Chapter 13: PRICING, QUOTATIONS, AND TERMS

In This Chapter

  • Determining the best price for your product internationally
  • Handling requests for quotations and the pro forma invoice
  • Defining the terms of sale

Pricing your product properly, giving complete and accurate quotations, choosing the terms of the sale, and selecting the payment method are four critical elements in selling a product or service overseas. Of the four, pricing can be the most challenging, even for an experienced exporter. (Methods of payment are covered in Chapter 14.)

PRICING CONSIDERATIONS

These considerations will help you determine the best price for your product overseas:

  • At what price should your firm sell its product in the foreign market?
  • What type of market positioning (that is, customer perception) does your company want to convey from its pricing structure?
  • Does the export price reflect your product’s quality?
  • Is the price competitive?
  • What type of discount (for example, trade, cash, quantity) and allowances (for example, advertising, trade-offs) should your firm offer its foreign customers?
  • Should prices differ by market segment?
  • What should your firm do about product-line pricing?
  • What pricing options are available if your firm’s costs increase or decrease? Is the demand in the foreign market elastic or inelastic?
  • Is the foreign government going to view your prices as reasonable or exploitative?
  • Do the foreign country’s antidumping laws pose a problem?

As in the domestic market, the price at which a product or service is sold directly determines your firm’s revenues. It is essential that your company’s market research include an evaluation of all the variables that may affect the price range for your product or service. If your firm’s price is too high, the product or service will not sell. If t he price is too low, export activities may not be sufficiently profitable or may actually create a net loss.

The traditional components for determining proper pricing are costs, market demand, and competition. Each component must be compared with your company’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.

It is also very important that you take into account additional costs that are typically borne by the importer. They include tariffs, customs fees, currency fluctuation, transaction costs, and value added taxes (VATs). These costs can add substantially to the final price paid by the importer, sometimes resulting in a total that is more than double the U.S. domestic price.

Foreign Market Objectives

An important aspect of your company’s pricing analysis is the determination of market objectives. For example, you may ask whether your company is attempting to penetrate a new market, seeking long-term market growth, or looking for an outlet for surplus production or outmoded products.

Marketing and pricing objectives may be generalized or tailored to particular foreign markets. For example, marketing objectives for sales to a developing nation, where per capita income may be one-tenth of that in the United States, are necessarily different than marketing objectives for sales to Europe or Japan.

Costs

The computation of the actual cost of producing a product and bringing it to market is the core element in determining if exporting is financially viable. Many new exporters calculate their export price by the cost-plus method. In that calculation, the exporter starts with the domestic manufacturing cost and adds administration, research and development, overhead, freight forwarding, distributor margins, customs charges, and profit.

The effect of this pricing approach may be that the export price escalates into an uncompetitive range. Table 13.1 provides a sample calculation. It clearly shows that if an export product has the same ex-factory price as the domestic product has, its final consumer price is considerably higher once exporting costs are included.

Marginal cost pricing is a more competitive method of pricing a product for market entry. 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, additional costs may occur because of product modification for the export market to accommodate different sizes, electrical systems, or labels. Costs may decrease, however, if the export products are stripped-down versions or made without increasing the fixed costs of domestic production. Thus, many costs that apply only to domestic production, such as domestic labeling, packaging, and advertising costs, are subtracted, as are costs such as research and development expenses if they would have been spent anyway for domestic production.

Other costs should be assessed for domestic and export products according to how much benefit each product receives from such expenditures. Additional costs often associated with export sales include the following:

  • Fees for market research and credit checks
  • Business travel expenses
  • International postage and telephone rates
  • Translation costs
  • Commissions, training charges, and other costs involving foreign representatives
  • Consultant and freight forwarder fees
  • Product modification and special packaging costs

After the actual cost of the export product has been calculated , you should formulate an approximate consumer price for the foreign market.

