PRICING & QUOTING

Learning Objectives Learn how best to price your products for export You will learn what determines an export price You will learn how to present your export price How to respond to enquiries

Introduction Price is one the of the key variables in the any international trade deal and should incorporate: The right quantity At the right level of quality At the right time And at the right cost or price

What is the right, price? Many factors affect the setting of the right price! Some of these factors are controllable some not! Export pricing must be FLEXIABLE!

Pricing Objectives To keep, increase or defend market share Compare prices with the competition Eliminate the competition Achieve target profits or maximise profits To use excess production capacity To project a high quality image To survive All of the above give rise to setting the right price for your company

Elements of Pricing The relationship between price and quantity = the price decreases as the quantities sold increases This is known as the law of demand However price in only one of several factors influencing demand and therefore sales. Take into consideration: Quantity, quality, time and cost

Price factors - Controllable & independent Controllable factors Cost of product = the costs incurred to manufacture and package the product (including: direct materials, labour, factory overheads, administrative & management costs)

Price factors - Controllable costs Selling & distribution costs In international trade especially transport and other distribution costs play a major role. The export must have a complete understanding of these costs

Controllable costs continued.. Cost of marketing support. In developed markets advertising & sales promotion is necessary to bring initial sales Product quality. A unique product can demand a higher price Product communication & image. Advertising & other communication can strengthen the appeal of the product

Independent price factors Prevailing price levels in the target market. In some instances the price is set by the existence of similar products in the target market Market supply & demand. This is dependant on the intensity of demand for the product. Example: Seasonal variations imported vegetables vs. locally grown

Independent price factors….. Competition. Intensive competition puts pressures on prices. In some instances you have to align your prices with those of your competitors. Foreign Exchange. Prices often fluctuate because of exchange rates. It is wise to consult the foreign exchange division of your bank for assistance when quoting in a foreign currency.

PRICING METHODS There are two main pricing policies: Cost-oriented pricing: is the simplest. The cost is calculated for each unit of production. A percentage or mark-up is added to this base cost to determine price.

PRICING METHODS The most common methods of applying the cost plus approach: Full cost pricing Direct cost pricing Marginal cost pricing Break-even pricing

Full Cost Pricing This takes into account all the variable costs & fixed overheads that are directly attributable to production, & a pre-determined profit margin. Weaknesses: No account is taken of the demand side this could result in the firm producing products they cannot sell

Direct cost pricing Direct cost pricing is represented by a formula: Direct cost = raw materials + direct labour + variable factory overhead A mark-up is added to the direct cost to cover estimated overheads and leave a profit, so identifying the costs directly attributed to each specific output & using those costs to set prices.

Marginal cost pricing Marginal costing is an accounting technique whereby a marginal cost is determined on the basis of additional variable costs only. It is the amount by which the total cost is changed if the volume of output of a product is increased by one unit. For example: If spare manufacturing capability is available, export prices at marginal costs may be quoted as the fixed costs are already being covered by domestic sales revenue.

Break-even pricing

Break-even pricing allows a firm to compare the profit outcome of alternative sets of prices. Firms can set prices to achieve maximum profit by concluding the price for given volumes. Verifying the volume that will deliver the most profit.

Market-oriented pricing Demand-oriented pricing Competition-oriented pricing

Demand-oriented pricing This implies that a high price is charge where customer interest is high and a low price is charged where customer interest is low, despite that fact that the cost may be the same in both cases. Based on the customers perceived value.

Competition-oriented pricing This is based on the actual or anticipated behaviour of competitors. Exporters would peg their price to that of their competitors. The main forms are: going rate pricing and sealed bid pricing. Going rate pricing = The price is determined by market leaders who know what price the market will bear Sealed bid pricing = Used when firms have to compete for contracts on the basis of tenders.

Determining Export Prices The costs to consider are: Factory costs (prime & overhead costs ) Selling & distribution costs (indirect & direct, such as transportation costs) Cost of marketing (advertising & similar activities Administrative costs ( salaries, office expenses, audit & legal fees, stationary & printing)

Information on foreign markets The size and nature of the market Knowledge of competitive price patterns How much room is their for price changes Are market shares changing? Is there a price leader? What is the relationship between price & volume? Constant re-view of prices

Elements of the export price structure Factory cost of product & profit = EXW/EX Works Export packing & marking, loading, in- land transport, documentation = FCA Free Carrier At…. Transport charges & handling fee = CPT Carriage paid to.. Insurance = CIP Cost insurance paid.

Elements of the export price structure continued…. Transport to importers warehouse, duties, taxes & clearing agents fees = DDP Delivered Duty Paid Importers mark-up, wholesalers mark-up and retailers mark-up = Price to consumer.

Average margins Example: TOYS Landed duty = 100% Importer to wholesaler = 115% Wholesaler to retailer = 150% Retailer to consumer = 250%

INCOTERMS INCOTERMS, determine which prices are paid by the exporter and which prices are paid by the importer. EXW = importer pays most of the costs DDP = exporter pays most of the costs

Export Costing Sheets Useful tool which services as a check list to ensure that no cost has be omitted A substantial amount of information will be supplied by your freight forwarder (transport rates, cost of documentation, insurance, packing and labelling costs etc.)

