Post on 30-Mar-2015
Export Pricing“Bottom up” and “Top Down” Models(Cost Plus and Target Pricing)
by Günter Schranz
Export Pricing - why
Prices are depending on…
• Relative costs
• Demand• Competition
How to get the right price
* export literature, translation, freight forwarding, logistics, export packing, product modifications, packaging, labeling, compliance with foreign standards, insurance, credit checking, export documentation, export financing, charges and of an overseas staff training …
Relative CostsExport Costs*DemandCompetitionPrice
Relative CostsExport Costs*DemandCompetitionPrice
Relative CostsExport Costs*DemandCompetitionPrice
Some Pricing Strategies
• Bottom Up – Pricing applying the traditional „Cost Plus“ approach to get the right price
• Top Down – PricingTarget Pricing to become competitive at a given price level on a price sensitive market
• SkimmingGet what you can!
Bottom Up - Pricing
• Export Price is calculated on base of domestic price
• Cost for export is just added to domestic price
Pros & Contras ?
Bottom Up - Pricing
Variation: Marginal Costing– direct cost of procuction and sales – fixed costs apportiond to sales volume
Conditions for Marginal Cost-Pricing– Stable Volumes– Marginal price is aplicable to new market
Marginal Costing may allow to find a moreagressive price on a competitive market
Bottom Up - Pricing (1/2)
Free On Board (FOB) % US$
Wholesale Price (EXW Named Place)+ Transport to carrier (airport, wharf)+ Customs clearance+ Additional packing/labor for transport+ Agent’s commission (Based on FOB price)
100+8+4+5
+12FOB (Named Place) =129
Cost and Freight (CFR) % US$
FOB Price (FOB Named Place)+ Sea/air freight charges to wharf/airport+ Sea/air document fees (Airway Bill, B/L)+ BAF (Bunker Adjustment Factor)+ Transport contingency
129+25
+8+2+2
CFR (Named Place) =166
Ex Works (EXW) % US$
Wholesale Price 100
EXW (Named Place) 100
Bottom Up – Pricing (2/2)
Carriage Paid To (CPT) % US$
CFR (Named Place)+ Cost for off-loading at destination
166+1
CPT (Named Place) =167
Cost, Insurance Freight (CIF) % US$
CPT (Named Place)+ Cost Insurance premium / agio
167+2
CIF (Named Place) =169
Delivery Duty Paid (DDP) % US$
CIF (Named Place)+ Import duty, taxes (% on CIF price)+ Customs clearance fees+ To door delivery
169+32
+5+12
DDP (Named Place) =218
Top Down - Pricing
• Calculate backward from a given market price to an EXW – price
• Compare with your EXW - price
• Take Actions:– Change / Develop your EXW price using such
tools as supply management, re-engineering, lean production, outsourcing …
– Go for other strategies, i.e. maximizing volumes, profit, market share
– Back out?
Top Down - PricingTrading Stage Price Per
unit (%)CalculationTip
Glass of honey at Dutch retail store 117Deducting VAT (here: 17%)* 17 117 – (117/1,17) Retail price excluding VAT 100 117/1,17Retailer Margin (52%)* 52 100 x 0,52 Retailer buys at / Importer sells at 48 100-52Importer Margin (Profit and Cost: here37%)* 13 48-(48/1,37)Importer buys at (including a 20% duty on CIF)* 35 48-13Duty 6 35-(35/1,2)CIF Price at Importer 29 35-6Deduct your fright cost 4 QuotationDeduct your insurance cost 4 QuotationFOB Price 21 29-4-4Deduct FOB cost 2 QuotationEXW Price ** 19 21-2*See local rates of target market** Deduct Broker / Agent commission if applicable
Export Costs
Problem:• Export costs are not always
calculable or known right from the beginning
• However it is crucial for the outcome to determine them as exact as possible
• Sometimes only export experience can help you out
Typical reasons for cost explosion
• Wrong trading terms applied or terms not understood => fright / logistical costs
• Packing (labeling requirements are not met• For any reason: Last minute product
modifications / last minute product adaption => additional, not calculated costs
• Wrong /incorrect / incomplete documentation
• Unforeseen delays (check reason for delay: document / certificate / label?)
Also have a look at…
• Fixed or variable costs are changing after accepting an order
• Currency changes - cover foreign exchange risk
• Rapid change of market prices – forecasting
• Changing conditions: legal / state of the art / other requirements
Assignment
• Prepare a price analysis for your company• Use quotations & calculation tables as
tools• Give recommendations on actual pricing• Prepare small presentation