Market Demand

For most consumer goods, per capita income is a good gauge of a market’s ability to pay. Some products create such a strong demand (for example, Levi’s denim jeans) that even low per capita income will not affect their selling price. Simplifying the product to reduce its selling price may be an answer for your company in markets with low per capita income. Your firm must also keep in mind that currency fluctuations may alter the affordability of its goods. Thus, pricing should try to accommodate wild changes in U.S. and foreign currencies. A relatively weak dollar makes the price of U.S. goods more competitive in many markets around the world, thereby enabling you to compete with domestic producers as well as with other foreign competitors whose production costs are suddenly reflected in their inflated domestic currencies. Your firm should also anticipate the kind of customers who will buy your product. If your firm’s primary customers in a developing country are expatriates or are local people with high incomes, a higher price might be feasible even if the average per capita income is low.

Competition

In the domestic market, few companies are free to set prices without carefully evaluating their competitors’ pricing policies. This situation is true in exporting and is further complicated by the need to evaluate the competition’s prices in each potential export market (see Box 13.1).

If there are many competitors within the foreign market, you may have little choice but to match the market price or even underprice the product or service in order to establish a market share. If the product or service is new to a particular foreign market, however, it may actually be possible to set a higher price than in the domestic market.

Pricing Summary

In summary, here are the key points to remember when determining your product’s price:

  • Determine the objective in the foreign market.
  • Compute the actual cost of the export product.
  • Compute the final consumer price.
  • Evaluate market demand and competition.
  • Consider modifying the product to reduce the export price.
  • Include “non-market” costs, such as tariffs and customs fees.
  • Exclude cost elements that provide no benefit to the export function, such as domestic advertising.

QUOTATIONS AND PRO FORMA INVOICES

Many export transactions, particularly initial export transactions, begin with the receipt of an inquiry from abroad that is followed by a request for a quotation. A pro forma invoice is a quotation prepared in the format of an invoice; it is the preferred method in the exporting business.

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. Because the foreign buyer may not be familiar with the product, the description of the product in an overseas quotation usually must be more detailed than in a domestic quotation.

The description should include the following 15 points:

  • Seller’s and buyer’s names and addresses
  • Buyer’s reference number and date of inquiry
  • Listing of requested products and a brief description
  • Price of each item (It is advisable to indicate whether items are new or used and to quote the price in U.S. dollars to reduce foreign exchange risk.)
  • Appropriate total cubic volume and dimensions packed for export (in metric units where appropriate)
  • Appropriate gross and net shipping weight (in metric units where appropriate)
  • Trade discount (if applicable)
  • Delivery point
  • Terms of sale
  • Terms of payment
  • Insurance and shipping costs
  • Validity period for quotation
  • Total charges to be paid by customer
  • Estimated shipping date from a U.S. port or airport
  • Currency of sale

Pro forma invoices are not used for payment purposes. In addition to the 15 items previously mentioned, a pro forma invoice should include two statements—one that certifies the pro forma invoice is true and correct, and another that indicates the country of origin of the goods. The invoice should also be clearly marked “pro forma invoice.”

Pro forma invoices are models that the buyer uses when applying for an import license, opening a letter of credit, or arranging for funds. In fact, it is a good practice to include a pro forma invoice with any international quotation, regardless of whether it has been requested. When final commercial invoices are being prepared before shipment, it is advisable to check with your local Export Assistance Center for any special invoicing provisions that may be required by the importing country.

If a specific price is agreed on or guaranteed by your company, the precise period during which the offer remains valid should be specified.

TERMS OF SALE

In any sales agreement, it is important to have a common understanding of the delivery terms because confusion over their meaning may result in a lost sale or a loss on a sale. Terms of sale define the obligations, risks, and costs of the buyer and seller involving the delivery of goods that make up the export transaction. The terms in international business transactions often sound similar to those used in domestic business, but they frequently have very different meanings. For this reason, the exporter must know and understand the terms before preparing a quotation or a pro forma invoice.

