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