3

Guide to pricing for export

This is one of three practical guides to the
more important and technical aspects of
the export process. Familiarising yourself
with the issues covered in this guide will
help you plan your international market
strategy, and ensure that the first export
sale you make develops into long-term,
self-sustaining business.
Why is export pricing different? Checklist

Pricing for any market requires an understanding of relative costs, demand and competition Exporting will place different
in that market. In offshore markets these factors vary greatly from those in Australia. Careful demands on your finances.
analysis of prevailing conditions in the markets you choose, and an accurate assessment of ‘Cost plus’ is the traditional
the way to structure your export price, determine whether you can be competitive and write approach to pricing in
profitable business. any market.
Marginal costing is a
standard export pricing
Options for calculating export price technique – but it assumes
you have stable revenues
The traditional method of price calculation is the “cost-plus” approach. The price calculation will in your domestic business.
include the components of domestic price, but the addition of costs that are specific to export Beware of aggressive
transactions can render a price constructed on this basis uncompetitive. pricing to gain market
entry. It can set your base
Marginal (or ‘differential’) costing is a technique commonly employed in export and produces a prices in the buyers mind.
more competitive price to assist market entry. This method establishes the base price of a product
or service using the direct costs of production and sales, with fixed costs apportioned to the Matching market price
volume of the sale. is essential to gain market
share. Calculate your
Care must be taken to ensure that your existing business continues to run at stable volumes and ex-works price on a ‘top
that your marginal price is applied to new business. A marginal costing example has been provided down’ basis to determine
within this guide. how you can be competitive
– and be profitable.
Other pricing techniques are more emotive and can involve predatory pricing at a loss to gain Plan for ‘surprises.’
market access. Operating in this manner requires an agile ‘on the ground’ presence to capture new Entering new markets
business and combat your competitors’ response. Unfortunately, being a “price taker” provides the always poses higher risks
buyer with a negotiating advantage, as your opening price is often perceived as a base level from due to unforeseen factors.
which future discounting is anticipated.

The ‘top down’ method

An alternative pricing technique to the ‘cost plus’ method is working back from a market price that
you will have to meet to be competitive. An example of this technique is provided to enable you to
work back to compute your ex-works price to be competitive in the export market.

What are the export components I need to consider?

Export market development can involve a range of costs that do not apply to domestic sales. Your
knowledge of these costs will only be developed through experience. It is critical at the outset that
you recognise these costs and include realistic values for them.

Some of the costs specific to export transactions include market research, travel, international
communications, production of export literature (including translation), freight forwarding and
other logistics charges. These also include export packing, product modifications, packaging,
labeling and compliance with foreign standards, insurance, credit checking, export documentation,
export financing charges and training of an overseas distributor’s staff. Austrade’s EMDG program
provides a level of rebate for these costs. Full details are available on the Austrade website.
What are the traps? Checklist

Without adequate research into the build up of an export price and an under-allowance for When dealing in new
unforeseen cost components and contingencies, export transactions that initially appear attractive markets check with
may prove unprofitable and/or unexpectedly resource-intensive. advisers and other
Australian exporters to
Ensure that the understanding with your buyer is clear and well documented. A ‘handshake on the identify the areas where
deal’ sometimes works well – but is the exception. Typical cost elements that can frequently be things can go wrong and
overlooked or under-estimated include: costs escalate.
Export documentation
> Additional freight and handling costs due to a misunderstanding of trading terms and conventions may be complex. Use
(Incoterms – see next section). an expert.
> Last-minute product modifications to meet an export standard. Getting an order is
> Packaging and labeling requirements (language, ingredients, use-by dates). exciting. But take
extreme care about
> Documentation requirements such as certificates of origin and expensive legalisation of invoices your costs.
by embassies.
Having your product
> Insurance (including credit insurance), finance and banking charges.
rejected at a port of
> Delays in customs clearance at port of discharge if documentation, packaging and labeling is not in order. entry can result in
heavy losses.
> For service exports, vaguely worded contracts or agreements where the buyer can enforce clauses
which require after sales service or implied warranties. Pricing behaviour
varies widely. Take time
to understand pricing
behaviours.
Other export pricing watch points
The 13 Incoterms
are the basic language
> The temptation to accept an order, often under time pressure, can result in losses unless you governing international
are closely monitoring your finances. Costs of production can change, as well as fixed costs. transactions. Take time
These factors can have a critical impact on your pricing, notably for marginal costing, where it is to understand them.
imperative to maintain close control and monitoring of fixed costs.
> Delays in customs clearance are common in many markets. Ensure that your liabilities for delivery
are worded explicitly to avoid unanticipated demurrage and other logistics charges.
> Take care with packaging, documentation and labeling requirements as rejection of your product
at the port of entry can result in high expenses in remediation or product return. Avoid promises
from agents or buyers that ‘all will be OK’ unless you are confident that you have fully complied
with local regulations.
> Get good advice on your foreign currency exposure. All Australian banks offer foreign exchange risk
management products.
> When dealing with documentary credits (such as a letter of credit), remember that the wording on
all documents must be precise and matching contractual requirements. Simple mistakes in clauses
in documentary credits can cause extensive delays in receiving payment.
> Get a good feel for price behaviour in the markets of interest. In some countries, bargaining is expected
as a matter of course. Get good local advice and experience of the market environment first-hand.
Stress product or service benefits wherever possible, before accepting demands for a lower price.
> Services exporters are often faced with different issues. Terminology in many countries can be
different and result in misunderstandings in areas such as warranties, performance bonds and the
handling of contract variations.
What are Incoterms?
Incoterms (International Commercial Terms) were introduced in 1936 to avoid confusion over the interpretation of shipping terms and
define the roles of the buyer and seller. The International Chamber of Commerce, based in France, is responsible for the administration
of Incoterms. The latest version (Incoterms 2000) covers 13 terms and defines the responsibility between the buyer and seller for each
component of an export transaction.

