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This section deals with pricing for international sales, choosing the terms of sale, preparing the Pro Forma invoice, choosing terms of sale (normally known as "shipping terms") and setting payment terms.
Preparing Price Quotations
An export transaction starts with a price quotation on your product. Potential international customers will request such a quote from you and will consider it legally-binding. Knowing the details behind preparing a quotation'scontent and form, then, can save you time, money, and future headaches.
Each menu item below contains vital information about how to set prices on your exports. Much of what you learn in one section integrates with the others. Altogether, you should gain a fuller picture of international pricing strategies and gain some helpful tips and tricks along the way.
What is the demand for your product?
The answers to this question tell you how much the market will bear for your product or service. It gives you an idea of how much your buyer is willing, or able, to pay. You will also find out if other products like yours are already being sold in your chosen foreign market and how to better compete in the marketplace.
Once you decide your target location, you will want to find out what affects its market demand as that relates to your product.
Some Things to Find Out
- The Market's Ability to Pay. What is the economic status of the country? Are you selling to an industrialized nation or emerging market? What is the country's per capita income? Per capita income is a good way to gauge a market's ability to pay. For most industrialized nations, per capita income is comparable to the U.S. If you are selling to a market with a lower per capital market, you may need to modify your product to reach a competitive selling price.
- Consumer Needs and Desires. Does your product provide consumers with something new in the marketplace? Is your product something they want? In some cases, a product may be in high demand because it is unique, popular, trendy, or a name brand. With these types of products, a low per capita income may not matter in setting prices.
- Competition. How much do your competitors charge for a similar product? How many competitors do you have? What other foreign countries are you competing against? Is a similar product already produced in the country you are entering? If your product has many competitors, you may have to match, or lower, the going price to establish a market share.
How to Investigate Market Demand
- Contact overseas distributors and agents who deal with products similar to yours.
- If you can, visit the area and gather market information first-hand.
- Use the U.S. Commerce Department's (DOC) "Customized Sales Survey" as a price source. It includes information the DOC gathered from local importers, distributors, retailers, wholesalers, end-users and producers who serve in areas where you may be looking to market. You can also pay the DOC for a customized report which supplies prices on comparable products sold in the country of your choice
.
- Register your Quality Assurance program with the standards of the ISO 9000 (International Organization of Standardization). Membered by 90 countries, this organization sets guidelines on how to manage the quality assurance programs of internationally sold goods. You can use it as a competitive marketing tool that helps your company with your buyer's ISO 9000 requirements. Find out more about ISO 9000 at ISOEasy.
Pricing For International Sales
Pricing your product for competition in a foreign market can be a complex process requiring knowledge and skill. You will want the price of your product high enough to make your company a reasonable profit, yet low enough to accommodate each overseas market you seek. Pricing may become your greatest challenge, as international prices and consumer needs fluctuate, market-by-market.
Before setting a price on your product, you will want to find the answers to these questions:
- What is the demand for your product? Smart exporters understand their market before entering it. Gather as much information you can concerning its local customs and prices so you can better compete in the marketplace.
- What are your company's foreign market objectives? The price of your product is essentially tied to what your company hopes to accomplish by its international sales business. Once you know your aims, you can gauge prices to meet the needs of your company while accommodating the demands of your market.
- What are your product's costs? Costs of exporting goods may include charges that stagger the uninformed. It pays, then, to have a clear idea of those costs and of what it takes to be a shrewd cost bargain-hunter. What you need is an insightful glimpse at measuring costs.
No magic formula exists for setting prices on international sales. But, being educated about the converging factors included in international pricing strategies can increase your company's profit.
Your Company's Foreign Market Objectives
What you hope to accomplish by exporting your product plays a big part in deciding the price for your product. Those same goals can help determine which method, or combination of methods you will use to calculate prices for exported goods. The two principal methods of calculating product price are Cost-Plus and Marginal-Cost pricing.
