PRICING, QUOTATIONS, AND TERMS
Proper pricing, complete and accurate quotations, and
choice of terms of sale and payment are four critical
elements in selling a product or service internationally.
Of the four, pricing is the most problematic, even for the
experienced exporter.
PRICING CONSIDERATIONS
- At what price should the firm sell its product in the
foreign market?
- Does the foreign price reflect the product's quality?
- Is the price competitive?
- Should the firm pursue market penetration or
market-skimming pricing objectives abroad?
- What type of discount (trade, cash, quantity) and
allowances (advertising, trade-off) should the firm
offer its foreign customers?
- Should prices differ with market segment?
- What should the firm do about product line pricing?
- What pricing options are available if the firm's costs
increase or decrease? Is the demand in the foreign
market elastic or inelastic?
- Are the prices going to be viewed by the foreign
government as reasonable or exploitative?
- Do the foreign country's dumping laws pose a problem?
As in the domestic market, the price at which a product or
service is sold directly determines a firm's revenues. It
is essential that a firm's market research include an
evaluation of all of the variables that may affect the
price range for the product or service. If a firm's price
is too high, the product or service will not sell. If the
price is too low, export activities may not be sufficiently
profitable or may create a net loss.
The traditional components for determining proper pricing
are costs, market demand, and competition. These categories
are the same for domestic and foreign sales and must be
evaluated in view of the firm'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.
FOREIGN MARKET OBJECTIVES
An important aspect of a company's pricing analysis
involves determining market objectives. Is the company
attempting to penetrate a new market? Looking for
long-term market growth? Looking for an outlet for surplus
production or outmoded products? For example, many firms
view the foreign market as a secondary market and
consequently have lower expectations regarding market share
and sales volume. Pricing decisions are naturally affected
by this view.
Firms also may have to tailor their marketing and pricing
objectives for particular foreign markets. For example,
marketing objectives for sales to a developing nation where
per capita income may be one tenth of per capita income in
the United States are necessarily different from the
objectives for Europe or Japan.
COSTS
The computation of the actual cost of producing a product
and bringing it to market or providing a service is the
core element in determining whether exporting is
financially viable. Many new exporters calculate their
export price by the cost-plus method alone. In the
cost-plus method of 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 net effect of this pricing approach may be that the
export price escalates into an uncompetitive range. For a
sample calculation see table 10-1. The table shows clearly
that if an export product has the same ex-factory price as
the domestic product, its final consumer price is
considerably higher.
A more competitive method of pricing for market entry is
what is termed marginal cost pricing. 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, export
products may have to be modified for the export market to
accommodate different sizes, electrical systems, or labels.
Changes of this nature may increase costs. On the other
hand, the export product may be a stripped-down version of
the domestic product and therefore cost less. Or, if
additional products can be produced without increasing
fixed costs, the incremental cost of producing additional
products for export should be lower than the earlier
average production costs for the domestic market.
In addition to production costs, overhead, and research and
development, other costs should be allocated to domestic
and export products in proportion to the benefit derived
from those expenditures. Additional costs often associated
with export sales include
- market research and credit checks;
- business travel;
- international postage, cable, and telephone rates;
- translation costs;
- commissions, training charges, and other costs
involving foreign representatives;
- consultants and freight forwarders; and
- product modification and special packaging.
After the actual cost of the export product has been
calculated, the exporter should formulate an approximate
consumer price for the foreign market.
MARKET DEMAND
As in the domestic market, demand in the foreign market is
a key to setting prices. What will the market bear for a
specific product or service?
For most consumer goods, per capita income is a good gauge
of a market's ability to pay. Per capita income for most of
the industrialized nations is comparable to that of the
United States. For the rest of the world, it is much lower.
Some products may create such a strong demand -- chic
goods such as "Levis," for example -- that even low per
capita income will not affect their selling price. However,
in most lower per capita income markets, simplifying the
product to reduce selling price may be an answer. The firm
must also keep in mind that currency valuations alter the
affordability of their goods. Thus, pricing should
accommodate wild fluctuations in currency and the relative
strength of the dollar, if possible. The firm should also
consider who the customers will be. For example, if the
firm's main customers in a developing country are
expatriates or the upper class, a high price may work even
though 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 point is also true in exporting, and
it is further complicated by the need to evaluate the
competition's prices in each export market the exporter
intends to enter.
