Starting an export business can be both exciting and scary. It is exciting due to the potential revenue a company can gain from having a global market reach, but scary due to unaccounted cost of selling a product internationally.Pricing a product for export also has to take into consideration the local market demand, and the range of prices of the exported products; a daunting prospect. Here in this blog post, we list down 12 key considerations on how to price a product for export.
To ensure an export business continues to be sustainable and profitable, one must be acutely aware of all the manufacturing costs, marketing costs, financing costs, duty costs, and the logistical cost. After taking into account all the hidden costs in international trade, a net profit is key to a sustainable business. Therefore, having the exact cost estimation before rushing into the export business is crucial.
1. Credit Facility Costs
The key differentiators between a manufacturer and the distributor are: –
- Customer Service and Quality Control
- Credit Facilities Provided
If you wish to jump aboard the export business, but do not have a manufacturing facility to produce the products you wish to sell, you have to be aware that the clients will request for facilities that otherwise a manufacturer cannot provide.
If not, there wouldn’t be any value added benefits for a purchaser to engage in a trade with you.
It is compounded by the fact that the world is getting smaller; manufacturers are gaining more access to the international market with the like of Alibaba, Amazon, or any other business matching platforms online.
Hence, one of the ways a distributor can contribute to add value to the purchaser is to extend a credit facility. Most importantly, credit facilities come at a cost.
This is especially the case when the distributor does not have enough cash to fund product purchases to sell or even have a credit facility with a manufacturer. This is quite common especially when a distributor is relatively new in the market.
The cost of a credit facility is then apparent when the distributor seeks for external funding, such as: –
- The export invoice financing facility
- Opening a credit facility with the bank such as a bank draft
- Business loan application
For all the listed examples above, there is an applied interest rate for the amount financed. The longer period facility will have a higher financing cost due to the compounding effect of the interest rate on the amount outstanding, just like a credit card.
You must take this financing cost into account when pricing your product for export.
2. Methods of Payment in International Trade
International fund transfers also come at a hefty cost. Regardless of the mode of transfer, the remittance intermediaries will charge a nominal fee for its services, albeit a fixed amount or a percentage of the amount traded.
Let’s look at a few instances of international fund transfer: –
- Letters of Credit
- Bill of Exchange
- Wire Transfer
Letters of Credit, Bill of Exchange and Wire Transfer
When a new trade partnership is formed, there is inherently less trust between the buyer and the seller. Moreover, international exports over a large geographical area do not make it feasible for the seller to be physically withholding the cargo transporting before receiving the payments due.
Hence, there are services to facilitate international trade. With the help of banks guaranteeing payments for an exported product, the seller will be able to trade with the ease of mind that the payment is secured.
The letter of credit provides such services, of course at a fee.
Usually, the applicant or the buyer is the person that bears the letters of credit fee. However, it is entirely up to the buyer or the seller to negotiate which party pays for the letter of credit fee.
It is more pressing for the distributors that purchase products internationally to export in a triangle shipment.
Bill of Exchanges also functions the same way as a letter of credit, although the major difference is that the underwriter of the risk of non-payment can be either the buyer or the bank. This too comes at a cost that the exporter has to take into consideration.
Wire Transfer is the least expensive of the three options; however, there is no guarantee of payment by the buyer.
3. Export Credit and Credit Insurance
Although not particularly common in export business, there are private companies that underwrite export credit insurance. A manufacturer or distributor may opt to purchase export credit insurance to cover extraordinary events that cause the buyer to default on their payments. It could be caused by force majeure, geopolitical change, or even a health pandemic such as the recent COVID-19 case that causes the buyer to default.
Export Credit Insurance doesn’t come cheap, because there are not many buyers of such a facility, therefore the insurance premium is more expensive.
Additional Reading: https://www.eulerhermes.com/en_US/resources-and-insights.html
4. Foreign Trade Currency Cost
Additional Reading: How To Reduce Foreign Currency Risk In International Trade
As if an international trade business wasn’t in itself an indication of foreign currency risk exposure, let us reiterate that fact; 70% of global business is operated with USD, hence, if the manufacturer or distributor resides in a country other than the USA, they are exposed to gains and losses in foreign currency fluctuation.