Pricing Methods: Cost-Plus vs. Marginal-Cost
Cost-Plus
This method looks easy, but be careful. The Cost-Plus accounting rationale revolves around maintaining the domestic profit margin. It uses the domestic price as a base price, adds export costs, and deducts any domestic marketing costs from the total. You may run into trouble with it, as variable costs connected with marketing in a foreign land are not taken into account. As such, your price may end up too high to compete in your foreign market. Cost-plus calculations look like this:
Domestic Price
+ Export costs
- Domestic Marketing costs
= Price on Product
Marginal-Cost
The Marginal-Cost method sets a "floor price" based on fixed costs, variable costs of foreign marketing, and profit. Floor price marks the point at which your company starts taking a loss on the sale of its product. Some deem the marginal-cost method a more realistic approach to setting product prices. Floor price is calculated thus:
|
Fixed costs =
Production costs
Overhead
Administration
Research & Development |
+
|
Product modification costs =
- Special labelling, translated instructions required under
regulations.
- Foreign market research
- Advertising and marketing, promotion
to establish product recognition in the
new market
- Translation, consulting and legal
fees for translating documentation
- Company in-service training for
foreign distributors/agents
- After sales service warranty costs
- Direct costs (freight, insurance,
handling)
- Tariffs
| |
+
|
Unexpected variable expenses:
- time cyle of export sales
- change in supplies or components
- complications in filling orders
- risk coverage in case of payment default
- extra sales and administrative costs
|
| + | Profit Margin (usually 12-15%, depending on financing
and credit terms) |
| = | Floor Price |
Pricing Options
You may want to set a price range for your product, predicated upon the specific customer level you want to capture. Positioning your product or service at the upper end of the market can call for a higher price. Using a moderate price will lower your risk factors. Pricing at the lowest range is possible when you want to reduce inventory and do not have a long-term commitment to your market area.
Always price your product in U.S. dollars terms to avoid currency exchange risks. This should be clarified in all financing agreements as well as on your pro forma quotation. (You will learn more about Preparing a Proforma Invoice later in this section.) At the same time, be aware that currency fluctuations in a foreign land can affect your price at anytime.
The examples below will shed some light on how your business objectives can influence your foreign marketing plan.
- Breaking Into A New Market. If you are trying to break into a new market where the competition is fierce, you should adopt a pricing plan that adjusts your price to beat the competition. In some instances this may mean lowering your price to gain a long-term market share. You may need to sacrifice profit in the short term to reach long-term goals.
- Increasing Your Market Share. You may need to set your prices slightly lower than the competition to do this. Cutting your marketing costs may be the way to go. Another way to allow you to drop price is to cut your freight costs.
What Are Your Product's Costs?
Earlier you learned how your company objectives factor in designing your marketing and pricing schemes for international sales. It was also mentioned that before you can begin your campaign, you must be able to quote a competitive price on your product. Costs, fixed and variable, need to be calculated within that price. As previously stated, the two principal methods of calculating product price are Cost-Plus and Marginal-Cost pricing.
Be a Good Cost Shopper: How to Shrink Costs
You say you have those cost+ blues? As you can see, keeping a careful watch on cost accounting can mean the difference between black and red in this business. It pays, then, to know how to shrink costs. Just knowing what they are could be the first step toward lowering them.
Incidental charges of Freight, Insurance, and Handling include:
- Warfage/dock fees
- Handling documentation
- Breakage, moisture damage, and other loss.(Hiring a good export packer can save you money. Get a referral from a reputable forwarder.)
- Legalization fees
- Inspection fees
- Courier charges
- Harbor maintenance
- Agent commissions
- Bank charges
- Collection costs on letters of credit, like credit insurance costs, if needed.
Note: Clarifying the terms of credit up front will save you pressures later. Be sure to check your customer's credit references. You also may consider adding contingency insurance in case your buyer's coverage is inadequate or non-existent.
Be sure to consider costs which may occur after the merchandise is unloaded on the destination dock. Establish ahead of time, by agreement between you and your buyer, who will pay these landed costs:
- Consular
- Certification
- Documentation fees.
Cost-Saving Strategies on Freight
Another way of cost-savings is to know where to find those savings. Freight-shopping is one place to look.