The chart provides a clear assignment of responsibility for both buyers and sellers in international transactions. For precise definitions of
the 13 Incoterms, consult the ICC website (http://www.iccwbo.org/incoterms ) and study carefully the liabilities of both buyer and seller.
Mistakes and misunderstandings can be costly.

Incoterms 2000 – Chart of Responsibility

EXW FCA FAS FOB CFR CIF CPT CIP DAF DES DEQ DDU DDP

Delivered
Free Free Cost Carriage Delivered Delivered
Ex Free Cost & Carriage Delivered Ex Quay Delivered
SERVICES Alongside Onboard Insurance Insurance At Duty
Works Carrier Freight Paid To Ex Ship Duty Duty Paid
Ship Vessel & Freight Paid To Frontier Unpaid
Unpaid

Warehouse Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Storage

Warehouse Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Labor

Export Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Packing

Loading Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Charges

Inland Buyer Buyer/ Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Freight Seller*

Terminal Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Charges

Forwarder’s Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller
Fees

Loading On Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Vessel

Ocean/Air Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller
Freight

Charges On Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller Buyer Buyer Seller Seller Seller
Arrival At
Destination

Duty, Taxes Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller
& Customs
Clearance

Delivery To Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller
Destination

* T here are actually two FCA terms: FCA Seller’s Premises where the seller is responsible only for loading the goods and not responsible for Inland Freight; and FCA Named Place
(International Carrier) where the seller is responsible for Inland Freight.
‘Cost plus’ export pricing model

All terms must be followed by a named place eg CIF Tokyo, FOB Sydney.

EXW EX WORKS $

+ Wholesale price (not including GST or delivery) 100

EXW (Named Place) 100

FOB FREE ON BOARD

EXW Price plus 100

+ Transport to carrier (eg wharf, airport) 17
+ Customs clearance (ECN) 8
+ Additional packing/labour for transport 5
+ Agent’s commission (eg 10% of FOB price) 13

FOB (Named Place) 143

CFR COST AND FREIGHT

or
CPT CARRIAGE PAID TO

FOB Price plus 143

+ Sea/air freight charges to wharf/airport 32
+ Sea/air document fees (eg Airway Bill, B/L) 11
+ BAF (Bunker Adjustment Factor)** 2
+ Transport contingency# 2

CFR or CPT (Named Place) 190

CIF COST, INSURANCE, FREIGHT

CFR or CPT price plus 190

+ Marine Insurance Premium 2

CIF (Named Place) 192

DDP DELIVERY DUTY PAID***

CIF plus 192

+ Import duty/tax (calculated as 20% of CIF price) 39
+ Customs clearance fees 8
+ Delivery charge from airport to customer 10

DDP (Named Place) 249

#
Suggested 5% of transport costs.
** May be charged by shipping/airfreight company (fuel surcharge).
*** Please note in some markets that sales taxes/VAT/GST may be applicable. Seek further advice from a local financial adviser.
‘Top down’ export pricing model

In overseas markets it will usually be the market place that will set your retail price. The following is an example of how to estimate
a competitors FOB price or to “work down” from a target price for your product – in this case, wine.

Examining the prices of competitive wines will give you another part of the jigsaw in understanding the market, and price points
to negotiate with your agent.

