Methods of Export Pricing
1. Cost Plus Pricing:
This method is based on adding a desired markup on costs–including domestic costs
and exporting costs(Documentation expenses, freight charges, custom duties and
international sales and promotional costs) to arrive at the prices for export markets.
Domestic marketing and promotional costs are not taken into account. This method
permits the exporter to maintain his desired profit percentage to set a suitable export
price.
Export related costs here will include Packaging, Foreign Market Research,
Advertising and Marketing, Exchange Conversion/Fluctuation Costs, Translation,
Consulting and Legal fees, Bank charges & other Financial Costs, Foreign
Agent/Distributor Product Information and Training, After-Sales Service Costs etc.
Normally, exporters are guided by any one of the following:
1. High Price Option: This approach will use higher mark-ups to produce big
profits. It may work if a company is selling a new and unique product targeted
at the upper-end of the market. This option is likely to attract competition and
limit the market for the product while, at the same time, yield bigger margins.
2. Moderate-Price Option: This is the middle path focusing on a lower risk as
compared to the high-or-low -price option. The emphasis is on matching
competition, building a market position and earning a reasonable profit
margin.
3. Low-Price Option: This route is generally taken to impede competition to
penetrate a market, suitable in case one is trying to reduce inventory and does
not have a long term commitment. Such pricing will result in low profit
margins.
2. Marginal Cost Pricing:
An improved version of cost plus method is called marginal cost pricing. The fixed
cost including expenses incurred on modifications to the product for producing an
additional unit for export is determined first. Variable export costs are then added to
arrive at the realistic total cost for exports. Such costs invariably include Packaging,
Foreign
Market
Research,
Advertising
and
Marketing,
Exchange
Conversion/Fluctuation Costs, Translation, Consulting and Legal fees, Bank charges
& other Financial Costs, Foreign Agent/Distributor Product Information and Training,
After-Sales Service Costs etc. Margins are then applied to arrive at the export price.
This result is a more realistic determination of cost of producing products for export.
3. Competitive Pricing:
Costs are important in pricing decisions. However they should be looked at alongside
the prices of competitive products in the target markets. Prices need to be set in tune
with the competition. Most customers compare prices of alternatives before coming to
a final decision. If one’s prices are set in isolation, these may not find favor with the
customer except in cases where there is no competition.
4. Market Pricing:
Extensive competition and availability of a variety of products have necessitated
market pricing-also known as target pricing. Here, the exporter has to work on a price
that the customer is willing to pay and focus shifts on managing costs as efficiently as
possible. This has happened because the customer today is highly informed-he knows
most costing and is ready to pay only what suits him. The exporter needs to work
backwards from target price down to the costs and find margins for him by managing
his overheads and other costs better.
Credit: International Business-MGU