- Freight carrying costs calculate on actual weight or volume weight of your product, whichever brings the highest price to the shipper. Depending on what mode of transport you use, other factors may come to bear. Remember to factor in the weight of the pallet used to transport your units.
- Investigate drawing up a multimodal transport agreement. This document allows for the continuum in process loading and unloading within the different modes of travel (truck, ship, air). It affects transport from the point of origin to off-loading in a foreign port. This type of agreement can append a Landbridge or Micro Landbridge agreement to bring your products into inland destinations.
- Check with other exporters in your field to find out their means of transport. The use of a shipping association could mean a savings if you are willing to negotiate rate on volume.
- Have you accounted for domestic freight costs? Domestic rates can skyrocket due to routing problems if complicated by transporting oversize loads. The maximum truck load limit is 44,000 lbs.
- The most common mode of transporation for overseas goods is by waterborne vessel. Sometimes you will need to factor in terminal and bill of lading fees, but you can also save money by find the lowest rates provided by carriers. For instance, some carriers will offer flat-rates per container transport.
- Using correct containers can make a difference in shipping charges. Check with the carrier for exact dimensions and weight allowances to find how many items to load in a container.
- If you need to transport a less than container load (LCL), a reputable Non-vessel Operating Common Carrier (NVOCC) can provide you with forwarder services as well as offering competitive space rates on smaller loads.
- Air shipment may seem like a good way to get your product to its destination. Keep in mind air freight costs will vary according to (a) tariff classification, (b) competition in routing, (c) space availability, and (d) the forwarder's willingness to share commissions. You may find air freight your best choice, weighing time gain against costs. Make sure you check container rates for air carriers. Also, have you considered the maximum allowable weight?
Gaining Incremental Sales
If you want to spread overhead costs out over a long period of time or minimize seasonal fluctuations, your goal may be to increase sales in a steady, constant manner.
Selling Excess or Obsolete Inventory.
You may need to unload accumulating inventory. Many companies view foreign markets as secondary markets for just this purpose. Your price should go low for a quick sell.
Building a Network of Distributors.
By having distributors and agents in your target market, you are more apt to achieve long-term growth and market penetration. To allow distributors to compete effectively, you may need to lower your international price. However, keep in mind, having local distributors and agents could necessitate the need for company training programs, an added cost to the company.
Terms of Sale
Why are Terms of Sale Necessary?
Sometimes called "shipping terms," "incoterms," or "international trade terms," the terms of sale establish the contractual obligations of the seller and the buyer under the price quotation and sales agreement. They distinquish in abbreviated form who is responsible for certain costs at the time of "transfer of risk," who holds ownership when and where the goods will be delivered.
Take note that as seller, you may be still held responsible for any goods that get damaged in transport depending on the mutual financial arrangements for payment.
Terms of Sale for domestic transactions differ from those for international transactions. When you are quoting internationally, international and domestic terms of sale can have different meanings. As a matter of good customer relations and in your own self-interest, you should ensure you and your buyer fully understand the extent of the terms used before shipment your goods.
Definitions of Terms The terms you use will be contingent upon many of the factors you have previously reviewed. When choosing terms you will want to consider the relationship you have with the buyer and the economic and political climate of the exporting country. The table below defines the most widely used terms.
| Term |
Definition |
Risk |
Cost |
Include on the
Quotation |
EXW
Ex Works |
Buyer arranges for pick up of goods at the
seller's location. Seller is responsible for packing, labeling, and preparing
the goods for shipment on a specified date or time frame. |
Buyer
assumes all risk. |
Buyer pays all transportation costs. |
N/A |
FCA
Free Carrier |
Seller is responsible for costs until the buyer's named freight carrier
takes charge. |
Seller and Buyer |
Split |
N/A |
FAS
Free Alongside Ship (over water only) |
Buyer arranges for the ocean transport. Seller is responsible for packing,
labeling, preparing the goods for shipment, and delivering the goods to the
dock. |
Seller: until the
goods reach the dock.