Export Costing Sheets & freight rates Most freight rates are based on weight or volume which ever is the greater of the two. Example: a parcel weights 1 metric ton the dimensions are 2 cubic metres, the freight rate would be based on the greater namely: 2 cubic metres

Example of a freight rate quoted by a shipping line for break bulk and or groupage cargo, quoted per freight ton. Freight rate quoted by shipping line: USD per weight or measure (freight ton) Weight of consignment = 2 metric ton Dimensions Length 2.5M X Width 1M X Height X 2 M = 5 cubic metres using the greater of the two amounts: 5 cubic metre X USD = USD freight rate payable

Sea freight containerisation quoted per container (6 or 12 metre) Container/Sea Freight is quoted: per container (FAK) = freight all kinds regardless of contents Example: USD for a 6 metre (20ft) container regardless of the weight, volume or contents.

Factors effecting your freight rate Un-foreseen increases in fuel, exchange rate fluctuations, out break of war etc, effect the sea freight rate. These increases are called surcharges. They include: Bunker Adjustment Factor (BAF) (fuel price increase) Currency Adjustment Factor (CAF) (currency fluctuations) War & port congest surcharges

Airfreight rates Airfreight rates are expensive and only include the cost of freight from the air port of loading to the air port of discharge. Airfreight rates are based on a weight to volume ratio, which ever yields the greater amount of income for the airline.

Air freight rates Example of how to calculate the chargeable weight. 1 mt = 6 cubic metre Step 1 - measure the parcel 100cm (L) X 100cm (W) x 100cm (H) = cm3 now divide this by 6000 = 166,66Kg (you have converted cms to kgs) round up = 167Kg Step 2 compare to actual mass = 150Kg Step 3 the volumetric mass of 167 Kg is greater than the actual mass of 150 Kg The airline would calculate the freight on 167 Kg

Export costing sheet template full container load sea freight EXPORT COSTING SHEET SEAFREIGHT PRODUCT: QUOTED FOR: SHIPPED FROM : SHIPPED TO: QUANTITY: NUMBER OF UNITS: UNIT WEIGHT:GROSS WEIGHT: UNIT CUBE OF PARCEL: TOTAL CUBE OF SHIPMENT FREIGHT RATE OBTAINED FROM EXCHANGE RATE USED It is important to record the details of the customer, weights, dimensions, exchange rates and freight rate quote.

Calculating to an EX Works price: UNIT PRICE OF PRODUCT: COST OF TOTAL SHIPMENT: PROFIT : OVERSEAS AGENTS COMMISSION: EXPORT, TURNOVER, OR OTHER TAX: SPECIAL LABELS, LABELLING, CONTAINERS: PACKING: MARKET STRAPPING OR BUNDLING: EX WORKS PRICE PER UNIT TOTAL EX WORKS PRICE THESE ARE THE COSTS INCURRED AT YOUR FACTORY ADDED TOGETHER WILL GIVE YOU THE TOTAL EX WORK PRICE FOR YOUR PRODUCTS

Calculating from EX Works to an FCA price: DELIVERY OF EMPTY CONTAINER (HAULIER COSTS): COLLECTION OF FULL CONTAINER (HAULIER COSTS): EXPORT DOCUMENTATION: PACKING CONTAINER RAILAGE/ROAD TO PORT OF LOADING: CARGO DUES/ WHARFAGE FEE: TERMINAL HANDLING CHARGE: FREIGHT FORWARDERS FEE FINANCING CHARGE: EXPORT CREDIT INSURANCE: FCA PORT OF LOADING UNIT FCA THESE ARE THE COSTS TO BRING A CONTAINER TO A PORT OF LOADING READY FOR SHIPMENT

Calculating from FCA to CPT & CIP FREIGHT CHARGED PER CONTAINER: BAF/BUNKER ADJUSTMENT FACTOR: CAF/CURRENCY ADJUSTMENT FACTOR: OTHER CPT PORT OF DISCHARGE INSURANCE CIP PORT OF LOADING ADDING THE ABOVE AMOUNTS TO YOUR FCA WOULD GIVE YOU A CIP PRICE. THE CONTAINER WOULD BE DELIVERED TO A PORT OF DISCHARGE (INCLUDING INSURANCE)

PRESENTING AN EXPORT PRICE/QUOTATION Communication is one of the most important aspects of any international trade transaction. Most transmission of information/ communication is done through the issuance of documentation - Documents drive trade!

Export Quotations The key element that can turn an enquiry into an order is the price quotation - setting out of the price and terms and conditions of sale under which the exporter agrees to supply the buyer.

Essential requirements when responding to an enquiry.. Speed: Respond quickly to show the you are keen and efficient. Clarity: Be clear and include the relevant details requested by the customer Quality: Back up all claims made, present a professional quotation Follow-up: The wheel that makes the most noise gets the most attention

Good quotations should contain : Some expression of thanks for the enquiry Clear and concise description of goods & quantities Statement of terms & delivery & packaging Details of prices, discounts Date of delivery Period for which the quotation is valid Preferred method of payment Be upbeat and enthusiastic in all correspondence.