Export pricing and quotations
The right pricing and the way you provide quotes for your goods or services
are both crucial for a successful and ongoing export business. This page
outlines general export pricing information as well as for products,
services, and issues to consider when quoting including using foreign
currencies.
Export pricing
Export pricing and domestic pricing are different: different overseas
market conditions, different costs, different quoting formats and different
currencies all affect what you charge your customers for your products or
services.
Pricing for any market requires an understanding of the relative costs,
demand and competition of that market.
Many overseas contacts you meet will want to know your price, so it is
essential to have your pricing determined before you approach an overseas
market.
The total cost of exporting
Before you can determine the prices you should be charging for your goods
or services, you must first be clear about the total cost to your business
of exporting that product or service.
Developing your export markets can involve a range of costs that do not
apply to domestic sales. These are general costs for exporting that are not
specific to an individual contract or shipment. They could be considered
your ‘fixed costs’ of exporting. How much you recover of these costs per
unit or per order or contract is up to you, but these costs should be
factored in before you start adding shipping costs, duties, etc. Costs may
include:
- Research into international markets
-
Travel to overseas markets
-
International communications
-
Production of export literature (including translations)
-
Modifications to your product or service
-
Packaging and labelling (products)
-
Product liability insurance or other insurances
-
Compliance with foreign standards
-
Credit checking
-
Export financing charges
-
Promotional costs
See sections below for more about pricing for products and
services.
Different prices for different markets
Calculating a separate price for each of your export
markets is important because:
-
For products, distributor, wholesale and retail mark-ups are often
different in each market and industry, which will affect the final
price of your products. Remember to include questions about these
mark-up costs when you are doing your initial market research.
-
Your competitors and the way they price their products or services
will probably be different in different markets, and you have to
take this into account when setting your prices.
-
The price that end users are willing to pay for your products or
services will not be the same in all markets around the world.
Price changes
Exporters need to adjust prices for many reasons including
increases in the cost of production such as raw materials, currency
fluctuations and inflationary increases. But customers don’t like
surprises and although price increases are part of doing business,
it’s wise to give as much notice as possible.
You will need to advise your customers or in-market partners when
your prices change - and why. You will also need to give sufficient
lead time for buyers to be able to pass price changes on to their
customers.
Extending credit terms will have a real cost impact
As an exporter you may be asked to offer credit terms. Or you may
find that you need to match your competitors on credit terms.
Extending credit terms will have a real cost impact on your company
because cash flow is critical to any business.
If you decide to offer credit terms you will have to estimate the
cost of the time it takes to receive payment at the end of the
credit period and build this cost into your price.
Not always all about price
Although some products are sold purely on the basis of price, many
exporters find that price is not the only factor that affects their
success in attracting new customers. Credit terms, delivery speed
and reliability, customer service and warranty, after-sales care
and the quality of your product or service are all important in
getting and keeping new international business.
Pricing for products
While most businesses spend the necessary time to gain a thorough
understanding of price calculations for their domestic business, many do
not put in the same amount of effort when it comes to their export markets.
Unfortunately, this can have a flow-on effect on both competitiveness and
the profitability of the business.
Although some exporters simply charge their domestic price with no further
thought, those who are successful over the longer term have almost always
invested the necessary time to get their export pricing right.
Costs to include when setting export prices
Regardless of who arranges and pays for freight and costs such as import
duties, you should know the costs your product attracts through the supply
chain. Without knowing these costs, you can’t fully understand where your
product fits into the market and therefore compare your price against those
of your competitors.
Some examples of costs in the supply chain include:
-
Shipping ex-factory to port of departure
-
Air or sea freight and insurance
-
Import duty and taxes
-
Customs clearance/broker fee
-
Ground transportation from port of entry to the warehouse or the
customer
-
Warehouse fees
-
Break-bulk fees, if third party warehouse applies
-
Agent's commission or importer's mark-up
Export quotations for products
The way prices for products are quoted in international business is
different to domestic sales. To ensure that both the buyer and the
seller are clear about who pays for which costs, and where
ownership transfers from seller to buyer, exporters use terms known
as Incoterms.
