Finding a Winning Strategy

This article is based on extracts from the new Strong and Herd Export Development Course, Pricing for Export

When researching a new market, the exporter needs firstly to look inward. It’s the same with pricing, but that’s just the beginning…

“Price is what you pay, value is what you get.” Warren Buffet.

Photo by Obi Onyeador (Unpslash)

I’m going to start with a contradiction…

  • Prices should never be calculated based on cost.
  • When setting prices, always start by understanding your costs.

Both statements are true.

The pricing method I am proposing will involve careful assessment of costs related to the product, which we will then almost totally ignore.

We can all relate to the contradictions of price strategy in our everyday lives. On the one hand, it’s not uncommon for someone to drive a few miles to save two or three pence per litre on filling up their car. On the other, people will readily pay a premium on a coffee just because the place of purchase is convenient. In both cases, our consideration of price has little to do with how much the purchase cost to make. Value is about what it’s worth to us at the time we buy.

It’s the same for our customers. Value is determined by the benefit derived from the purchase, and the relative cost and benefits of alternatives. But we do need to understand our costs in order to understand if the market is worthwhile at all.

In many businesses, the true cost of getting a product to market is never fully understood. The discipline of costing is sometimes a dark art, where we overlook or deliberately ignore some aspects of the essential activity in getting a product to market.

In calculating the cost of production, we consider the costs the we can attribute directly to the finished product. The cost of material, labour and heat or power. Then we need to add a share of fixed costs; the rent of the building, machinery, overheads, administration, sales and profit. At minimum, the product needs to cover the costs directly attributed to its manufacture plus a sufficient contribution to fixed costs/overheads. Knowledge of our costs ought to give us a notion of a price below which we will not go. (We make break that rule sometimes, but if we do, we must know why. More of that later.)

When we calculate costs for export, there are some additional things to include:

The cost of any modifications to the product or packaging.

  • Costs of arranging customs clearance and associated documentation (depending on Incoterms used).
  • Costs of delivery (depending on Incoterms used). Costs of payment arrangements.
  • Costs of currency exchange (where relevant).
  • Costs of export staff

(Take care not to miss anything. We go through this in more detail on our pricing for export course – see below for details.)

But there are costs that shouldn’t be included:

  • UK sales team
  • After sales service
  • UK marketing
  • Overheads not related to export sales

The cost of producing goods for export will often be substantially different to your costs for the home market.

Having established this cost information, you will not use it to set export prices. Neither will you take your home prices and adjust by a fixed percentage. What you must now do is consider the end user. What is the product worth to them, and what alternatives do they have? What are their buying habits? Where do they buy?

Pricing decisions should always start by considering the end of the supply chain. Considering what price your end user is willing to pay will always be a guess. As we saw at the beginning of this article, it’s something of a moving target. But our guess needs to be an informed one, based on reliable knowledge. We might be working on information about what our competitors’ products cost. If we have no competitors (and if we don’t, that has ramifications for our export strategy, not just prices), then we need to find another way of reaching a conclusion. For example, by researching the prices of comparable products.

How do we set our prices in comparison to the competition? That really depends on our objectives. Some businesses seek to win market share quickly by setting competitive (lower) prices. This is called Entry Pricing in marketing and is a way we often see a newcomer behave, particularly in a competitive market. The price might take the form of a special promotion. The newcomer is hoping to tempt you away from your regular choice because of a better price but keep your long-term custom because you find you actually prefer the new product.

Conversely, some suppliers introduce their product at a higher price than their competitors. If done well, it can help to build a brand with a high perceived value, but at the cost of slower initial growth and usually higher costs in market development.

Such decisions are intended to be temporary and can be seen as part of the initial launch.  To make our decisions about pricing strategy we need to consider what the long-term prices to end users should be. From our previous research, we already know what our planned supply chain would be, and we can work back from end user price to calculate what margins everyone in the supply chain (including ourselves) could achieve.

With this information, we know how to pitch to a prospective distributor, agent or other representative.  Of course, if our plan is to sell directly to end users, the work is done.

Article written by Tim Hiscock - Export Development & International Trade Advisor at Strong & Herd LLP

 

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