The traditional components for determining proper pricing are costs, market demand, and competition. These categories are the same for domestic and foreign sales and must be evaluated in view of the firm's objective in entering the foreign market. An analysis of each component from an export perspective may result in export prices that are different from domestic prices.
Firms also may have to tailor their marketing and pricing objectives for particular foreign markets. For example, marketing objectives for sales to a developing nation where per capita income may be one tenth of per capita income in the United States are necessarily different from the objectives for Europe or Japan.
The net effect of this pricing approach may be that the export price escalates into an uncompetitive range. For a sample calculation see table 10-1. The table shows clearly that if an export product has the same ex-factory price as the domestic product, its final consumer price is considerably higher.
A more competitive method of pricing for market entry is what is termed marginal cost pricing. This method considers the direct, out-of-pocket expenses of producing and selling products for export as a floor beneath which prices cannot be set without incurring a loss. For example, export products may have to be modified for the export market to accommodate different sizes, electrical systems, or labels. Changes of this nature may increase costs. On the other hand, the export product may be a stripped-down version of the domestic product and therefore cost less. Or, if additional products can be produced without increasing fixed costs, the incremental cost of producing additional products for export should be lower than the earlier average production costs for the domestic market.
In addition to production costs, overhead, and research and development, other costs should be allocated to domestic and export products in proportion to the benefit derived from those expenditures. Additional costs often associated with export sales include
For most consumer goods, per capita income is a good gauge of a market's ability to pay. Per capita income for most of the industrialized nations is comparable to that of the United States. For the rest of the world, it is much lower. Some products may create such a strong demand chic goods such as "Levis," for example that even low per capita income will not affect their selling price. However, in most lower per capita income markets, simplifying the product to reduce selling price may be an answer. The firm must also keep in mind that currency valuations alter the affordability of their goods. Thus, pricing should accommodate wild fluctuations in currency and the relative strength of the dollar, if possible. The firm should also consider who the customers will be. For example, if the firm's main customers in a developing country are expatriates or the upper class, a high price may work even though the average per capita income is low.
Where a particular foreign market is being serviced by many competitors, the exporter may have little choice but to match the going price or even go below it to establish a market share. If the exporter's product or service is new to a particular foreign market, it may actually be possible to set a higher price than is normally charged domestically.
A quotation describes the product, states a price for it, sets the time of shipment, and specifies the terms of sale and terms of payment. Since the foreign buyer may not be familiar with the product, the description of it in an overseas quotation usually must be more detailed than in a domestic quotation. The description should include the following 15 points:
It is very important that price quotations state explicitly that they are subject to change without notice. If a specific price is agreed upon or guaranteed by the exporter, the precise period during which the offer remains valid should be specified.
Confusion over terms of sale can result in a lost sale or a loss on a sale. For this reason, the exporter must know the terms before preparing a quotation or a pro forma invoice. A complete list of important terms and their definitions is contained in Incoterms 1990, a booklet issued by ICC Publishing Corporation, Inc., 156 Fifth Avenue, Suite 820, New York, NY 10010; telephone 212-206-1150. The cost is $23.95 plus postage, handling, and sales tax if applicable. Guide to Incoterms 1990, also available from ICC, uses illustrations and commentary to explain how buyer and seller divide risks and obligations and therefore costs in specific kinds of international transactions. The 1990 update of Incoterms resulted in several new terms and abbreviations; exporters should, therefore, take care to use the correct terms to avoid confusion.
The following are a few of the more common terms used in international trade:
The exporter should quote CIF whenever possible, because it has meaning abroad. It shows the foreign buyer the cost of getting the product to a port in or near the desired country.
If assistance is needed in figuring the CIF price, an international freight forwarder (see chapter 12, Documentation, Shipping and Logistics) can provide help to U.S. firms. The exporter should furnish the freight forwarder with a description of the product to be exported and its weight and cubic measurement when packed; the freight forwarder can then compute the CIF price. There is usually no charge for this service.
If at all possible, the exporter should quote the price in U.S. dollars. Doing so eliminates the risk of possible exchange rate fluctuations and the problems of currency conversion. (As a courtesy, the exporter may also wish to include a second pro forma invoice in the foreign currency of the buyer.)
A simple misunderstanding regarding delivery terms may prevent exporters from meeting contractual obligations or make them responsible for shipping costs they sought to avoid. It is important to understand and use delivery terms correctly.
Domestic Sale Export Sale
Factory price $ 7.50 $ 7.50
Domestic freight .70 .70
_______ _______
8.20 8.20
Export documentation .50
_______
8.70
Ocean freight and insurance 1.20
_______
9.90
Import duty (12 percent of landed cost) 1.19
_______
11.09
Wholesaler markup (15 percent) 1.23
_______
9.43
Importer/distributor markup (22 percent) 2.44
_______
13.53
Retail markup (50 percent) 4.72 6.77
_______ _______
Final consumer price $14.15 $20.30
Tech International
1000 J Street, N.W.
Washington, DC 20005
Telephone Fax
202-555-1212 202-555-1111
PRO FORMA INVOICE
Date: Jan. 12, 1991
To: Gomez Y. Cartagena Your Reference: Ltr., Jan. 6, 1991
Aptdo. Postal 77
Bogota, Colombia Our Reference: Col. 91-14
We hereby quote as follows Terms of Payment: Letter of Credit
Terms of Sale: CIF Buenaventura
_______________________________________________________________________
QUANTITY MODEL DESCRIPTION UNIT EXTENSION
_______________________________________________________________________
3 2-50 Separators in accordance $14,750.00 $44,250.00
with attached specifications
3 14-40 First-stage Filter $ 1,200.00 $ 3,600.00
Assemblies per attached
specifications
3 custom Drive Units 30 hp each $ 4,235.00 $12,705.00
(for operation on 3-phase
440 v., 50 cy. current)
complete with remote controls
______________________________________________________________________
TOTAL FOB Washington, D.C. domestic packed..................$60,555.00
Export processing, packaging, prepaid inland freight
to Dulles International Airport & forwarder's
handling charges FOB Dulles Airport, Virginia...............$63,670.00
Estimated air freight and insurance.........................$ 2,960.00
Est. CIF Buenaventura, Colombia.............................$66,630.00
______________________________________________________________________
Estimated gross weight 9,360 lbs. Estimated cube 520 cu. ft.
Export packed 4,212 kg. Export packed 15.6 cu. meters
______________________________________________________________________
PLEASE NOTE
1. All prices quoted herein are U.S. dollars.
2. Prices quoted herein for merchandise only are valid for 60 days
from this date.
3. Any changes in shipping costs or insurance rates are for account of
the buyer.
4. We estimate ex-factory shipment approximately 60 days from receipt
here of purchase order and letter of credit.