Taking a decision on price is not an easy task when it comes to exporting products internationally and the right export pricing is one of the important components for the success of your business. in the global market.
Setting an export price that is both competitive in the target market and profitable for your business requires careful consideration of various factors. A well-calculated export price ensures you cover production costs, shipping fees, taxes, and other expenses while still allowing room for a profit margin.
This article provides a step-by-step guide on how to decide export prices of your product, ensuring that you remain competitive in the international market and maintain profitability.
1. Understanding the Cost of Goods Sold (COGS)
The first step in determining your export price is understanding the Cost of Goods Sold (COGS). COGS represents the direct costs incurred in producing your goods. These costs typically include:
Raw materials: The cost of raw materials needed for production.
Labor costs: The wages paid to workers involved in producing the goods.
Manufacturing overhead: Costs related to manufacturing, such as utilities, factory rent, and machinery maintenance.
The formula for COGS:
COGS=Material costs+Labor costs+Manufacturing overhead
For example, if your raw materials cost $15 per unit, labour costs $5 per unit, and manufacturing overhead is $2 per unit, your COGS for each product will be $22.
2. Add Packaging and Labeling Costs
Once you have calculated the COGS, the next step is to include costs related to packaging and labelling. Exported products often require specialised packaging to ensure they are protected during transportation. Additionally, you may need to meet specific labelling requirements of the importing country, which can vary by product type and market.
Common packaging and labelling costs include:
Export-compliant packaging materials (e.g., durable boxes, pallets, shrink-wrap).
Custom labelling for the destination market (e.g., ingredients, certifications, regulatory compliance marks).
Let’s say the packaging costs $3 per unit and labelling adds $1, which means your total cost per unit at this stage would be $26.
3. Transportation Costs: Domestic and International
Transporting goods to the foreign market involves a series of logistical steps, each adding to the overall export cost. Transportation can be divided into three key stages:
Domestic transportation: Taking the product from your factory to the port of export. This might involve trucking or rail freight.
International transportation: The cost of shipping the goods to the destination country, which could involve sea or air freight.
Destination transportation: In some cases, you may be responsible for the cost of transporting the goods from the port to the buyer's location within the destination country.
Each of these steps incurs costs, and shipping rates vary depending on factors such as the distance between countries, the volume or weight of the goods, and the mode of transport (air, sea, or land).
For instance, if the domestic transportation costs are $500, and international freight for a shipment of 100 units costs $2,000, your total transportation cost per unit would be 500+2000=$2500 for transporting 100 units and $25 for 1 unit.
4. Export Duties, Taxes, and Compliance Costs
Depending on the nature of your goods and the country you're exporting to, you may need to account for export duties, taxes, or fees. These could include:
Export duties imposed by your home country.
Export licenses or compliance fees.
Special taxes on specific types of goods (e.g., agricultural products, luxury items).
For example, if your export duties total $300 for 100 units, your cost per unit would increase by:
300/100 = $3
At this point, the cost per unit is $54, which is ($26 + $25 + $3)
5. Insurance Costs
International shipping involves various risks, such as damage, loss, or theft of goods. Therefore, many exporters purchase insurance to protect their shipments. The cost of insurance typically depends on factors such as the value of the goods, the route, and the mode of transport.
If insurance for your 100-unit shipment costs $200, the cost per unit would be:
200/100= $2
Now, your total cost per unit stands at $56.
6. Consider Incoterms (International Commercial Terms)
Before setting your final export price, it’s essential to determine which Incoterm you’ll use in your agreement with the buyer. Incoterms are internationally recognised trade terms that specify which party is responsible for covering various costs and risks during shipping.
For example, some common Incoterms include:
EXW (Ex-Works): The buyer is responsible for all transportation costs from your factory onward.
FOB (Free On Board): You are responsible for delivering the goods to the port of export, but the buyer assumes responsibility once the goods are loaded onto the ship.
CIF (Cost, Insurance, and Freight): You cover the costs of shipping and insurance until the goods arrive at the destination port.
The Incoterm you choose will directly affect your pricing strategy, as it determines how much of the transportation, insurance, and other costs you bear versus the buyer.
7. Currency Exchange Rate
If you're exporting to a country with a different currency, fluctuations in exchange rates can significantly affect your profitability. It's important to monitor exchange rates regularly and factor any potential risks into your pricing. In some cases, you might want to include a small buffer or margin to account for possible currency changes.
For instance, if you’re exporting to a country where the local currency is volatile, and the exchange rate fluctuates by 2-3%, you may want to add a similar margin to protect your profit.
8. Determine Your Profit Margin
Once you’ve covered all your costs, it's time to set your profit margin. Profit margins in export pricing depend on factors like market competition, demand, and your business goals. Typically, exporters aim for a margin that not only covers all costs but also offers a return on investment.
Let’s assume you aim for a 20% profit margin. If your total cost per unit is $56, your desired profit would be:
56×0.20=11.2
Adding the profit to the total cost, your final export price per unit would be:
56+11.2= 67.2
9. Conduct Market Research and Competitive Analysis
Before finalizing your export price, it's essential to conduct research on the target market. This includes understanding local demand, competitor pricing, and any price sensitivity in the market. Your export price needs to strike a balance between being competitive and ensuring profitability.
If similar products in the target market are selling for $70 per unit, pricing your product at $67.2 would be competitive, leaving room for market entry and growth.
10. Offer Payment Terms and Discounts
Finally, consider the payment terms and any discounts you might offer buyers. For example, you may offer discounts for bulk purchases or early payments. These strategies can make your pricing more attractive while allowing you to close deals faster.
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Calculating export prices is a multi-step process that requires a careful balance between costs and profitability. By considering all aspects—from COGS, packaging, transportation, and insurance, to profit margins and market dynamics—you can arrive at a price that ensures your business remains competitive in the global market. Moreover, it’s important to stay adaptable and continuously revisit your pricing strategy to respond to changing market conditions, currency fluctuations, and logistical challenges. By following this approach, you can maximise your export opportunities while maintaining a strong, sustainable business.
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