value of the transaction, they may agree to a currency basket.
It is important that you understand not only the elements that make up your price, but also those of your overseas trading associate. Remem- ber there are no free lunches; everything has a cost.
Figure 2.5 illustrates how a product might move from one country to another by an importer or exporter. In particular, it shows how the
COSTS Costs of manufacturing
• Export commission (7–20%)
• Freight forwarder fee
• Freight to port
• Consular invoice
• Export packing
• Foreign distributor/agent fee (5–20%)
Selling price Exporter COUNTRY #1
Importer COUNTRY #2
COSTS
• Buying price (less cash discount)
• Marine insurance
• Freight port to port
• Brokerage costs
• Duty (tariff)
• Tax (IRS/other)
• Freight in (port to receipt)
• Banking cost Landed cost
EXPENSES
• Distributor commission
• Repacking
• Freight out
• Salary
• Interest
• Postage
Landed cost + expenses
• Profit margin Sales price
Figure 2.5 Pricing Model
selling price in one country becomes the buying price in the other.
Typical commission percentages are between 7 and 20 percent for an export middleman and between 5 and 20 percent for an import middleman (in other words, a foreign distributor or agent), although commissions may be as low as 1 percent and as high as 40 percent. The key issues are the price of the product and the number of units (sales
Table 2.2 Examples of Cost Elements
Terms of Sale: CIF
Export Import
Cost Elements Cost Cost Elements Cost
Factory cost of 100 units $10,000 Landed cost (CIF) $14,105
@ $100/unit Expenses:
Duty @ 5.5% $ 776
Tax (IRS or other) $ 150 Brokerage costs $ 100 Brokerage clearance fees $ 50 Export packing $ 150 Reforwarding from broker $ 100
Freight to port $ 500 Banking charges $ 50
Consular invoice $ 50 Letter of credit @ 1/4% $ 75
Freight forwarder fee $ 150
*Export agent commission $ 1,500 Total landed cost $15,306
@ 15% of cost
†Foreign agent commission $ 500 Expenses
@ 5% of cost Warehouse $ —
Repacking $ 100
Freight out $ 100
Advertising $ 500
*Salary $ 1,410
Interest $ —
Postage $ 100
Marine insurance ($12,950 $ 155 Total landed plus $17,516
@ $1.20 per $100 value expenses
Transportation (ocean) $ 1,000 Unit cost $175.16
Landed cost (CIF) $14,105 Suggested selling price $350.32
@ 100% markup
Profit on 100 units $17,516
*Only if an export middleman or import agent is used.
†Calculated at a commission of 10% of buying price: Markup (%) = Sell cost/cost × 100.
Reference Information
Our reference_________________ Customer reference_____________
Customer Information
Name ______________________ E-mail_________________
Address ____________________
____________________ Fax_____________________
Product Information
Product _____________________ Dimensions _____× _____× _____
No. of units _________________ Cubic measure _________ (sq. in.) Net weight __________________ Total measure _________________
Gross weight ________________
Product Charges
Price (or cost) per unit __________× units ________ Total _______
Profit (or markup) __________
Sales commissions __________
FOB, factory __________
Fees–packing, marking, inland freight __________
Freight forwarder __________
Financing costs __________
Other charges __________
Export packing __________
Labeling/marking __________
Inland freight to __________
FOB, port city (export packed) __________
Port Charges
Unloading (heavy lift) __________
Loading (aboard ship) __________
Terminal
Consular document (check if required) _________________________
Certificate of origin (check if required) _________________________
Export license (check if required) _____________________________
FAS vessel (or airplane) __________
Freight
Based on______________ Weight ____________ Measure Ocean ______________ Air ____________
Rate ________ Minimum ______________ Amount ______________
Insurance
Coverage required ______________
Basis ________________ Rate ________ Amount ____________
CIF, port of destination
Figure 2.6 Export Costing Worksheet
Reference Information
Our reference ________________ Customer reference _____________
Customer Information
Name_______________________ E-mail__________________
Address ____________________
____________________ Fax_____________________
Product Information
Product _____________________ Dimension _____× _____× _____
___________________________
No. of units _________________ Cubic measure _________ (sq. in.) Net weight __________________ Total measure ________________
Gross weight ________________
Note: If quote is FOB factory, use export Costing sheet to determine price at
CIF, Port of destination
Landed cost (CIF, port of destination) __________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
Customs duty
Customs house broker fees Banking charges
Taxes: federal state other Total landed Expenses
Inland freight (from port city) Warehouse costs
Repacking
Inland freight (from warehouse) Advertising/promotion
Overhead (% of annual) Salary (% of annual) Loans (principal/interest) Total landed plus expenses Unit cost
Selling price
Margin __________%
Profit
Figure 2.7 Import Costing Worksheet
volume) that you can sell. If, for instance, the product is a big-ticket item (i.e., having a high sales price), the commission percentage may be quite low, but a small percentage of a million-dollar sale can be very good business.
Table 2.2 shows a set of fictitious cost elements associated with a CIF quotation which corresponds to the steps shown in Figure 2.5.
Figures 2.6 and 2.7 are offered as work lists to aid you in accurate cost- ing of your product.
Is there sufficient profit at the volumes(number of units) you can sell to make it worth your while and meet your personal profit goals? Recall that the same amount of work goes into importing or exporting a prod- uct that makes no profit as one that makes a good profit.
H O T T I P
A
word of caution for manufacturers: If at first exporting doesn’t appear profitable, check your manufacturing costs. It may be necessary to import less costly components in order to compete internationally.Be satisfied that you have a viable project. Then take the next step to lay out a long-range market plan. The next chapter explains how to develop that plan and then how to put it into action to make a transaction.