The first in our export risk series addresses the juggle involved in pricing your products for an international market. As improper pricing of your products could undermine your profitability-or your business, it is vital to ensure you understand the complexities of documentation, foreign exchange and perceived market value.Exporters have to offer pricing that is competitive as well as allowing them to make a fair profit on their goods. This means doing their market research on similar products in the marketplace, understanding the barriers to get into the market they wish to sell to and not having unrealistic profit ideas. Export pricing calls for a high degree of certainty and a clear understanding of the terms and conditions on which the transaction is based. To get to this level of certainty, an exporter must be aware of:
- The transport costs to be paid by each party, and the Incoterm that matches this to the underlying commercial contract;
- The timing and method of payment, and the currency used; and
- Additional on-costs incurred by the exporter that need to be factored into the sales price.
The Incoterm used will determine who pays for items involved in the movement of the exports such as freight, marine insurance, wharf charges, inland cartage and potentially duties and taxes and where the responsibility starts and ends between exporter and importer. Accordingly, it is vitally important to use the correct Incoterm, to include a named location for the transfer of responsibilities between the parties, and to ensure it matches the commercial agreement underpinning the sale. If you are in a strong negotiating position, it may be possible to insist on payment up front and in Australian dollars, moving the cost and the risk to the buyer. However not everyone is in this boat. Another option is to make the buyer's decision process as easy as possible by preparing your export price list CIF (Cost, Insurance and Freight) in the currency of the country and port of product destination. Some tips to consider:
- Understand the way business is done in the export market; conduct your business similarly and offer the same value proposal as local suppliers. Payment terms, delivery and after-sale servicing are important considerations.
- Include a proviso in your price list: ‘Prices subject to change’.
- Consider currency fluctuations when preparing the price list.
- Do not include ‘suggested retail prices’ on your wholesale price list unless requested. This is not well received, especially in North America.
- When preparing an export price list, the following costs may apply. These costs should be included in each item to be exported: - Fixed costs - Shipping ex factory to port of departure - Air or sea freight and insurance - Import duty and taxes - Customs clearance/broker fee - Ground transportation from port of entry to warehouse or customer, as appropriate - Warehousing fees, if applicable - Agent's commission or importer's markup, as appropriate - Break-bulk fees, if third party warehouse applies - Packaging and labelling to local standards - Product certification, if required - Product liability insurance - Advertising and promotional costs - Finance costs and banking charge
- Remember that the retailer adds a markup on your product as well. While this does not affect the preparation of your wholesale price list, it is critical to understand what the retail price of your product would be to the end user. It is also important to understand how your prices stack up against your competitors' to determine whether the market can bear your price.
There are different methods for calculating prices and the one you use will often depend on your industry, your business’ positioning in the market, and sometimes competitors. Cost-plus method. The exporter starts with the domestic manufacturing cost and adds administration, research and development, overhead, freight forwarding, distributor margins, customs charges and profit. The net effect of this pricing approach may be that the export price escalates into an uncompetitive range. Marginal cost pricing. Consider 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. This would include any product modifications plus economy of scale savings, as the incremental cost of producing additional products for export should be lower than the earlier average production costs for the domestic market. Buyer based. This takes into account perceived value, which is more psychological than based on economics. This is the method that relies on your business’ positioning as a market leader or premium brand. Competition based. This is benchmarked to your competitors’ or market average. Price adjustment strategy. This may include discount pricing and allowances, rebates, discriminatory pricing or promotional pricing such as loss leaders to attract customers. Be aware of all the costs that you may be called upon to pay. Knowing your costs allows you to quote with confidence for profitable export sales. For a more detailed appreciation of export pricing, refer to the Australian Institute of Export’s Australian Export Handbook, or attend one of their Export Procedures courses; see www.export.org.au for more details. -Dianne Tipping is managing director of Excon International and a director at the Australian Institute of Export. With input from Peter Mace, general manager at the Australian Institute of Export.
The effect of foreign exchange on pricing
Exporters that find pricing difficult due to foreign exchange fluctuations should take note of movements that may affect their profitability. The current strength of the AUD dollar looks set to continue on back of improving consumer and business sentiment, better than expected unemployment numbers and the Reserve Bank’s decision to lift the official cash rate by 0.25 percent to 3.25 percent in October. Exporters need to be aware of the risks associated when the Australian dollar is moving higher and understand the impact to their Australian dollar cash flows. A key question every exporter needs to ask is: what is the impact on my cash flow for every one percent move higher in currency prices? The primary objective of foreign exchange risk management is to minimise potential currency losses and not to profit from foreign exchange rate movements. For exporters with defined inward cash flows, they can look to minimise these risks by locking into foreign exchange forward exchange contracts or foreign exchange options to take advantage of favourable foreign exchange prices now, best used when consistency of inward foreign payments is known. An alternative is to have your customers pay you in Australian dollars thereby removing the currency risk. While not for possible in every situation, it can be an effective short-term option in managing larger or one off foreign payments. -Jason McClintock, senior manager FX Trading, at American Express Foreign Exchange International Payments (www.americanexpress.com.au/fxip)
Understanding your freighting costs will go a long way towards providing a suitable price for your goods. International freight providers should be able to supply a firm price for all exports. The price should be in a nominated currency and ideally in Australian dollars. Exporters should also be aware of the current fuel surcharge, which generally change on a monthly basis. In addition to the actual freight charge, service providers have the capability to advise exporters of any additional charges. Exporters should ensure that they fully understand these charges, which can include customs disbursements (for high value shipments), quarantine charges, delivered duty paid administration fees, storage charges and so forth. Exporters should ask their service provider to produce a rate card that includes all of these costs and then reconcile that rate card on receipt of the invoice. It's a good idea to record the total cost of freight per export shipment then divide that cost by the shipment weight: the chargeable weight, which is the higher of the volumetric or dead weight. In doing this, exporters will quickly build an accurate freight cost data base on a per kilogram basis, which allows for accurate costing and margin management. -Ross Gluer, general manager International, at TNT Express Australia (www.tnt.com.au)