Buyer: from dock to
destination |
Buyer: all ocean transport costs. Seller is
responsible for costs associated with transporting the goods to the dock. |
Cost of transporting goods to the
dock. |
FOB
Free On Board (over water only) | Seller
arranges for ocean transport of the goods, preparing the goods for shipment, and
loading the goods onto the vessel. The goods ship ocean freight collect. |
Buyer: once the items are on board. | Seller: wharfage
(charges to load the goods onto the ship) and freight forwarder fees. |
Costs, until on board. |
CFR
Cost and Freight (over water only) |
Seller has the same responsibilites as when shipping FOB, but shipping costs are prepaid by the seller,
instead of shipping collect. |
Seller: assumes the risk until the shipment reaches the overseas dock. |
Seller: costs of freight fees up to destination. | Add Freight to cost of product. |
CIF
Cost, Insurance, and Freight (over water only) | Seller has the same responsibilites as
when shipping CFR with the addition of including a marine insurance policy. |
Seller: until the shipment reaches the overseas dock. |
Seller: insurance and freight forwarder fees. |
insurance, freight, and costs of goods. |
NOTE: This listing is meant only as a brief introduction to terms. It by no means spells out all the obligations under each term. For details on all terms of sale, definitions, and concurrent ICC recommendations, you can purchase Incoterms 1990.
Other terms you'll want to know:
Multimodal
Transport |
Air
Transport |
Ocean
Transport |
Rail
Transport |
EXW
FCA
CPJ
CIP
DAF
DDU
DDP |
FCA
|
FAS
FOB
CFR
CIF
DES
DEQ |
FCA |
Preparing a Proforma Invoice
Sellers are often requested to submit a pro forma invoice with or instead of a quotation. Pro forma invoices are not for payment purposes but are essentially quotations in an invoice form, hence the origin of the latin word "pro forma" which means "in the form of" in Latin.
These invoices serve as models the buyer can use when applying for a license or arranging funds. You will need to detail your invoice carefully, since your buyer may construe the information within in it as a legally-binding offer you make. In fact, as a matter of good business practice, you should ensure your buyer can calculate all costs from the proforma. One other consideration to take into account are variances in requirement demanded by the destination country. You should include a pro forma invoice with any international quotation, regardless of whether it has been requested.
NOTE: Invoices should be conspicuously marked "pro forma invoice."
Sample Pro Forma Invoice
Definitions
PRO FORMA INVOICE
Sellers are often requested to submit a pro forma invoice with or instead of a quotation. Pro forma invoices are not for payment purposes but are essentially quotations in an invoice form. Much of the information included within your proforma may be construed as legally binding. IT IS IN YOUR BEST INTERESTS TO CLARIFY ALL TERMS OF SHIPPING AND PAYMENT BETWEEN YOU AND YOUR BUYER BEFORE PRESENTING YOUR PROFORMA INVOICE.
FROM
The address and phone number of the seller.
DATE
The date the invoice was prepared and sent.
Reference No.
The buyer's reference number on the letter of inquiry.
Payment Terms
How the buyer is required to pay for the goods. Consider the risks associated with each term before choosing one.
Country of Origin
Country where goods are produced and sold.
Estimated Date Of Shipment
Usually 45, 60, or 90 days from the date the order is placed or the letter of credit is recieved. Consider how long it will take to buy materials and produce tscription
A specific and detailed description of the item so that the buyer knows exactly what they will be receiving. Include cubic volume in your description.
Unit Price
The price of one unit of the item.
Total Puct into a foreign market requires a blend of careful strategies. You will need to consider all you know about costs, documentating to the conditions of sale, insurance policies, meeting regulatory requirements, and packaging to make your export experience a successful venture for all concerned. Navigate the categories below to find out how to transport your product successfully.
- Freight Forwarders
Freight Forwarders are international shipping specialists who you can hire for advice or assistance. They can also direct you to places where you can find answers.
- Documentation
Accuracy and attention to detail are key here. Mistakes in documentation can lead to problems or delays in receiving payment.
