Pricing:  Where to Begin    

Developing an export pricing strategy is one of the most important and complicated aspects of selling overseas.  There are many factors to take into consideration when setting prices including your company’s export objectives, market dynamics, costs associated with exporting the product, and sales strategy.  When considering your company’s export objectives, you need to ask yourself the following questions:  Does your company export in order to seek long-term growth?  Does it use export as incremental sales meant to bring down manufacturing costs?  Does it export as a loss leader or as a key deliberate strategy?

Understanding Market Dynamics and Costs

You must also consider market dynamics.  It is important to research the market and the competitive landscape as well as fully understanding your true costs associated with exporting overseas so as not to charge too much or too little for your product.  Exporting often has other cost implications including transportation, taxes, duties, local testing/certifications, special trade show expenses, sales commissions, insurance, financing, travel and, in some cases, special product development costs.   Once you understand your true cost of the product, you will need to consider your selling strategy, whether it is selling direct to retailers using sales reps, distributor or multi-layer distribution.  You will also want to consider your supply chain model, whether it be Ex-warehouse, FOB, Direct Import or landed in country.  You may decide to calculate your price based on what you think the market can bear (top-down) or you can price according to your costs (bottom-up).  Some companies also consider U.S. pricing when determining their export price.

– Top-Down Pricing

If you are working from the top-down, you will have done your research in order to understand the competitive landscape as well as what consumers are prepared to pay or can afford to pay.  Once you decide on your market price, you must deduct the various costs depending on your selling strategy and supply chain model to decide what you need to sell to reach the market price.  Below is an example that illustrates this:

– Bottom-Up Pricing

On the other hand, you can figure pricing based on cost-plus (bottom-up).  Starting with your product cost and then adding the various costs depending on your selling strategy and supply chain model to reach your final price. A Product Margin Calculation (Bottom-up Example) follows:

– Based on U.S. pricing

Alternatively, and perhaps the easiest and most common way to figure your pricing structure is to base your export price on your U.S. price list.  From there, you may start discounting.  Even though there are many associated costs with exporting, in order to make the product affordable to the consumer, many companies decide to lower their margins so prices can be competitive in the international markets.  In this instance, you are likely to use the same base price (or Ex-Works price) for various markets.  The problem with this approach is that it does not take into account market and country differences or the foreign market landscape.  The benefit of doing it this way is that it is more consistent and much easier to keep track of.

Supply Chain

Your supply chain is an integral part of the international sales process as it impacts both the cost of the item and the time it takes to deliver a product. An article was prepared by the International Business Council (IBC) to provide a thorough overview of four primary supply chain alternatives: Domestic Warehouse, China-based Warehouse, Direct Import and Foreign Warehouse. For additional information on this topic, read Export 101: Understanding Supply Chains on the IHA blog.

Sales Channels

The sales channels that you use will also affect your pricing and thus need to be taken into account. Your pricing may vary greatly whether or not you sell directly to a retailer or have assistance along the way by using a distributor and/or sales representative.  The IBC has published a detailed article, Export 101: Understanding Sales Channels that explores these factors in greater detail.  The article can be found on the IBC blog.

One note of caution: it is important to consider your short-, mid- and long-term sales channel plans from the very beginning of selling into a new market.  It is a common mistake to begin selling to a retailer directly and only later discovering that a distributor is needed.  Thus, it is important to reserve sufficient margin in your pricing to cover extra costs that may creep into the equation.  Selling to a retailer with your rock-bottom price is never a good idea until you have clearly established your sales channel over time with experience.

One very good motto to keep in mind is, “You can eliminate the distributor, but you can’t eliminate their function.” Who is going to perform these sales and service functions and what will those services cost?

Currency Selection and Exchange Rates

Another factor that needs to be taken into consideration is the currency in which the product will be priced.  As exchange rates fluctuate on either the sourcing or sales side of the supply chain equation, your product cost and margin will also fluctuate.  If you buy and resell your products in your home currency, you have no risk.  But, if you buy in one currency and sell in another, you have exchange rate risks that need to be considered and factored into your pricing model.

The IBC published an article specifically on this issue, Export 101: Understanding Exchange Rates, which can be found on the IBC blog.

Collection and Payment

Once you have sold your goods, the most important thing is collecting your payment.  Customers will often pay in advance, ask for terms or use a Letter of Credit.  As a company, you need to determine what type of risk you are willing to take.

– Payment in advance

The least risky of all, of course, is payment in advance.  You will receive funds before the goods are shipped.  Customers may wire the funds or pay with a credit card.  As a shipper, this is always the most advantageous, but unfortunately, the most risky to the customer so they may not always agree to it.

– Extending payment terms

Customers often ask for payment terms.  As a supplier, this is the most risky, and it is important to do your due diligence before granting terms.  Always ask for at least three credit references, preferably from your home country.  You could also utilize a credit reference service such as Dun and Bradstreet to get information as well.  Customers will ask for at least 30 day terms, but you must understand that international sales often require an extra 30 days to account for delivery to country.  If you are nervous about granting terms, you can always look into getting an export credit insurance policy that may help protect you if your customer decides not to pay.

– Letters of Credit

Another alternative collection method is to ask your customer to open a letter of credit.  A letter of credit is a letter from a bank guaranteeing that the payment will be received.  There are several different types of letters of credit such as revocable, irrevocable, stand-by and revolving.  The disadvantage of the letter of credit is that they can be costly to both parties and are often time consuming as paperwork and requirements must be done according to the specific terms.  The advantage of a letter of credit is that there is little risk to both parties.

Global Accounts

As retailers grow their business, they often expand into other markets and may share pricing.  For example, Walmart US and Walmart Mexico may buy the same product, but if you have different prices, you need to have an explanation for it, or you can create problems.  It is best whenever possible to differentiate by offering product of supply chain variations to avoid apples to apples comparison.  When setting your prices, you must also be aware that prices can be affected by legal and cultural dynamics.  For example, price fixing in Japan is illegal.  It is important to know your market.

Conclusion

Before setting off to sell your product across the globe, it is extremely important that you have corporate buy-off in your own office.  You are going to be demanding a lot of different things that may require going outside the normal processes.  For example, you will need the marketing department to perhaps create packaging for you in different languages.  The product department to differentiate or localize products (style, color, usage, voltage, etc.).  You will need the finance department to understand why longer terms are needed and what, when and how to use letters of credit.  Order processing will take longer, and customer service will have different requirements.  You will also need warehouse and logistics support behind you.  After figuring out all of these additional costs and possibilities, exporting can be a great profitable way to grow your business.