Pricing for Export part 1 – Counting the Cost

Setting prices can often be a puzzle, particularly in international trade.

If you read any text book on business, the chances are it will tell you to avoid what is known as a ‘cost plus’ approach. And we all know from experience that this is sensible advice.

The prices we pay for things rarely reflects their true cost. As I write this, I am sitting in a busy railway station with a long wait before I can catch my train. There are plenty of trains going to my destination very soon, but they are peak hour ones, for which my low priced ticket isn’t valid. Clearly, the train that I do catch will cost just as much to make the journey as the more expensive ones. In fact, as my train will be quieter, the cost per passenger (sorry, we are customers these days aren’t we?) will be considerably higher. The coffee I just bought cost more than I would pay for the same product at an outlet nearer home, yet it is made of exactly the same ingredients.

The most extreme example of pricing I ever heard was for an early laser printer. It came in two models, economy and deluxe. The deluxe one was faster. Do you want to know why it was faster? They were basically exactly the same, except the economy one had an additional chip on the circuit to slow it down. So the economy model was more expensive to make. Counter-intuitive certainly, but it’s the best example I know that reminds me the price a customer will pay is not for what the product cost to make but for what it will do for them.

And yet, I want to start thinking about export pricing by discussing cost. The books that tell us about strategic pricing and all those clever ideas are right in what they say, but every business has to make a living. Market forces may well lead us to veer from the cost plus approach, and in some extreme cases we may even consciously and deliberately sell products at a notional loss (not too often though. We’ll come back to this in the next instalment). But it’s essential to know from the start what our costs are, and in international trade there are often costs that we may overlook if we’re not careful.

An existing business that is planning to export for the first time should already know the costs attributed to its products. In considering an opportunity to sell in another country, there are additional considerations:

  •  Production
    It may be necessary to adapt the product for another market. Changes in dimensions, design, voltage need to be understood and fully costed. Local regulations, for example on health and safety or environmental impact may also necessitate changes. Don’t forget any changes to packaging or labelling.
  •  Delivery costs
    Responsibility for the cost of delivery and associated activities such as freight clearance, insurance, documentation, import duties, VAT and so on can add considerably to the manufacturer’s costs. International trade transactions are typically governed by the international commercial terms known as Incoterms which set out which party is responsible for particular costs. A new exporter needs to take a little time to understand Incoterms. See the Strong and Herd website for more information http://www.strongandherd.co.uk/incoterms-2010/
  •  Transaction and credit costs
    International sales typically incur additional costs such as bank charges, commissions, costs related to later payments and the cost of managing the business. It might also be assumed that the cost of sales may be high compared to home sales, as travel and communications will almost certainly be more costly.

The new exporter should consider all these issues, and take professional advice if necessary.

This can all sound pretty daunting, but on the other hand there can be major financial benefits to exporting, especially if it contributes to a significant growth in business. A larger business can often benefit from economies of scale, for example by placing larger orders for raw materials or making greater use of manufacturing equipment.

The crucial thing is to have a proper understanding of all the costs that a business can expect to encounter in exporting. This naturally helps guide the decision of whether to export at all, and to consider the relative benefits of particular markets, but it also ensures that the exporter goes into price negotiations with a real understanding of their costs.

This is only the start of the process. In the next instalment, we’ll look at using price as a strategic tool to enter new markets, maximise profits and develop brand value.

 

Written on 28th March 2013 by Tim Hiscock, S&H LLP Associate

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