Due to market and economic conditions, each currency value varies on a day to day basis. A currency value is judged by its relative value when compared to another currency; hence the phrase “currency pair”.
For example, a EUR/USD currency pair evaluates the relative value of EURO Dollar as compared to the USD Dollar value. A EURO/USD value of 1.00 indicates that the value of the EURO is 1 USD Dollar. A EURO/USD pair of 1.25 indicates that 1 EURO is valued at 1.25 USD Dollars. In this example, a higher EURO/USD pair value indicates a decrease in USD’s relative value.
Since a currency value fluctuates daily, there are risks involved in international trade. A higher USD value would translate to a foreign currency gain if the price remains constant, and vice versa.
There are many instruments to help hedge against the risk of foreign currency exposure, which we detailed in the “Additional Reading” above. Once again, these instruments also come at a cost to the seller.
5. Marketing Costs
Exposures come at a cost. The most direct way of getting an international trade business visible is via marketing channels. With an export-import business, the marketing channel available is largely the same with any other businesses, so we won’t get into the obvious channels such as ad advertising, radio broadcasting, or website promotion.
Let’s look at marketing channels that are specific to export import businesses.
Trade shows are one such channel that is unique to international trade.
We are familiar with the Consumer Electronics Show (CES) held in the World Market Center in Las Vegas, where about 100,000 exhibitors both local and foreign showcase their products in all things electronics related. Another kind of trade show or trade fair is catered specifically for exporters and importers to convene and exchange contacts.
The Salone Internazionale del Mobile held in Milan hosts an annual furniture fair that gathers furniture manufacturers to exhibit their product for buyers around the world to view. With a trade fair, the buyers get to physically inspect the exhibits, ask impromptu questions and foster business relations with the buyer, the same goes for the exhibitors as well. While this is going on, the organizers of the exhibit profit from the exhibition fee and entrance fee, which is a win-win situation.
Trade missions are organized differently when compared to trade shows. In terms of scale, trade missions are arranged in a more personalized and a smaller expedition, where manufacturers and distributors collectively make a trip to a targeted country to market their products.
These trade missions are often arranged by Embassies and the local ministry of trade, and often they are cost subsidized to promote foreign trade. Nevertheless, subsidies of the ministry of trade come with conditions such as company size or a minimum expenditure in the mission. This is also another cost exporters have to consider when pricing a product to sell globally.
6. Consular Invoice
Perhaps this is also another cost of export that is often overlooked, a consular invoice differs from a commercial invoice.
A consular invoice is an endorsed invoice by the consulate of the importing country. The purpose of having a consular invoice on top of a commercial invoice is to ensure that the amount, quantity and price are all in line with the market rates.
Having an invoice endorsed by the consulate involves a small administration fee.
Not all countries practice this requirement, especially when a country is the participating nation of the World Trade Organization (WTO), whose sole purpose is to promote international trade by reducing trade barriers.
7. Intellectual Property Rights
The World Intellectual Property Organization highlights that: –
“The pricing of an export product will partly depend on the extent to which the brand or trademark is recognized and valued by customers in the export market and the extent to which the product will face competition from similar or identical products (which may be limited through IP protection”
As a manufacturer, applying for a patent or intellectual property on the product feature that differentiates the product from its competitors will, in the long term, safeguard revenue potentials. Intellectual properties deter copycats that may duplicate your product and sell internationally at a more competitive price. The cost of intellectual property registration will come from hiring a patent attorney and paying the US Patent Office Fee.
No to mention, safeguarding an intellectual property comes at a cost as well.
As a distributor, selling patented products will also come at a premium, paid to the original patent holder for each patented product you sell.
Violation of patent rights come at a cost too, Qualcomm used Apple for USD 7 Billion for not owned license payments.
8. Logistics Costs
Alas, the cost that we are most familiar with. Logistics cost is the most obvious cost to consider while pricing your product for export. We have dedicated this website wholly to discuss all matters logistics related.
