Taxes and regulatory costs

Apart from customs duties levied on goods coming into a country, additional costs (e.g. fees for import certificates and for other administrative processing) purchasing or excise taxes which apply to various categories of goods, value-added or turnover taxes which apply as a product goes through a channel of distribution, as well as retail sales taxes, all of which serve to increase the final price of the goods.

The cost of inflation

In addition the effect of inflation on the cost of the goods should not be ignored. The selling price should always be related to the cost of the goods sold and the cost of replacing the items concerned. By selling goods in foreign markets below their replacement cost, you may be better off not exporting at all. Inflation becomes an important consideration when payment is delayed by several months or where credit extended over a long-term contract.

The cost of exchange rate movements

Many South African companies have experienced heavy financial losses because of adverse movements in exchange rates. Of particular concern to the exporter should be those areas of exchange risk that they cannot cover forward. For example, where freight rates are given in US dollars, the exporter needs to ensure that they are covered if the rand weakens. Worse still, should the rand strengthen significantly between the time of accepting an order and the actual date of shipment, the exporter could be providing the customer with an unexpected discount.

For these reasons, it is important that every exporter have some knowledge of exchange rate trends and can adjust the rates used for currency conversions accordingly. (This additional cost, however, may have a detrimental effect on price competitiveness.)

An easy form of protection would be to quote all export prices in South African rands. However, from a marketing point of view, this would be unwise. Importers usually prefer all quotes to be in their own currency or US dollars. Firstly, they can easily compare the offers of various foreign and national suppliers and, secondly, they may be equally concerned about the exchange risk, particularly if their own currency is susceptible to devaluation or appreciation.

Another form of protection is to stipulate in the export quotation that the quoted price is subject to alteration depending on exchange rate fluctuations. This solution, however, is seldom acceptable to the buyer.

The cost of channel length

The length of your channel of distribution can have a considerable impact on the final export price. Apart from the various intermediaries who will be marking up the product, a lack of standardisation in respect of such mark-ups makes it very difficult to assess their actual contribution to the final price. Often, intermediaries will use higher wholesale and retail margins for foreign goods than for similar domestic goods.