Managing Export Consumer Pricing

Case Study

By

Dick Brentnall 

 

International distribution channels for consumer products can often be complicated due to the number of parties involved in any buying chain. As such all these parties can directly impact on the end selling price, the one the local consumer pays for the product. Management of pricing is, of course, further effected by international logistical costs, local taxation and duties, and the trade margins expected to be enjoyed in any given market.

My main international trade experience was gained with a consumer products company which possessed valued brands which required the appropriate price to be paid by consumers and the trade alike. Each Brand/product had a target consumer price set on a market by market basis taking into account local competitive activity.

These notes describe the process we carried out to ensure a target consumer price was established in each market. Whilst this process was broadly successful throughout the world, we will take the English Caribbean markets as a practical example.

The background is this. The region comprises of a number closely grouped countries, each with their own taxation and duties in addition to a Caricom common external tariff (CET) and a common local currency the East Caribbean Dollar (EC$). For many islands (all being independent countries) one could see the next island a few miles away. In other words a closely knit business community with few secrets between each country.

The first step was to set an agreed target price for each product so that a local resident travelling to a neighbouring country would find his preferred product at the same price on the shelf. For this exercise to be more than a strategy it required the wholehearted understanding and cooperation of all of the company’s distributors within the region.

Therefore all distributors were regularly consulted on the target price taking into account the economy of each country, level of local competition pricing and, quite simply, what would their consumers be prepared to pay for the product taking into account the perceived value of the brand/product. They also had to subscribe to agreeing a regional target price rather than one just set wholly for their own circumstances.

My company would then set about establishing the appropriate price for our goods, country by country, to ensure the target price could be achieved. Again this could not occur without the wholehearted assistance of the distributor.

We would use a price model format to calculate each product price and work downwards from the target consumer price which is invariably a retailer’s price on the shelf. The following is an abbreviated summary:

Target consumer price

       ↓

Retailer margin

               ↓

Distributor price

               ↓

Distributor price

               ↓

Landed cost

               ↓

Taxes & duties

                ↓

CFR

                ↓

Ex-works

Within this Region all distributors preferred a CFR arrangement so a specific figure was calculated for each product for each country. In practice due to the varying taxes & duties it meant that each distributor was charged a different price for the same products. In normal circumstances this would have created a major problem between the company and its distributors.

Some distributors were making more, some making less cash profit as compared to some of their fellow distributors. It was not a problem because this was an open trading situation where all parties had subscribed to mantra that a standard consumer price was the most beneficial for business.

There were other problems as well. Politicians of the day would wish to influence the policy. I well remember on two separate occasions meeting with finance ministers to discuss how we did business and the rationale used. Naturally my local distributor was also in attendance. I used the price model to illustrate both our thinking and how we literally structured our prices. We had nothing to hide.

We pointed out the key criteria of targeting (not setting) a consumer price. This was set to ensure we were not undersold or oversold by the trade; we wanted the consumer to pay the right price for our brands/products. It should be added that in these two situations there was local manufacture of similar products albeit of a lower quality and retailed at a much lower price point. We highlighted the need to ensure there was real separation in pricing between these local products and our own as we were not seeking conflict.

We also illustrated the key fact that any difference in prices charged to the distributor were wholly in line and due to the duties and taxes charged in their country. In both instances after a long discussion both ministers were satisfied with our approach. There is no doubt that using the price model as an illustration rather than just discussing figures was the critical factor.

These local concerns lead on to the legality of this approach. Today anti-trust laws in many countries actively prohibit any selling party imposing a margin or a selling price onto another. This is not suggested in this process.

Our view was to quite simply agree with a distributor a target consumer price bearing in mind he is the only person who can ‘police’ its implementation locally through recommendation and the active use of his salesforce. Without this process the consumer price of the product would float and in most instances become unaffordable for the local consumer.

This case study has highlighted a common group of markets where we to tried to ensure some consumer price conformity across them all. This principal of setting a target consumer price was adopted in all of our markets as standard practice. As already discussed the pricing strategy would be first discussed and agreed with the distributor for him to follow through locally. We would set our FCA price accordingly.

When appointing a new distributor we would, at the outset, introduce him to the concept and process to ensure he was actively involved at the start.

So does this work? The short answer is yes. In most markets we would find our products being sold at or close to our target consumer prices.  In these instances we knew consumers were buying at the right price for the right product at the right quality.

 

Written 21st January 2013 by Dick Brentnall S&H LLP Associate/ Trainer

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