The most commonly applied terms of sale in the global marketplace are the international commercial terms, or Incoterms. A complete list of these important terms and their definitions is provided in Incoterms 2000, a booklet issued by the International Chamber of Commerce (ICC). To purchase the booklet, contact ICC Books, 1212 Avenue of the Americas, 18th Floor, New York, NY 10036; call (212) 703-5066; or go online at www.iccbooksusa.com.

Following are a few of the more frequently used terms in international trade:

  • CIF stands for cost, insurance, and freight to a named overseas port. The seller quotes a price for the goods (including insurance), all transportation, and miscellaneous charges to the point of debarkation from the vessel. (The term is used only for ocean shipments.)
  • CFR applies to cost and freight to a named overseas port. The seller quotes a price for the goods that includes the cost of transportation to the named point of debarkation from the vessel. The buyer covers the cost of insurance. (The term applies only for ocean shipments.)
  • CPT (carriage paid to) and CIP (carriage and insurance paid to) apply to a named destination. These terms are used in place of CFR and CIF, respectively, for all modes of transportation, including intermodal.
  • EXW (ex works) means “from a named point of origin” (e.g., ex factory, ex mill, ex warehouse); the price quoted applies only at the point of origin (i.e., the seller’s premises). The seller agrees to place the goods at the buyer’s disposal at the specified place within a fixed time period. All other obligations, risks, and costs beyond the named point of origin are the buyer’s.
  • FAS, or free alongside ship, refers to the seller’s price quote for the goods, including the charge for delivery of the goods alongside a vessel at the named port of export. The seller handles the cost of wharfage, while the buyer is accountable for the costs of loading, ocean transportation, and insurance. It is the seller’s responsibility to clear the goods for export. FAS, as the term implies, is used only for waterborne shipments.
  • FCA, or free carrier, refers to a named place within the country of origin of the shipment. This term defines the seller’s responsibility for handing over the goods to a named carrier at the named shipping point. According to Incoterms 2000, the named shipping point may be the seller’s premises. In that case, it is the seller’s responsibility to clear the goods for export from the United States. The term may be used for any mode of transport.
  • FOB, or free on board, refers to a named port of export in the country of origin of the shipment. The seller quotes the buyer a price that covers all costs up to and including the loading of goods aboard a vessel. (FOB is used only for ocean shipments.) As with other “F” terms, it is the seller’s responsibility to clear the goods for export.

Some of the more common terms used in chartering a vessel are as follows:

  • Free in is a pricing term that indicates that the charterer of a vessel is responsible for the cost of loading goods onto the vessel.
  • Free in and out is a pricing term that indicates that the charterer of the vessel is responsible for the cost of loading and unloading goods from the vessel.
  • Free out is a pricing term that indicates that the charterer is responsible for the cost of unloading goods from the vessel.

It is important to understand and use sales terms correctly. A simple misunderstanding may prevent you from meeting contractual obligations or make you responsible for shipping costs that you sought to avoid.

When quoting a price, you should make it meaningful to the prospective buyer. For example, a price for industrial machinery quoted “EXW Saginaw, Michigan, not export packed” is meaningless to most prospective foreign buyers. The buyers might find it difficult to determine the total cost and, therefore, might hesitate to place an order. You should quote CIF or CIP prices whenever possible because such quotes show the foreign buyer the cost of getting the product to or near the desired country.

If possible, you should quote the price in U.S. dollars. This will eliminate the risk of exchange rate fluctuations and problems with currency conversion.

If you need assistance in figuring CIF or CIP prices, an international freight forwarder can help. You 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 compute the CIF price, usually at no charge.

FACT: A common misperception of many company owners is that their prices are too high for foreign markets.

INSIGHT: What makes your product sell domestically can help it sell abroad. Price is important, but it is not the only selling point. Other competitive factors are need, utility, quality, service, credit, and consumer taste. Don’t assume your price is uncompetitive. Your products could still be a bargain in countries with a strong currency, even after adding overseas delivery costs and import duties.

FACT: Pro forma invoices are the preferred method of quoting prices.

INSIGHT: It is a good practice to include a pro forma invoice with any international quotation regardless of whether it has been requested.

See Also: Case Study