Deciding on an export price – the price that you will sell your product(s) at
Establishing an export price is about covering costs, ensuring sales and generating profits. The long-term objective of pricing setting is to achieve sufficient volumes (i.e. numbers of units sold) to ensure maximum profits after all costs have been covered. Setting a high price could limit the volume of goods sold, whereas a low price might increase volume but could have an adverse effect on profits.
As a rule, the total cost of exports (which include the cost of designing, developing, producing, packaging, distributing, marketing and servicing the products), plus a minimum required profit (also referred to as a ‘profit margin’ or just ‘margin’), should be used to set the lower limit on the price. The upper limit of the price will be that price above which the company cannot remain competitive and it is determined by the potential value that customers place on the product and the amount of money that they are prepared to pay for it. Often, this value will depend on the circumstances of the buyer. For example, a moderately priced household product may be considered too expensive by parents with considerable family commitments. On the other hand their son, who has a lower income but no such responsibilities and who pays no more than a nominal contribution towards board and lodging, may consider the same product to be cheap and good value for money. Similarly, a dishwasher may be considered an essential purchase by some consumers, but regarded as a luxury by others.
The impact of the export price on export/sales volumes
Generally, the higher the price the lower the quantity of the product that will be purchased (i.e sold). However, the impact that a particular price will have on sales volumes is determined by a number of factors beyond price, including:
- The supply of competing products
- The current price of competing products
- How the competition reacts to being undercut (or, alternatively, how they react to a higher price than its own being set)
- The nature of the market segment the company has chosen as its target
- How the buyers in this market segment react to the price
- Competitive advantages which the product might have, e.g. high quality, unique features, a favourable image in the market place, etc.
Price setting does not happen in a vacuum
Within the range of prices permitted by the market place, the competition and various government regulations, the exporter is responsible for setting and attempting to control the actual prices of the goods traded in different markets. The challenge is to arrive at a selling price that will enable all costs to be recovered and that will provide the best possible return on the investment made and the risks being taken. To achieve this goal, an image for a product must be projected that focuses on value-for-money and once customers have decided to purchase, a marketing strategy must be used to convince them that their decision was a sound one.
Export price competitiveness
You have now decided on an export price, but will this price work in the marketplace? Your next step is to check the competitiveness of your export price in the target foreign market. You would do this by comparing your export price with the market-related price you identified in step 1 of the export pricing process.
If you find that your price is too high, you must decide whether your product quality, design, uniqueness, promotion, etc. will offset this higher price (this is unfortunately seldom likely to be the case, especially for a new exporter). If you still consider this price to be too high, you may consider alternative ways of reducing it, perhaps only temporarily, in order to get a foot-hold in that foreign market. Some of the ways in which you can reduce your price, include:
- Accepting a lower profit margin
- Recalculate your costs to reduce the contribution allocated for fixed costs, or factory overheads – this technique, is referred to as marginal pricing, is possible only if the exporter has a substantial domestic market to pay for all the fixed costs.
- Revisit all of your cost items to see where you can reduce costs – click here to read more about cost reduction strategies
If you find that you cannot afford to lower your price, you may need to find ways to improve the attractiveness of the non-price features of your firm’s product offering e.g. use of a brand name, better design, higher quality, better packaging, better promotion, faster installation and other initial and after-sales services.
If you find that your product is priced lower than other competing products (may you be so lucky), you may decide to raise the price above what you have initially set.
Clarification ahead of time as to the discounts, rebates and promotional allowances you may be required to offer your agents or distributors is also important, because, the cost of these items must be included in the calculation of the export price. You should also keep in mind that you might want to have the flexibility to offer a lower price, better credit, on more favorable delivery terms to attract special customers. So the cost of these concessions also need to be built into the overall export price.
At this point, you have done everything necessary to prepare an export price strategy for your export plan. The steps that follow really have more to do with implementing this strategy (and will be revisited in step 10 of the 21-step export process). Nevertheless, we also discuss them here, because it is often difficult to distinguish between planning and implementing when it comes to price setting!
Your export price is seldom the final selling price in the marketplace
This is a very important issue. In the case of many products – especially consumer products – is likely that you will be selling your exports to an intermediary – perhaps an importer, distributor, wholesaler or retailer. This intermediary may then sell your products on to other intermediaries who eventually sell the product to the final consumer. But not before having added a whole host of additional costs (such as transportation costs and commissions) to your export price. Depending on what basis you sold your products to your customer, they may have to still pay the import duties and other costs to clear the goods through customs (assuming that you agreed that the importer – and not you – would take care of these costs). This will inflate your export price quite considerably and the final selling price to consumers may be a lot higher – even double or more – than your export price. You should not assume your export price to be the final selling price and you must take these additional costs into consideration when comparing your final selling price with the market-related price you identified from your export research – see step 1. If you do not, you will not be comparing ‘apples with apples’ and you may find yourself priced out of the market. Of course, it is fair to assume that your initial buyer (i.e. not the final consumer) would not have bought from you had (s)he not thought it possible to sell your products on to these other intermediaries and to the final consumer for a profit! Still, you need to know what your consumer is ultimately paying for your product as this affects your competitiveness. Based on this knowledge, you may decide to reduce the number of intermediaries in your distribution channel, thereby reducing your final selling price and ensuring greater competitiveness for your product. Let’s move on to the next step in the export pricing process.