Reviewing your earlier pricing analysis
As part of your export research undertaken in step 7 of the 21-step export process, you would have undertaken an export price analysis. This price analysis started with an assessment of the demand and competitive situations in the target market and would have resulted in you establishing an estimate of a market-related price for your product(s), taking these demand and competitive situations into consideration. In addition, your analysis would have attempted to identify all of the costs you would likely incur in marketing and distributing your product to your target market, as well as the costs that your customer and other intermediaries would incur in getting the product to the end consumer.. This price analysis would have formed an important section in your export research report. Your findings would now serve as a key input into your pricing strategy.
As part of your preparation of an export pricing strategy in your export plan, you would summarise the findings of your price analysis that you presented in the export research report. The findings would be used to calculate an export price and to guide your export pricing strategy.
Work backwards to a quick estimate as to your price competitiveness
As a quick rough guide to determine whether your current ex factory pricing that you use in your domestic market is viable or not, it is suggested that you working backwards from the market price to a base (or ex works or ex factory) price. The various intermediary costs associated with transport, inland distribution, storage, import duties, agent's commissions, taxes, etc. must be subtracted from the market price (which you have just identified above). These are the costs that you would have identified as part of the price analysis undertaken in step 7 of the export process.
In addition, you also need to subtract your expected promotional costs, travel abroad, international communications, spoilage, cost of credit terms, spoilage and returns, servicing costs, and minimum profit margins that you require. Once all of your 'export-related' costs have been accounted for, you should be left with a base (or ex works/ex factory) price referred to above. You would then compare your actual current ex factory price for domestic sales with this base price that you have now just calculated. Hopefully, your ex factory price for the domestic market will be much lower and you will feel excited that you can compete on price in your export market. However - unfortunately - this is unlikely to be the case. The chances are more likely that your current ex factory price will be higher (if not significantly higher) than the base price you calculated in this exercise.
This exercise highlights pricing problems or opportunities
If your domestic ex factory price is lower than the base price you calculated from the anticipated market price, then you can confidently continue with a more formal costing and pricing exercise in the next step of this pricing process, knowing that your prices are "in the ball park" and that you are able to compete on price in your export market(s). If, on the other hand, your domestic ex factory price is considerably higher than the base price you have estimated, you need to undertake a very careful costing exercise in which you think long and hard about the costs involved and how you can reduce them or whether you can possibly get away with increasing your export pricing. Remember, though, if you are entering a new market, there may not be much opportunity to increase your export prices as foreign buyers are not likely to be so accommodating to the "new kid on the block".
Why do I have to do two 'costing' excercises?
In the next step towards of this export pricing process, you are expected to undertake a formal costing exercise. Why then do you need to do this backward costing exercise proposed above? Well, price is such an important element of the marketing mix, that you need to give it a lot of consideration. This backward calculation is a 'quick and dirty' exercise intended to determine whether you face a pricing problem or pricing opportunity. This knowledge should help guide you in your formal costing exercise in putting emphasis were it is needed most. If this quick backwards calculation indicates that you face pricing problems then you might think differently about certain costs that you plan to incur - you may decide to travel abroad less or make use of online marketing to generate business, instead of placing an expensive ad in a trade magazine, for example.
This backward costing should not take you too long and can be done quickly and roughly; it simply puts your pricing and costing into the right perspective. In fact, pricing is so important, we expect that you will need to review your costing exercise several times bfore you make your first export sale.