Getting ready to export your product overseas? Should you price it at $5 or $7? How do you decide? Leif Holmvall, veteran exporter, author, consultant and coach on exporting, has a tip or two to share with us. Leif has more than 45 years of experience doing business in 100-plus countries with the focus on helping businesses expand internationally. What follows is an excerpt of an interview I conducted with him about 6 years ago (and worth republishing), which focuses on how to develop the best export pricing strategy – an issue that can be complex if you’ve never calculated an export price before.
1. How do you set the right export price on a product? What is it based on?
To calculate export price, the key factor is how much the end users/customers are willing to pay in their local currency. You then calculate backwards to see how much each individual party in the distribution chain needs/wants in profit and add packaging, freight costs and customs duties. The total indicates your export price.
2. Who decides on the best export pricing? The seller, the buyer, the market or all of the above?
The customer and the market. What is the end user willing to pay before taxes and after discount? Who are the competitors and what are their price levels? (The cost of the jacket you just bought will vary based on where it is being purchased, for example, in a discount chain or a specialty designer store.) You as a seller can select distribution solutions that secure a profitable export price and increase your competitiveness.
3. Can you give an example on how companies get export pricing wrong? For example, let’s say you sell products successfully locally. Should you use the domestic selling price as a basis for your establishing an export price?
Your export price has nothing to do with your domestic price. To give an overseas distributor a discount on your local price is wrong. So is basing it on your manufacturing cost. The local market, wherever that is, drives the price and manufacturing cost and is only of interest to calculate your profit. Companies do not realize that their distribution solution has a considerable impact on price and profit and how successful they will be on each market. They tend not to consider currency and protect themselves against currency fluctuations.
4. What factors influence pricing and profitability?
If you charge too much for a product, you can say goodbye to paying customers. If you charge too little, say goodbye to your profit. Strike a balance between being competitive and being profitable. Neither you nor your distributors want to do business without making money. They are your key to success overseas. Being greedy can lead to a bad investment. The distribution setup is a key factor and so is the number of distribution levels. If you can’t make distribution profitable with your first option, look at other distribution solutions and calculate again. Always leave a buffer to allow for special pricing of large orders or promotions. Remember that with increased sales/production your marginal costs are lower, i.e., your manufacturing cost is reduced and you can afford a large order at a lower price.
5. Do packaging, freight and customs duties have an impact on export pricing?
Those factors all influence your calculation to arrive at the landed cost. If you can reduce them, your export price and profit will increase. Select the right packaging, minimize size and weight and adapt to standard sizes for shipping containers. Make sure to negotiate the freight cost and select optimum transport method. Air freight can sometimes cost less than sea freight because there are minimum weights/volumes for sea freight.
If you export to Europe you will also pay duty on freight and packaging costs. When shipping to North America from another country, you will only pay duty on the export price. Make sure that you do not include the cost of shipping, packaging and insurance in North American pricing because then the client will have to pay duty on them as well. (Show the actual product price and, on the invoice, separately show costs for packaging, shipping and insurance.) Investigate the right customs tariff for your product. The wrong one can cost you extra in duties or authorities can back charge you if you selected wrong Harmonized System (HS) code.
6. What’s the best way to minimize costs, keep profit margins high and still motivate an overseas customer to buy? What needs to be analyzed?
Minimize the number of distribution levels. If you have an importer plus local dealers, they have to make money. If you sell direct to the local dealers you eliminate one middleman and can save part of the importer’s profit/cost and give the local dealers a higher margin. You achieve a higher profit and they do too. To find your local dealer, ask where the end user wants to buy. That indicates a potential partner. Don’t set up competing distribution in the same geographical area. That will result in price wars and less interest from your distributors to promote your product.
7. Is there one single thing that business owners fail to factor in when they establish export pricing?
Many companies base their export pricing on the manufacturing cost and domestic selling price. That is completely wrong. Most importers want a fixed price in their currency to know the real cost, and the exporter has to adapt to this.
Most exporters start to analyze distribution from their company and decide on distribution that way, believing that they should sell the same way as on the domestic market. For example:
Exporter > Distribution channels > End user. The exporter decides on the distribution it wants.
They should have started with the overseas market.
End user > Distribution channels > You, the exporter. In this way you start from the market to find the most suitable distribution method as well as pricing.
8. Any export experience you wish to share regarding how pricing a product right (or wrong) made a huge difference?
Many years ago, I helped a Swedish company introduce sport wheelchairs to Canada. One of the large manufacturers of wheelchairs in Canada was hungry to sell it and willing to pay a premium for our products. Because of these factors, our export price was higher than what the end user paid in Sweden. If we had set the price based on the Swedish customer price, the Canadian company would still have charged the customer the higher price and kept all profit. From this example, you can see that the export price is not comparable with your domestic price.