Per Bottle Quick Tips

Similar wine per bottle at retail store HK $305
Deduct VAT HK $0
Consumer Price per bottle Excluding VAT 1
HK$305
Deduct retail margin of 60% HK $183 305 x 0.60
Retailers Buying Price Per Bottle HK $122 305 – 183
Importers Buy Price per bottle HK $ – Deduct Importers margin of 30% + Clearance & 2
HK $ 88 122 /1.38
Warehouse Allowance of 3% + Advertising & Promotion Allowance of 5% = total of 38%
Importers Buy Price per case with duty HK $ HK $1056 88 x 12
Importers Price per case before duty – Deduct Duty (80%) of CIF HK $587 1056 / 1.8
Convert to AUD $ 3
AUD $146.00 587/4
CIF per case AUD $146
4
Deduct Freight AUD $1.00
Deduct Marine Insurance AUD $1.00
FOB per case AUD $144
1
VAT and sales taxes are applied in many overseas markets. In this example there are no VAT or Sales Taxes in Hong Kong.
2
Retailers take a full margin on the selling price not the buying price.
3
Assumes an exchange rate of AUD $1 to HK $4.
4
Assumes a freight rate of AUD $1200 for 20 foot FCL, sea freight container that packs 1200 cases.

Marginal or differential costing export pricing model

This is a commonly used export pricing technique which is based on variable costs such as direct labour, direct material and variable
manufacturing overheads. It is particularly useful where a company has excess production capacity and needs to reduce its export prices
to be competitive. Marginal costing enables you to calculate the break-even point – the minimum price at which you can profitably sell
to an overseas customer.

In this example, the selling price per unit is $10.00.

UNIT SALES 40,000 20,000

TOTAL $ PER UNIT $ TOTAL $ PER UNIT $
Revenue 400,000 10.00 200,000 10.00
Variable costs 160,000 4.00 80,000 4.00
Contribution 240,000 6.00 120,000 6.00
Fixed costs 150,000 3.80 150,000 7.50

Net profit/(Loss) 90,000 2.20 (30,000) (1.50)

To determine the minimum price that this company can sell to overseas buyers it is necessary to calculate the break-even point.
The contribution margin is the difference between selling price and variable costs ($6.00) divided by the sales price ($10.00). In this
case the margin is 60%.

The break-even point is calculated by dividing the fixed costs ($150,000) less the net profit ($0 to break even) = $150,000 divided by
the contribution ($6). In this case, the company would need to manufacture 25,000 units at a selling price of $10 to break even.
Useful websites and links
Austrade’s site www.austrade.gov.au provides a wealth of
information on exporting as well as links to other organisations
involved in facilitating export. Learn more about the Export Market
Developments Scheme (EMDG) from the Austrade website.
State governments provide a range of services for exporters.
The New South Wales Exporters Network includes practical
advice, online forums and links to other service providers. This site
includes advice on export pricing. www.smallbiz.nsw.gov.au.
Consult the Business Victoria website www.business.vic.gov.au
for excellent advice and templates – and follow the link to Vic
Export, the section of the site catering for exporters.
The Government of Queensland has some good modules
for exporters, including grants and finance – access it through
the main website of the Queensland Department of State
Development, Trade and Innovation at www.sdi.qld.gov.au
and find the heading ‘Export and International Trade’.
Western Australia’s Department of Industry and Resources
offers a most useful ‘Online Guide to Exporting’ that includes a
module on pricing. Start at the homepage www.doir.wa.gov.au
and click on ‘Export and Trade’.
The South Australia Department of Trade and Economic
Development home page www.southaustralia.biz/dted provides
a link to ‘Export South Australia’ www.exportsa.sa.gov.au.
This website incorporates an excellent ‘Export Road Map’
which will take you through the export journey. There is good
information on pricing and quotations in the ‘Finance’ module.
The Tasmanian Department of Economic Development includes a
well-arranged series of modules on exporting, all with useful links.
www.development.tas.gov.au.
Australian Business Limited (ABL) provides a range of international
trade services to its members. www.australianbusiness.com.au.
The Australian Industry Group (AIG) provides extensive services to
members operating in export markets. Click on ‘Trade and Export’
on their homepage. www.aigroup.asn.au.
All of the major banks (ANZ, Commonwealth, HSBC, NAB,
Westpac) include extensive information on their websites for
exporters, with details of the range of services for small and large
businesses. Many complex, paper-based transactions are now
executed electronically at a low cost and high efficiency.
The Export 911 site has some useful data on pricing formats.
www.export911.com.
A US site from University of North Carolina adds some
useful background on export pricing and quotations.
www.cecunc.org/business/international/export.html.
The first step in researching import duties for overseas markets
is understanding the Australian Harmonised Commodity
Classification (AHECC) code for your product. The Australian
Bureau of Statics (ABS) maintains this list and can be found at
their website www.abs.gov.au and follow the links: Statistics ->
By Catalogue Number -> Chapter 1 - General -> 12 - Classification
and Work Manuals -> 1233.0.
The Australian Federation of International Forwarders (AFIF)
www.afif.asn.au brings together companies who specialise in
freight and logistics for international trade. A good forwarder
will help you avoid many pitfalls ranging from freight rates and
terms to documentary requirements.
For more information on Austrade
phone 13 28 78 or visit www.austrade.gov.au
October 2006