Pricing, Terms, and Quotations
To sell a product or service worldwide, you must price it appropriately, offer detailed and accurate estimations, select the terms of sale, and select the payment method. Even for a seasoned exporter, price might be the most difficult of the four.
Considerations in Pricing
These factors can aid you in determining the optimal pricing for your goods in another country:
• What is the best pricing for your company's goods on the international market?
• What kind of market positioning (i.e., consumer perception) do you want your company's price structure to convey?
• Does the export price represent the quality of your product?
• Is the pricing reasonable?
• What kinds of discounts (trade, cash, quantity) and allowances (promotion, trade-offs) should your organization provide to its international customers?
• Should pricing be different depending on the market segment?
• How should your organization price its product lines?
• What price choices do you have if your company's costs go up or down? Is the foreign market's demand elastic or inelastic?
• Are your pricing going to be considered acceptable or predatory by the foreign government?
• Are the antidumping rules of the foreign nation a problem?
Just as in the domestic market, the price at which a product or service is sold has a direct influence on your company's sales. As part of your company's market research, all of the factors that may influence the price range for your product or service must be considered. The product or service will not sell if your company's price is too high. Export activities may not be lucrative enough or may even result in a net loss if the price is too low.
Costs, market demand, and competition are the basic components for establishing optimal price. Each factor must be evaluated in light of your company's objective of entering the worldwide market. Based on an examination of each component from an export perspective, export pricing may differ from domestic pricing. It's also necessary to account for any costs that the importer is likely to incur. Tariffs, customs fees, currency fluctuations, transaction costs (including shipping), and value-added taxes are just a few examples (VATs). These costs can dramatically raise the importer's final price, resulting in a total that is frequently provided in the US. Customers evaluate the entire package, but quality, reputation, and service are typically more important to them than price.
Foreign Market Objectives
The evaluation of market objectives is a critical component of your company's price analysis. For example, you may inquire about if your organization is aiming to break into a new industry, searching for long-term market growth, or looking for a place to sell excess inventory or obsolete items.
Marketing and pricing goals might be broad or specific to specific international markets. Marketing objectives for sales to a developing country, whose per capita income may be one-tenth that of the United States, must naturally differ from those for sales to Europe or Japan.
Costs
The real cost of creating and getting a product to market is crucial in establishing whether or not exporting is financially viable. The cost-plus approach is used by many new exporters to determine their export price. The exporter adds administration, research and development, overhead, freight forwarding, distributor margins, customs duties, and profit to the domestic production cost in this estimate.
The export price may grow to an uncompetitive level as a result of this pricing approach. Although an export product may have the same ex-factory pricing as a domestic product, the final consumer price may be much higher if exporting charges are factored in.
Marginal cost pricing is a more competitive strategy of price a product for market entry. However, if the export products are stripped-down versions or are manufactured without increasing the fixed costs of local production, expenses may be reduced.
Many expenditures that are unique to domestic manufacture, such as labeling, packaging, and advertising, are deducted, as are costs like research and development if they would have been incurred anyhow for home production.
Other expenses for domestic and export products should be evaluated depending on the amount of benefit received by each product from such expenditures, and may include:
• Commissions, training fees, and other costs related with overseas agents
• Market research and credit check fees
• Business travel expenditures
• International postal and telephone rates
• Translation costs
• Costs of product customization and unique packaging
After you've estimated the real cost of the export goods, you should come up with a rough consumer pricing for the international market.
Market Demand
The ability of a market to pay for most consumer goods may be gauged by its per capita income. Some commodities, such as Levi's denim jeans, are in such great demand that even a low per capita income has minimal impact on the selling price. In markets with low per capita income, simplifying the product to lower the selling price may be an option for your organization.
Currency changes may affect the affordability of your products, so keep that in mind. As a result, pricing should strive to account for large swings in the value of US and foreign currencies. A comparatively weak dollar makes U.S. goods more competitive in many markets across the world, allowing you to compete with both local and international companies whose production costs are suddenly reflected in their inflated native currencies. Your business should also consider the kind of clients who will purchase your goods. Even though the average per capita income in a developing country is low, a higher price may be possible if your company's major consumers are expats or locals with high incomes.
Competition
Few enterprises in the home market are free to establish prices without closely examining the pricing practices of their competitors. This issue, which is common in exporting, is exacerbated further by the requirement to assess the pricing of competitors in each possible export market.
If there are a lot of rivals in a foreign market, you may have little choice but to match the market pricing or even underprice the product or service to gain market share. However, if a product or service is new to a foreign market, it may be permissible to charge a greater price than is possible in the native market.
Pricing Summary
When deciding the pricing of your product, keep the following considerations in mind:
• Decide what your goal is in the overseas market.
• Calculate the export product's true cost.
• Calculate the final retail price.
• Assess market demand as well as competitors.
• Consider making changes to the product in order to lower the export price.
• Take into account "nonmarket" expenditures like tariffs and customs fees.
• Exclude cost components such as domestic advertising that have no bearing on the export function.
Quotations and Pro Forma Invoices
The receipt of an enquiry from overseas, followed by a request for a quotation, is the starting point for many export operations, especially first-time export transactions. In the exporting company, a pro forma invoice is a quotation created in the format of an invoice; it is the preferable way.
