The need for a formal costing process
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.