Where a particular foreign market is being serviced by many
competitors, the exporter may have little choice but to
match the going price or even go below it to establish a
market share. If the exporter's product or service is new
to a particular foreign market, it may actually be possible
to set a higher price than is normally charged
domestically.
PRICING SUMMARY
- 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.
QUOTATIONS AND PRO FORMA INVOICES
Many export transactions, particularly first-time export
transactions, begin with the receipt of an inquiry from
abroad, followed by a request for a quotation or a pro
forma invoice.
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. Since the foreign buyer may not be
familiar with the product, the description of it in an
overseas quotation usually must be more detailed than in a
domestic quotation. The description should include the
following 15 points:
- Buyer's name and address.
- Buyer's reference number and date of inquiry.
- Listing of requested products and brief description.
- Price of each item (it is advisable to indicate
whether items are new or used and to quote in U.S.
dollars to reduce foreign-exchange risk).
- Gross and net shipping weight (in metric units where
appropriate).
- Total cubic volume and dimensions (in metric units
where appropriate) packed for export.
- 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 to factory or U.S. port (it is
preferable to give U.S. port).
- Estimated date of shipment arrival.
Sellers are often requested to submit a pro forma invoice
with or instead of a quotation. Pro forma invoices are not
for payment purposes but are essentially quotations in an
invoice format. In addition to the foregoing list of items,
a pro forma invoice should include a statement certifying
that the pro forma invoice is true and correct and a
statement describing the country of origin of the goods.
Also, the invoice should be conspicuously marked "pro forma
invoice." These invoices are only models that the buyer
uses when applying for an import license or arranging for
funds. In fact, it is good business practice to include a
pro forma invoice with any international quotation,
regardless of whether it has been requested. When final
collection invoices are being prepared at the time of
shipment, it is advisable to check with the U.S. Department
of Commerce or some other reliable source for special
invoicing requirements that may prevail in the country of
destination.
It is very important that price quotations state explicitly
that they are subject to change without notice. If a
specific price is agreed upon or guaranteed by the
exporter, the precise period during which the offer remains
valid should be specified.
TERMS OF SALE
In any sales agreement, it is important that a common
understanding exist regarding the delivery terms. The terms
in international business transactions often sound similar
to those used in domestic business, but they frequently
have very different meanings.
Confusion over terms of sale can result in a lost sale or a
loss on a sale. For this reason, the exporter must know the
terms before preparing a quotation or a pro forma invoice.
A complete list of important terms and their definitions is
contained in Incoterms 1990, a booklet issued by ICC
Publishing Corporation, Inc., 156 Fifth Avenue, Suite 820,
New York, NY 10010; telephone 212-206-1150. The cost is
$23.95 plus postage, handling, and sales tax if applicable.
Guide to Incoterms 1990, also available from ICC, uses
illustrations and commentary to explain how buyer and
seller divide risks and obligations -- and therefore costs
-- in specific kinds of international transactions. The
1990 update of Incoterms resulted in several new terms and
abbreviations; exporters should, therefore, take care to
use the correct terms to avoid confusion.
The following are a few of the more common terms used in
international trade:
- CIF (cost, insurance, freight) to a named overseas
port of import. Under this term, the seller quotes a
price for the goods (including insurance), all
transportation, and miscellaneous charges to the point
of debarkation from the vessel. (Typically used for
ocean shipments only.)
- CFR (cost and freight) to a named overseas port of
import. Under this term, the seller quotes a price for
the goods that includes the cost of transportation to
the named point of debarkation. The cost of insurance
is left to the buyer's account. (Typically used for
ocean shipments only.)
- CPT (carriage paid to) and CIP (carriage and insurance
paid to) a named place of destination. Used in place
of CFR and CIF, respectively, for shipment by modes
other than water.
- EXW (ex works) at a named point of origin (e.g., ex
factory, ex mill, ex warehouse). Under this term, the
price quoted applies only at the point of origin and
the seller agrees to place the goods at the disposal
of the buyer at the specified place on the date or
within the period fixed. All other charges are for the
account of the buyer.