It is estimated by the World Bank that total logistics cost consists of 13 percent of Gross Domestic Products (GDP). Highly developed nations such as Japan and the USA have managed to reduce the logistics cost to 5% of GDP and 8% of GDP respectively.
The geographical area of a country also contributes to a higher transportation cost, which partially explains the reason why the USA has a higher logistics cost as compared to Japan’s logistics cost.
Factors that contribute to logistics costs are: –
- Freight forwarder Fee
- Inland Transportation Fee
- Ocean Freight, Air Freight, Rail Freight
- Custom Clearance Fee
- Terminal Handling Charges
- Warehouse Storage Charges
- Marine Cargo Insurance
- Import/Export Permit or License Requirement
- Product Inspection Certificates
Of course, the transportation costs are distributed between the buyer and seller of the product, the logistics responsibilities are marked by the INCOTERMs negotiated between the buyer and the seller
Additional Reading: Difference between CIF and CIP
Additional Reading: Difference between DDP and DAP
Additional Reading: Difference between FAS and FOB
Additional Reading: Benefits of Marine Cargo Insurance
Having all the logistics responsibilities negotiated between the buyer and seller is important, as it impacts on the the final price you consider when exporting the prodcut
9. Distributor’s Cost
Manufacturers often reach the market on a global scale via the help of local distributors or agents.
The reasons why manufacturers engage with distributors are to take advantage of the local distributor’s experience and knowledge selling and marketing their products locally. And furthermore, converting the otherwise fixed cost of setting its own distributorship into a variable cost.
That particular variable cost comes in a form of distributor’s commission, in which the distributors agree to purchase the product at a lower than market price.
A distributor’s commission or discount plays an important factor to how to price your product for export.
10. Duty Tariffs and Tax
Although technically a part of the logistics cost, duty tariffs warrant a dedicated topic to look into, because depending on the product you intend to export or trade, and also to the country to intend to export to, the different rates of tariff duty and taxes may make-or-break the deal to actually sell.
Additional Reading: How does HS Code Work
Customs duties are a source of revenue for the importing country where they charge a tariff on the cargo’s declared invoice value.
The countries with the highest average duty tariff are Bermuda, Bahamas, and Djibouti. Whereas the countries with the lowest average import duty tariff are Singapore, Hong Kong, and Macau.
As an exporter, the buyer’s overall cost of importing plays a major role in determining the price of your products. It is often the case where developing countries impose a relatively higher duty tariff than the developed countries.
On the other hand, most export products are not imposed with a duty tariff, since countries encourage external trade. But even so, the exporter has to be mindful of the duty tariff as it is definitely in the minds of the importers when considering a purchase order from overseas.
There are preferential trade agreements, in a form of a bilateral agreement, or a multilateral agreement such as the North America Free Trade Agreement (NAFTA), where participating nations benefit from a lower duty tariff when products are traded between those countries.
When considering how to price your product for export, it is important to take that into consideration as well.
11. Market Demands a la Market Study
The most important consideration of them all is whether there is a market demand for the product you are selling internationally. If the demand for your product is strong enough, no matter what the costs, tariff burden, import permit requirements, or any other trade barriers, the market demand speaks louder.
To ascertain the market demand, we need to have market studies. To begin with, even large multinational companies have failed to understand the market, resulting to a loss in millions of dollars from misplaced investment.
Starbucks’ attempt to penetrate Australia’s market is one example, although not traditionally an export/import business, they still require an extensive market demand research.
70 percent of Starbucks café is closed in 2008, due to many reasons, one of which is that Starbucks coffee did not suit the local’s taste.
There are many sources of market study that small businesses can gain access to: –
- Local industry consultants
- Association and trade publications
- Market testing via trade exhibitions
- Market reports
- Government’s external trade ministries
This may not be an extensive list of items to consider when you price a product for export, but be mindful that each different country will have different sets of market conditions to abide by. This is only the beginning, but the end result can be rewarding.