A quote explains the product, gives it a price, defines the shipping date, and outlines the terms of sale and payment. Because the international buyer may be unfamiliar with the goods, the product description in an overseas quotation must normally be more detailed than in a domestic quotation. The following should be included in the description:
• Buyer's reference number and date of inquiry
• List of desired products and a brief description
• Price of each item (it is preferable to note whether things are new or used and to give the price in US dollars to eliminate foreign currency risk)
• Appropriate total cubic volume and dimensions packaged for export (if applicable in metric units)
• Shipping weights (gross and net) that are appropriate (in metric units where appropriate)
• Trade price reduction (if applicable)
• Delivery location
• Terms of sale
• Payment terms
• Insurance and shipping fees
• Quote validity period
• Total charges to be paid by the buyer
• Estimated shipment date from a U.S. port or airport
• The selling currency
Payments are not made using pro forma invoices. A pro forma invoice should include two declarations, one certifying that the pro forma invoice is genuine and correct, and the other indicating the nation of origin of the products, in addition to the 15 elements stated above. "Pro forma invoice" should also be clearly mentioned on the invoice.
Buyers utilize pro forma invoices when asking for an import license, obtaining a letter of credit, or arranging for money. In fact, regardless of whether a pro forma invoice has been requested, it is a good practice to include one with each overseas estimate. Before preparing final commercial invoices for export, check with your local United States Commercial Service office to see whether the importing nation has any specific invoicing requirements.
If your organization has agreed to or guaranteed a certain price, the exact term for which the offer is valid should be indicated.
Terms of Sale
The ability of a market to pay for most consumer goods may be gauged by its per capita income. Some commodities, like as Levi's denim jeans, have such a strong demand that even low per-unit prices aren't enough to keep them in stock. Any sales agreement's delivery conditions must be well understood, since misconceptions regarding its meaning might result in a missed transaction or a loss on a sale. Their selling price is unaffected by per capita income.The customer and seller's obligations, risks, and expenses associated with the delivery of products that make up the export transaction are defined in the terms of sale. Although the phrases used in international business transactions seem similar to those used in domestic commerce, their meanings are usually extremely different. As a result, before creating a quotation or a pro forma invoice, the exporter must grasp and comprehend the terms.
International commercial terms, or Incoterms, are the most widely used terms of sale in the worldwide marketplace. In a publication published by the International Chamber of Commerce, a comprehensive list of these significant phrases and their meanings is supplied (ICC). Visit store.internationaltradebooks.org to purchase the booklet.
Commonly Used Terms
It's crucial to know what sales terminology mean and how to apply them appropriately. A simple misunderstanding might keep you from fulfilling contractual commitments or leave you liable for shipping costs you had hoped to avoid.
Make a price quote that is significant to the potential buyer. To most prospective overseas customers, a price for industrial machinery listed "EXW Saginaw, Michigan, not export packaged" would be useless. These potential clients may have difficulty calculating the overall cost and, as a result, may be hesitant to place an order. Whenever feasible, give CIF or CIP rates to demonstrate the overseas customer the cost of transporting the product to or near the desired location.
If at all feasible, include a price in US dollars. This eliminates the danger of currency conversion issues and exchange rate swings.
An international freight forwarder can assist you with calculating CIF or CIP pricing. The CIF price may normally be calculated for free by the freight forwarder.
Cost, Insurance, and Freight (CIF)
Cost, insurance, and freight to a certain international port The vendor gives a price for the items (including insurance), all transportation, and other fees up to the point of disembarkation from the ship. (Only maritime cargoes are referred to as "shipments.")
Cost and Freight (CFR)
Cost and freight to a specific foreign port. The vendor specifies a price for the products that includes the cost of transportation from the vessel to the designated place of debarkation. Insurance is paid for by the customer. (This word only pertains to maritime shipping.)
Carriage Paid To (CPT)/Carriage and Insurance Paid To (CIP)
CPT and CIP refer to a specific location. For all forms of transportation, including intermodal, these words are used in place of CFR and CIF, respectively.
Ex Works (EXW)
Ex factory, ex mill, or ex warehouse are popular versions that mean "from a specific location of origin." The price mentioned is only valid at the place of origin (i.e. the seller's location). The vendor undertakes to deliver the products to the customer at the designated location within a certain time frame. Beyond the indicated location of origin, the buyer is responsible for all further duties, risks, and expenses.
Free Alongside Ship (FAS)
The vendor is responsible for wharfage, while the buyer is responsible for loading, maritime transportation, and insurance charges. It is also the seller's obligation to obtain export clearance for the merchandise. FAS is exclusively used for watery commodities, as the name indicates.
Free Carrier (FCA)
Refers to a specific location inside the shipment's nation of origin. The seller's obligation for delivering over the goods to a designated carrier at the named shipment destination is defined by this word.
The designated shipment point may be the seller's premises, according to Incoterms. In that instance, clearing the products for export from the United States is the seller's obligation. Any form of transportation can be referred to as a mode of transportation.
Free on Board (FOB)
Refers to a specific export port in the shipment's nation of origin. The seller gives the customer a price that includes all expenditures up to and including loading cargo onto a ship. (FOB refers to ocean shipping exclusively.) It is the seller's obligation, as with other "F" terms, to clear the items for export.
Commonly Used Terms When Chartering a Vessel
Free Out
Indicates that the charterer is liable for the expense of discharging the vessel's cargo.
Free In
Indicates that a vessel's charterer is liable for the expense of loading cargo aboard the vessel.
Free In and Out
Indicates that the vessel's charterer is liable for the cost of loading and unloading cargo.
FTL
Full Truck Loaded
LTL
Less Truck Loaded
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