- Packing and Labeling
Your shipment will travel far through several modes of transportation, be jostled, and stored in several locations along the way. Customs agents will check marks to verify your product meets with foreign regulations.
- Insurance
Your shipment is subject to many hazards, such as damaging weather conditions, and rough handling by carriers during its transport to the buyer. Insurance can protect you from such hazards.
Freight Forwarders
Every exporter has at one time or another used the services of a freight forwarder. A good international freight forwarder can save you time and money through its contacts and experience.
While it is always good practice to keep track of your own export transactions and recheck the process, your freight forwarder can act as your agent to move your cargo from origin to destination. Many smaller sized export companies, in fact, consider the freight forwarder the external shipping department to the company, essentially their travel agent for all export products.
The forwarder can act as adviser, stategist, even freight carrier and can arrange for payment on goods. Who you choose as your freight forwarder, therefore, is an important decision to make, one that can effect the profit margin of your foreign sales.
Roles of the Freight Forwarder
A good freight forwarder knows every aspect involved with getting your product overseas and collecting on your goods. Review the activities below to see how a freight forwarder can help you.
Preparing Price Quotations. A forwarder can help prepare your price quotation
by finding the direct and incidental costs to factor into your quoting price.
More importantly, a forwarder knows if and where to look to negotiate the best
prices on these costs. Some of the costs a forwarder can determine are:
- Packaging
- Freight
- Handling fees
- Freight forwarding fees
- Insurance
- Duties
- Port charges
- Consular fees
- Special documentation
Handling and Transportation. Improper packaging and labeling can mean disaster
for your export scheme. Using the incorrect modes of transport can dwindle profits
and waste precious time. A good freight forwarder can provide valuable assistance
and advice to lower your risk and bring those odds on disaster to minimum.
Even though you are ultimately responsible to see performance under your transportation contract, a freight forwarder can lead you to the shortcuts. While each forwarder may specialize in one area more than another, the list below lets you know the many tasks in which a freight forwarder can assist you:
- Act as shipper's agent under a power of attorney.
- Advise on different methods of shipping, routing, and modes of transport.
- Advise on best packaging for you product.
- Arrange for packing, marking, and containerizing your goods at the port.
- Research and negotiation for the best rates with carriers.
- Book shipments on vessels and aircraft.
- Arrange for loading and unloading of your shipment at the port.
- Oversee on-loading procedures.
- Issue delivery orders.
- Arrange for insurance.
- Arrange for receipt of Bill of Lading or waybill.
- Track shipments and see them through customs.
- Obtain consulate, legalization, and certification documents from the destination country.
- Arrange for warehousing or delivery to buyer's location.
- File damage claims with carriers or insurance companies.
- Prepare documents for collection of payment under the letter of credit.
- Provide messenger services.
Regulations. As an exporter, you must know the pertinent laws and regulations
of both the U.S. and your buyer's country. It is a part of the freight forwarder's
business to know those governing regulations and how to obtain U.S. and foreign
licensing. You can find the freight forwarder's assistance invaluable at the
time you apply for such licenses and to ensure you meet the criteria subject
to the law of each land.
Documentation. A freight forwarder can ensure you have all the documents your
shipment requires to successfully complete your export transaction. Your freight
forwarder can:
- Assemble all required documents.
- Prepare export declaration documents.
- Prepare consular invoices and legalizations.
- Prepare bill of lading.
- Prepare collection drafts.
- Review documentations for accuracy and to make sure all is in order.
- Ensure that goods comply with customs export documentation regulations.
Depending on the control you want over each shipment process, you can arrange with your freight forwarder to draw up each document subject to your approval before proceeding.
Getting Paid. Your freight forwarder can assist you in receiving payment as
quickly as possible. First, by reviewing the letter of credit to see if the
terms can be met; and second, by forwarding your documents to the bank for collection.
Do You Need a Freight Forwarder?
Consider the distance, handling, and cultural exchanges your product will make when deciding whether you need a forwarder. As a rule, you are better off allowing a freight forwarder to handle larger and more complicated shipments. Ask yourself the following questions to help guide your decision.
