A summary of where you have come from
In the previous step (step 1) of the export pricing process, you reviewed the price analysis you undertook as part of your export research. Your price analysis provided you with an indication of a market-related export price, an assessment of the demand and competitive factors likely to impact on your final export price, and identified the likely export-related costs you would incur in marketing and distributing your product in the foreign target market. With this information in mind, you then undertook a 'quick and dirty' price comparison working backwards from the market-related price and deducting all of your export-related costs to get to a base (or ex works) price. You then compared this base price with your domestic ex factory price to see whether you are price competitive or not. You know have an idea whether you face a pricing opportunity or pricing problem. Given the competitive nature of global markets, it is more than likely that you face a pricing problem (i.e. you cannot match the market-related price you identified from your export research).
The need for a formal costing process
The previous section was a quick calculation simply intended to give you an idea of where you stand - that is, whether you are likely to face a problem with your pricing or not. It was not intended as a formal costing exercise. By knowing whether you need to be 'tighter' with your costing, you will be more aware and sensitive to the various pricing and costing alternatives you might face. You now have to undertake a more formal costing exercise to highlight with greater certainty the costs you face. The purpose of this costing exercise is to:
- Ensure that you have identified all of the costs likely to impact on your final export price
- Estimate as realistically as possible the actual costs associated with each cost item
- Determine the export pricing strategy you will follow based on your costs, your expected final price, the demand and competitive factors you face, and the flexibility you have with your export price setting
- Find ways of cutting costs (by reducing expenditure in certain areas, for example)
- Decide on a final export price
There are many costs involved
One of the major challenges in exporting
is ensuring that you remain competitive yet still make
a profit. Bear in mind that the channel between your firm
and your customer is much longer than in the domestic market
and that there are many intermediaries along the way. You
need to account for the wide variety of additional costs you will encounter, such as distribution costs, documentation costs, the cost of additional channel
intermediaries, as well as the taxes and tariffs that you
will encounter when doing business with overseas markets.
Indeed, you will find to your dismay that there is a cost
around every corner.
The price at home will not be the price abroad
These costs all contribute to either a higher
price or to lower margins (i.e. lower profits). There are
many company executives that in their travels abroad have
looked at the selling price of products similar to theirs
in an overseas market and that have then translated this
price back into rands and thought to themselves they cannot
help but "make a killing". However, once they
embark on the export road to "millions' they
soon discover that all of these many, many costs between
their factory door and the client's warehouse quickly erode
any chance of extraordinary profits. More often than not they find to their dismay that their products once
landed in the export market are in fact more expensive
than those of their overseas competitors. At this point
many exporters give up. The more competitive exporters
then begin to look for ways of reducing costs and creating
additional value - if they are determined enough, these
last-mentioned entrepreneurs are bound to succeed.
The need to cost for export
One way of overcoming these obstacles
is to undertake a thorough costing exercise and to think
carefully about the pricing strategy you plan to follow.
In the next few sections, we will take you step by step
through the costing process and we will introduce you to
alternative pricing strategies.
The costing exercise begins with your production costs
You export costing exercise begins at a stage before the ex works or ex factory price. It begins with estimating the costs associated with actually producing the export product. The reason for this is that by saving costs in the production process, you can achieve a lower ex works/ex factory price and this will have a positive impact on the resting of the 'costing chain'.
OK, let's tackle the costing exercise
Thus in this section, we take you step by step through the typical costs that you will encounter in export markets. We begin
with the typical costs of manufacturing a product and then
we add the costs that you are likely to incur as you move
closer to your customer. These cost schedules are simply guidelines.
Every company, industry and different country may have
different costs associated with them. You need to ensure
that you have identified all of the costs associated with
your particular company, industry and target country. Careful and realistic
costing is a crucial part of the export process.