Export Pricing

EXPORT PRICING

A. K. Sengupta Executive Director Jagannath International Management School Kalkaji, New Delhi.

Right Price

\u2022 An important determinant of business success. \u2022 Right price does not always mean low price.

\u2022 Right price depends upon factors like nature of the marke competition, buyers purchasing power, foreign exchange fluctuations etc. Pricing Approaches

\u2022 Major pricing approaches are Cost \u2013 based pricing and Market \u20 pricing. \u2022 Concept of Marginal \u2013 cost pricing vis-a-vs full cost pricing Pricing Decisions for firms in Developing Countries

\u2022 Inability to influence prices. \u2022 Lower production technology - base because of marginal supplier. \u2022 Export as commodities (with marginal value addition) \u2022 Fiercely competitive market \u2013 margin is low

\u2022 Essential to formulate appropriate pricing strategies with inno preconditions for success.

Pricing Objectives

A firm\u2019s pricing policy may be guided by any one or more of the objectives: (i)

Market Penetration: Market penetration may be a very important objective particularly for new exporters. A firm may attempt to penetrate the marke with a low price.

(ii) Market Share: The price may be manipulated to increase the market share

(iii) Market Skimming: This is often the case with innovative products. The product is introduced with a high initial price to skim the cream of the mark The price may be subsequently reduced to achieve greater market penetration.

(iv) Fighting Competition: Sometimes price is a tool to fight competition. A price reduction by the competitor may have to be countered by price cuts. Sometimes price cuts may be affected to discipline the competitor or to compel the competitor to reduce prices so that his cash flows will be affecte (v)

Preventing New Entry : A firm may charge a low price even when there is scope for high price so that the industry does not look very attractive to ne entrants.

(vi)

Shorten Pay-back Period: When the market is uncertain and risky because of factors like swift technological changes, short product life cycles, political reasons, threat of potential competition etc., recouping the investment as earl possible would be an important objective.

(vii)

Early Cash Recovery: A firm with liquidity problem might give priority to generate a better cash flow. Hence, it would adopt a pricing that might help it liquidate the stock and/or encourage prompt payment by the channel membe buyers.

(viii) Meeting Export Obligation: A company with specific export obligation may be compelled to adopt a pricing policy that enables it to discharge its export obligation. Sometimes it may even imply a price lower than the cost. (ix)

Disposal of Surplus: A company confronted with a surplus stock may resort exporting to dispose of the surplus.

(x)

Optimum Capacity Utilisation: Exporting is sometimes resorted to enable the firm to achieve optimum capacity utilisaton so as to minimize the unit cost of production. In such a case, achieving the required quantity of exports could b the objective of export pricing.

(xi)

Return on Investment: Achieving the target rate of return is the most importa pricing objective in a number of cases.

(xii)

Profit Maximisation: In many cases, the primary pricing objective is maximization of profits.

Types of Cost in Export Marketing

Fixed Cost • Production cost Variable Cost • Selling and delivery costs. Production Costs Fixed Cost

Fixed costs are costs which remain fixed upto a certain level of output (inve in land, building, rent, plant & machinery) Even if there is no production, some people are paid salary, minimum expenses like electricity cost etc. Variable Costs

Variable costs are costs which vary with the variation in the level of outpu include cost of factors like labour, material etc.

Selling and Delivery Costs

•

Include the cost of holding stocks, packaging, transport, documentation preshipment inspection, insurance and cost of advertising, personal sellin etc.

•

Salesman’s salary – fixed cost

•

Commission and traveling & incidental expenses are variable costs.

Marginal cost Pricing

•

Pricing on Marginal cost – direct costs are covered i.e. the variable costs.

Points in support of use of Marginal cost

•

Export sales are additional sales – need not be burdened with overhead costs, recovered from domestic market.

•

Products less known in foreign markets.

•

Markets with low purchasing power.

•

Competition is severe.

How to recover the fixed cost

•

Domestic market

•

Extra loading

Feasibility

•

Existence of large domestic market

•

Adoption of mass production technologies which will remove the gap between full cost and the marginal cost

Limitations

•

Importers become used to low price

•

Not applicable to industries mainly dependent on export market.

•

Where overheads are insignificant.

Marginal cost sets the lower limit

•

The idea is not that direct cost should be charged every tune.

•

Marginal cost provides the lower limit upto which a firm can reduce the

Disadvantages

•

Developing countries might be charged of dumping.

•

Competition among exporters from developing countries lead to undercu each other resulting in loss of foreign exchange.

•

Very often low prices may be quoted in the absence of adequate informa about prevailing prices in foreign market.

Elements for Export Price Quotation

The following chart gives the various elements of costs.

(a) For export price based on marginal cost. (b) For export price based on cost: •

Export Price Based on Marginal Cost (a) Direct costs

(b) Variable costs: Direct material

Variable production overhead (for example, special dies and jigs) Variable administration overheads (for example, salary of export clerk) (c) Other costs directly related to exports: • Selling cost – advertising support to importers abroad • Special packaging, labeling etc. • Commission to overseas agent • Export credit insurance • Bank charges • Inland freight • Forwarding charges • Inland insurance • Port charges • Export duties if any • Warehousing at port, if required • Documentation and incidental • Interest on funds involved/cost of deferred credit • Cost of after-sales including free part supply • Pre-shipment inspection and loss on rejects After-sales service

Total Direct Costs

Less: duty drawback Direct Cost Net

=F.O.B. price at marginal cost II. Freight (volume or weight whichever is higher) III. Insurance C.I.F. price (based on marginal cost) 1. Export Price Based on Full Cost

i)

Direct cost as in (1)

ii)

Fixed cost/ common cost Production overheads Administration overheads Publicity and advertising (general) F.O.B. price (based on full cost)

iii)

Freight (volume or weight whichever is higher)

iv)

Insurance

C.i.f. price based on full cost

Part of the above cost sheet gives the lower limit of the export pricing. As would be clear from the cost sheet, all cost directly related to export are taken into account for fixing the lower limit. If some incentives are allowed on the export of the product concerned the lower limit would be further reduced by th amount of incentives.

In the case of export houses purchasing their supplies from suppor manufacturers, the cost price of supplies obtain would constitute the lower Market Oriented Export Pricing

The following chart gives the nature of analysis for market – oriented pricin

Analysis for market oriented export pricing

Market price _________ Less retail margin on selling price __________ Cost to the retailer _______ Less whole sellers mark up on his cost ________ Cost of the wholesaler ______ Less importers mark up on his cost ________ Cost of the importer _______ Less import duty ________ C.I.f. price _____ Less freight and insurance charges _______ F.O.B. realization of the exporter ___________

To-down Calculation for International Pricing Consumer Price:

1,160

VAT*

160

Market price minus VAT:

1,000

Margin retailer:

250

Price to retailer:

750

Margin wholesaler:

90

Price to wholesaler:

660

Margin to importer

33

Landed-cost price:

627

Import duties:

110

Other costs (storage, banking):

17**

CIF (Port of destination):

500

Transportation costs:

130**

Insurance costs:

6**

FOB (port of shipment)

364

Transportation costs factory to port:

34**

Export price ex-works (EXW):

330

Factory cost price:

300**

Export profit (per unit):

30

+

16%**

=

25%**

+

12%**

+

5%*

+

20%**

*Note that VAT is calculated as a percentage of the price without VAT. Trade margins are usually calculated as a percentage of the trade selling price. The trade margins for some sectors are calculated as a percentage of trade b prices.