- Is the size of the shipment large or small?
Small shipments require less detail to intricate shipping procedures. Large shipments necessitate more documentation and closer detail to cost-effective means of packaging, shipment arrangements, and handling.
- Is your shipment of high value or low value?
Shipments of lower value require less complex payment methods. Shipments of higher value usually require making arrangements for payment and drawing up special documents to correspond to the financing agreement.
- Is the delivery date a condition of the terms of the export transaction?
If so, an experienced freight forwarder can determine the best way for your shipment to arrive on time.
- Are there unusual circumstances involved with your shipment?
Perhaps you will be dealing in shipments of non-typical material characteristics. Examples of such are over-weight shipments, requiring special packaging, controlled substances subject to special shipping, regulations and documentation. A freight forwarder will know what you need.
- Is the foreign market you are entering susceptible to trade barriers?
If you are an inexperienced exporter, a freight forwarder can guide you in the best ways of entering a foreign market that imposes trade barriers or restrictions.
- Does your company have an experienced shipping department?
If you company is large and you have established a shipping department, you may not need the full services of a freight forwarder. On the other hand, many smaller companies consider their freight forwarder as their own shipping department.
- How frequently do you ship to certain destinations?
If you are shipping to a specific destination frequently, you may be able to set up standard procedures for preparing documents and arrange for shipping in-house. Keep in mind you will need to stay apprised of changes in export regulations! If you ship to particular destinations infrequently, the use of a freight forwarder may be less costly than arranging for shipment yourself.
- Can you afford a freight forwarder?
Although freight forwarders are relatively inexpensive, you may be able to find better shipping rates on your own.
*Source: Fast Track Exporting by S. Renner and W. G. Winget.
Finding a Freight Forwarder
The following resources can help you locate freight forwarders.
Choosing a Freight Forwarder
Using the right freight forwarder can save time, money and establish a more competitive base for your product. Using the wrong one can send you in the opposite direction. If you've decided you could use the assistance of a freight forwarder, you must find one that suits your needs. This section covers the criteria for determining if the freight forwarders you select are appropriate for your type of product and the shipping destination.
Some forwarders are more familiar with certain aspects of trade than others. Therefore, it is a wise business decision to interview each forwarder focusing on the following questions. Consider each before choosing which forwarder to use.
Does the freight forwarder:
- Have an office near your shipping port?
- Have experience handling your type of product and shipping to your market?
- Have experience with the type of carriers you require?
- Have a good credit rating?
- Have favorable shipping rates and delivery schedules?
- Receive good recommendations from carriers?
- Belong to a professional association or organization?
- Have expertise shipping to your buyer's country?
- Have a reputation for friendliness, competence, efficiency, reliability, cost-effectiveness, trustworthiness, and using fair business practices?
Is the forwarder bonded and licensed by the Federal Maritime Commission or
Cargo Network Services?
Freight forwarders must be bonded and licensed through the Federal Maritime Commission (FMC). In fact, they are regularly audited by the FMC. Many air freight forwarders belong to a Cargo Network System or Civil Aeronautics Board. Some forwarders specialize in both air and ocean shipments or may act as a Non-vessel Operating Common Carrier (NVOCC), a freight consolidator.
Are the forwarder's fees reasonable?
Fees for freight forwarders can fluctuate with the value of shipment, subject to negotiations and commissions on freight rates. Certain forwarders receive commissions from shipping companies for selling cargo space if qualified as a NVOCC. The negotiated savings can be passed on to you as a part of the priority and rates established on the forwarder's volume shipment. Certain out-of-pocket expenses, such as messenger fees, telex and telephone, direct overhead, etc., are billed separately.
Be sure to find out what services are free of charge. Are there documents you can prepare yourself to defray costs? Find out what the fees are for preparing documents such as pro forma invoices, commercial invoices and packing lists.
For the most part, freight forwarders are independent businesses competitive in rates and scope of services. Taking bids> from forwarders from time to time gives you a chance to compare pricing in the industry.
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