One of the most challenging issues for exporters is pricing their goods to optimize profits and sales. Companies often ask me if there is an X factor or a multiplier that they should apply to domestic prices to compensate for the additional costs of exporting.
Unfortunately, it’s not that simple. A company needs an astute sales and marketing team that understand and can compensate for the hidden costs for selling a product in a given market.
By simply multiplying domestic prices by an X factor, you run the risk that the multiplier is too high so your products aren’t competitive. Or, on the other hand, your multiplication factor may be too low, and your price doesn’t adequately cover additional costs. In this case, your company’s export sales may not generate enough profit or may even create a net loss.
Export Pricing Objectives
Export pricing is a balancing act. On one end of the lever, exporters needs to price their products attractively enough to expand sales. On the other side of the lever, they need to price their products high enough to maximize profit.
These two objectives are dynamic and require constant vigilance based on observance and feedback from the marketplace. Reps, customers, trade associations, and competitive price movements are the primary sources for this feedback.
Export Pricing Strategy
A good strategy used by veteran sales person is to create more than one price list.
A successful small exporter recently stated that he uses several official price lists. His U.S. price list is his calculating basis. From this base, his export price lists are customized and dedicated to a particular country or region. However, he cautions: “Do not under-price a product or you may face dumping charges.”
Another old hand tells his young sales people: “Never give an overseas customer, rep or agent your domestic price list. You should only provide a price list customized for that particular market.”
For example, his official price list for China is approximately 30% inflated over the U. S. domestic price list. This savvy exporter projects additional costs of selling in China to be 8.2% higher than domestic costs. The Chinese expect to negotiate lower prices from whatever your initial offer. His China price list includes a negotiating cushion that enables him to potentially concede up to 20% and still meet or slightly exceed profit on domestic sales.
Export Cost Considerations
There are two types of costs that need to be added to the export price structure:
1. Direct Costs
These include expenses such as product modifications or changes for a particular market, special labeling for a foreign market, and translation costs.
2. Indirect Costs
These include such things as higher telephone bills, higher travel costs, and staff costs to prepare export documents.
Do not confuse these direct and indirect product costs with the costs of getting your goods to market. Expenses such as export packing, freight and insurance should be itemized separately from product costs.
If you lump all costs together and provide a single price, you may potentially elevate your product offer so that you appear to be overpriced. Savvy competitors will take advantage of your higher single price. Customers also leverage a single composite price as a negotiating tool to request cost reductions.
Be sure to treat export pricing as a major consideration in your overall business planning and strategy. This will pay dividends and create a stronger export department.