Incoterms
Some common Incoterms you may have heard mentioned include FOB and
CIF. It is very important that exporters understand the details of
each Incoterm they may use and their responsibility for each one.
One common mistake, that can lead to confusion, is not including a
named place after the Incoterm. If you are using FOB and shipping
from Sydney, then the correct way to communicate this is FOB
Sydney. Not including a named place here means the buyer will not
know where they have to arrange and pay for freight from.
Which Incoterm you use depends on your situation and that of the
buyer. Whilst there is no rule about which Incoterm should be used
for particular countries or industries, buyers will most likely
have a strong preference for how they buy from overseas. Some
Incoterms result in less effort for the customer, so require more
arrangements to be made from the exporters’ side. This may be a
good customer service offering from your business should buyers be
seeking to have goods delivered right through to their door.
The most recent version of Incoterms is Incoterms 2010. For more
details and some tips see the
International Chamber of Commerce (ICC) website
. For short courses about Incoterms, see our Export Training page
for providers.
Export price lists and written quotations
Some tips for preparing an export price list:
-
Show which currency you are quoting in. If using Australia dollars
then A$ or AUD should be shown. Some buyers may assume ‘$’ alone
means US$;
-
GST should not be included for export sales. Ensure any mention of
‘GST included’ is removed if using your domestic price list as a
template, this confuses buyers;
-
Even if Incoterms are used, when quoting it is recommended include
clear details about what the price includes as some buyers may have
incorrect understanding of the terms used. An explanation should be
included in your price lists and contracts as well.
Include validity for pricing, when is the price list valid until?
-
Include any minimum order quantities you may require or quantity
the pricing is based on
-
Item codes make it easier for buyers to place an order and result
in less confusion
-
Clearly show your company name, address (including Australia) and
contact details for placing an order or enquiry
Providing quotes in currencies other than Australian dollars can be
risky for those who don’t understand the risks. See the ‘Quoting in
foreign currencies section below for some general information on
this topic.
Different methods for calculating prices for products
While there are many different ways for calculating prices, the methods
listed below are some of the most common.
Cost Plus and Top Down
Cost Plus and Top Down are two of the best costing methods to calculate
your export price, but they are best used in parallel; do two separate
calculations and then compare one against the other to achieve a
finely-balanced result. Here is what you do:
-
For Cost Plus
: you work outwards from your ex-factory price to the end customer.
-
For Top Down
: you work from the ideal end customer price backwards to you.
The reason that these two methods in parallel are better than using
one method alone is that each method individually has its
weaknesses.
Using the Cost Plus method alone, for example, may result in a
price that is too high, which means that you won’t have many
customers.
And, if you sell at a price that customers would ideally like and
calculate by using the Top Down method, you may end up losing money
on each order.
So, calculating your final selling price between Cost Plus and Top
Down is a balancing act that all sellers must face.
Top tips about export pricing for products
-
Set a price that reflects your brand and promotion, but bear in
mind that an unknown brand from Australia may not be able to charge
the same prices as well-known competitors, particularly those
in-market.
-
Before you start quoting prices to your customers, be sure to
factor in the promotional costs associated with supporting your
products in-market.
-
You could create a problem for yourself if you quote a low price
initially in order to get business, and assume that your prices
will naturally increase over time. Buyers tend to expect the exact
opposite: that is, they expect to get a price reduction to reward
them for ongoing business, particularly if their orders increase in
size and volume.
-
It is important that you know your profit margins and break even
points; if you don’t have this information readily to hand you will
not be able to make an informed decision if a customer asks you for
a discount.
-
Discounts are a cost; before you offer a discount to a customer
reflect on the effect it will have on your bottom-line.
-
The wise exporter learns about
Incoterms
so that they can quote using the correct international trade
language. Both you and your customers should know who pays for
what, and be absolutely clear at what precise point in the
transaction ownership of the goods transfers from you to your
customer.