- FAS (free alongside ship) at a named U.S. port of
export. Under this term, the seller quotes a price for
the goods that includes charges for delivery of the
goods alongside a vessel at the port. The seller
handles the cost of unloading and wharfage; loading,
ocean transportation, and insurance are left to the
buyer.
- FCA (free carrier) to a named place. This term
replaces the former "FOB named inland port" to
designate the seller's responsibility for the cost of
loading goods at the named shipping point. It may be
used for multimodal transport, container stations, and
any mode of transport, including air.
- FOB (free on board) at a named port of export. The
seller quotes the buyer a price that covers all costs
up to and including delivery of goods aboard an
overseas vessel.
When quoting a price, the exporter should make it
meaningful to the prospective buyer. A price for industrial
machinery quoted "EXW Saginaw, Michigan, not export packed"
would be meaningless to most prospective foreign buyers.
Such buyers would have difficulty determining the total
cost and, therefore, would hesitate to place an order.
The exporter should quote CIF whenever possible, because it
has meaning abroad. It shows the foreign buyer the cost of
getting the product to a port in or near the desired
country.
If assistance is needed in figuring the CIF price, an
international freight forwarder can provide help to U.S.
firms. The exporter 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 then compute the CIF price. There is usually
no charge for this service.
If at all possible, the exporter should quote the price in
U.S. dollars. Doing so eliminates the risk of possible
exchange rate fluctuations and the problems of currency
conversion. (As a courtesy, the exporter may also wish to
include a second pro forma invoice in the foreign currency
of the buyer.)
A simple misunderstanding regarding delivery terms may
prevent exporters from meeting contractual obligations or
make them responsible for shipping costs they sought to
avoid. It is important to understand and use delivery terms
correctly.
SAMPLE COST-PLUS CALCULATION OF PRODUCT COST
Domestic Sale Export Sale
Factory price $ 7.50 $ 7.50
Domestic freight .70 .70
_______ _______
8.20 8.20
Export documentation .50
_______
8.70
Ocean freight and insurance 1.20
_______
9.90
Import duty (12 percent of landed cost) 1.19
_______
11.09
Wholesaler markup (15 percent) 1.23
_______
9.43
Importer/distributor markup (22 percent) 2.44
_______
13.53
Retail markup (50 percent) 4.72 6.77
_______ _______
Final consumer price $14.15 $20.30
SAMPLE PRO FORMA INVOICE
Tech International
1000 J Street, N.W.
Washington, DC 20005
Telephone Fax
202-555-1212 202-555-1111
PRO FORMA INVOICE
Date: Jan. 12, 1993
To: Gomez Y. Cartagena Your Reference: Ltr., Jan. 6, 1993
Aptdo. Postal 77
Bogota, Colombia Our Reference: Col. 93-14
We hereby quote as follows Terms of Payment: Letter of Credi
Terms of Sale: CIF Buenaventur
______________________________________________________________________
QUANTITY MODEL DESCRIPTION UNIT EXTENSION
______________________________________________________________________
3 2-50 Separators in accordance $14,750.00 $44,250.00
with attached
specifications
3 14-40 First-stage Filter $ 1,200.00 $ 3,600.00
Assemblies per attached
specifications
3 custom Drive Units _ 30 hp each $ 4,235.00 $12,705.00
(for operation on 3-phase
440 v., 50 cy. current)
complete with remote controls
______________________________________________________________________
TOTAL FOB Washington, D.C. domestic packed..................$60,555.00
Export processing, packaging, prepaid inland freight
to Dulles International Airport & forwarder's
handling charges FOB Dulles Airport, Virginia..............$63,670.00
Estimated air freight and insurance.........................$ 2,960.00
Est. CIF Buenaventura, Colombia.............................$66,630.00
______________________________________________________________________
Estimated gross weight 9,360 lbs. Estimated cube 520 cu. ft.
Export packed 4,212 kg. Export packed 15.6 cu. meters
______________________________________________________________________
PLEASE NOTE
- All prices quoted herein are U.S. dollars.
- Prices quoted herein for merchandise only are valid for 60 days
from this date.
- Any changes in shipping costs or insurance rates are for account
the buyer.
- We estimate ex-factory shipment approximately 60 days from receip
here of purchase order and letter of credit.