-
If you have a website and successfully sell on-line you need to be
careful that you don’t undercut either your in-market suppliers or
in-market retailers.
-
And a final tip? We know that shipping costs can change quickly and
exchange rates can fluctuate alarmingly. Both of these will affect
your end costs, so be sure to regularly review your prices.
Pricing for services
A service export is an activity where there is a high degree of
human involvement in the development and delivery of that activity.
What is being provided tends to be less tangible (than products)
and there is more variability in quality.
Pricing considerations may include:
-
Specific costs associated with services – withholding tax, visas,
flights, establishing a presence (local or virtual), accommodation,
transport, pre-sales visits, freight, insurance, wages,
translation, IP protection, currency/exchange rates.
-
Business and cultural practices specific to the country eg. fixed
price or negotiable, pre-sales effort required.
-
Competition within the market – local and international companies.
-
Ease of entering markets – local barriers, regulations, language
etc.
-
Maturity of your industry in the target market – frontier v’s
established.
-
Unique service offering – ability to charge premium prices,
perception you want to create about the service offering.
-
Accounting for after sales costs.
-
Meeting the costs of complying with applicable international
standards.
-
Opportunity costs – impact on domestic business, existing
commitments, hiring of additional local staff.
Pricing models for services:
Cost plus
– Cost plus pricing requires an accurate understanding of your
total costs for delivering the service into the target market and
ensuring sales success. Once the cost is decided, then a margin is
added to reflect a price that is compatible with your perceived
market position. It is important that you have an understanding of
the average margin for your industry in the export market. In
calculating cost plus you:
-
need a good understanding of costs, margins and overseas expenses
-
may not be competitive in some markets (under or over-priced).
You might be able to reduce the price or match a competitor’s price
if local resources are cheaper than in Australia. Calculate final
pricing by finding a balance between affordability for customers
and your profit.
Competitive pricing
- Competitive pricing can be good for market access, especially if
new services can be released shortly after market entry with
demonstrable benefits and features. Competitive pricing is
acceptable if you can deliver at a similar cost structure to others
in the market, otherwise you may experience margin squeeze.
Competitive pricing can make premium pricing difficult in the
future as it often signals a “value for money” or “affordable”
market position. Input from market research, competitive analysis,
discussions with representatives and customers about the
competitiveness and positioning of your services will increase your
understanding of the competitive pricing point of your service.
Premium pricing
- Premium pricing is developed around a strategy of what the market
will bear. This is a good export strategy not only because it is
more profitable, but also provides more margin to cover cost
increases, and may allow you to maintain a price in a foreign
currency, absorbing negative impacts of changes in exchange rates.
It will allow you to establish a premium brand in the market and
allows you to reduce pricing to loyal clients without damaging your
profit. There is perceived value in innovative and uniquely
packaged services. If you can charge premium prices for your
services, you can meet competitive threats over time.
Beachhead pricing
- Beachhead pricing means pricing your service so that it is
perceived as excellent value for money. Beachhead pricing can
reduce the time to get market entry, while sacrificing early
margins. The process must be tightly controlled so that your
representatives/partners understand that market success will bring
future price increases to cover lost margins and achieve rightful
market positioning. It is a useful pricing strategy for your
representatives / partners as it will allow them to get access to
distribution channels at the launch of your service in the export
market. It is recommended you use this strategy with caution.
As your company’s presence in an export market matures, you may
revise pricing strategies for existing and new services.
Top tips about export pricing for services
-
Set a price that reflects your brand and promotion, but bear in
mind that an unknown brand from Australia may not be able to charge
the same prices as well-known competitors, particularly those
in-market.
-
Before you start quoting prices to your customers, be sure to
factor in the promotional costs associated with supporting your
services in-market.
-
You could create a problem for yourself if you quote a low price
initially in order to get business, and assume that your prices
will naturally increase over time. Buyers tend to expect the exact
opposite: that is, they expect to get a price reduction to reward
them for ongoing business, particularly if the amount of business
they give you increase in size.
-
It is important that you know your profit margins and break even
points; if you don’t have this information readily to hand you will
not be able to make an informed decision if a customer asks you for
a discount.
-
Discounts are a cost; before you offer a discount to a customer,
reflect on the effect it will have on your bottom-line.
Quoting in foreign currencies
Exchange rates can be a complicated and tricky area for exporters.
Discuss exchange rate issues with your bank or financial adviser and
make sure that you understand exactly what is involved.
Note
: Austrade strongly suggests that exporters develop foreign currency
policies and procedures within their company to ensure all foreign currency
transactions are managed as agreed.
Quoting in foreign currency can be hazardous: if the Australian dollar
appreciates, or goes up in value against the foreign currency you are
quoting in between order confirmation and payment date, you will receive
less Australian dollars than you expected.
This is exchange rate risk and can be very costly for exporters if not
managed appropriately.
Quoting in Australian dollars will avoid this problem, but it passes the
risk on to your customer, who may not be prepared to take it on.
Options to address exchange rate risk
Options to manage your exchange rate risk should be discussed with your
bank. If you are not confident talking about exchange rates, you can
research more online before approaching the bank. (The International Trade
section of your bank’s website will provide information about their
exchange rate products.)
Here is a quick overview of some of the most common options available for
managing exchange rate risk:
Quoting in Australian dollars
The option of quoting your prices in Australian dollars carries the least
risk and cost for you as an exporter. You are guaranteed the amount you
will receive in Australian dollars; your customer is the one who has to
bear the exchange rate risk.
If the Australian dollar appreciates against the importer’s currency, your
buyer will have to pay more than they planned for your goods.
The result: an unhappy customer, who may decide to take their business
elsewhere and will look for a supplier who offers pricing in their own
currency.
Forward exchange contracts
Forward exchange contracts are a low risk option for both the buyer and
seller, although there are costs involved for the seller.
Also known as hedging, this option locks in the exchange rate with your
bank for a given day in the future. The pricing of these contracts is
determined by the difference in interest rates between the countries of
each currency.
Once the rate is locked in by a forward contract you will receive the
agreed amount of Australian dollars, regardless of what the exchange rate
is on the day.
Remember this option works both ways; that is, whether the Australian
dollar depreciates or appreciates against the foreign currency. So, in some
cases you may receive less than you would have using the spot rate on the
day, but you will have certainty about the amount you will be paid in
Australian dollars.
Note
: There are also risks if your payment doesn’t come in on the day expected
as you won’t have the foreign currency to close out the contract. In this
case renegotiation of a contract is required.
You should speak to your bank about the options they may suggest based on
your circumstances.
Disclaimer
Austrade does not endorse or guarantee the performance or suitability of
any introduced party or liability for the accuracy or usefulness of any
information contained in this Report. Please use commercial discretion to
assess the suitability of any business introduction or goods and services
offered when assessing your business needs. Austrade does not accept
liability for any loss associated with the use of any information and any
reliance is entirely at the users’ discretion.
Why You Need To Know About Foreign Bribery and its Implications:
Bribing, attempting to bribe or facilitating bribery of a foreign public
official is a serious crime and amendment to the Australian Criminal Code
in 1999 makes acts of this nature overseas punishable in Australia.
Companies can also be held criminally responsible for the acts of their
agents. The extraterritorial nature of these penalties reflects the serious
criminal nature of bribery and the detrimental effects it has on Australian
trade and reputation, and international governance.
It is no defence that such acts may be common practice in some countries.
You must be aware of the types of activities that are legal and illegal
when interacting with foreign officials. The offence applies regardless of
the outcome or result of the bribe or the alleged necessity of the payment:
companies and individuals may be held liable regardless of whether or not
the bribe obtains the advantages sought and whether or not the bribe was
considered necessary to do business. Refer to Attorney-General’s Department
Foreign Bribery website