Export Pricing

Correct pricing is a necessary condition for an export shipment.

The consumer often makes a purchase decision based on the price of a product or service. So-called price elasticity is important for understanding how willing the buyer is to consider the product, especially for a new market, focusing on the price offer. Considering that the exporter often works not with the end consumer but with a B2B partner, the importance of a correct pricing policy increases many times over. We will talk about this below.

How to calculate the appropriate price for an export offer?

Pricing is a complex process involving many departments and services of an enterprise. The organization of this indicator depends on the specific company, including the specifics of its activities. For example, in industrial enterprises, great importance is traditionally given to calculating the cost of products, which then forms the basis with the addition of some margin. Logically, in this case, leading positions are given to economic or financial divisions.

In companies that are more market-oriented, when forming a valuable offer, attention is paid to competitive analysis and the study of price offers. As a result, commercial services and marketing mainly influence the approved prices.

More often in practice, company management tries to combine these approaches to take into account both the costs incurred in creating the product and the current market conditions, but one way or another, someone has the final say in the decision. For developing a price offer for export, especially if it is created for a new geographic market, it is still advisable to focus more on the "from the market" or "from the project" approach, and here's why.

First, a typical situation: "marketing" justifies a price lower than "economics and finance"; it is very rare for it to be the other way around. When entering new markets, it is better to use the marketing approach by default - the product is new, the manufacturer is unfamiliar, interaction schemes are not worked out. It will be much easier to enter with a lower price in order to then build a more correct pricing policy.

Secondly, economists and financiers "like" to include all expenses in the price calculation, including general administrative expenses, which causes a significant increase in cost, and consequently, the price. But for the sake of the cause, calculating prices for new sales is better done based on the cost, which includes only production and commercial expenses, because if the sale does not take place, it will not reduce the incurred "overhead" costs. Roughly speaking, during the launch period of a product on a new market, it can be "freed" from various overhead costs in the cost price. In addition, it must be taken into account that export outside the Customs Union does not provide for the inclusion of VAT in the price.

Finally, thirdly, when forming an export price, there are many nuances that already increase the company's costs and therefore must be taken into account in the product pricing. Information of this kind is collected by marketers or specialists in export sales who can build a logical chain of price formation. What needs to be considered in the framework of a detailed calculation?

It is logical to build it as follows.

First, based on analytical procedures, methods of collecting information about competitors' prices from the export market (more on this later in the text), the "entry price" is determined; it should be approximately 10-15% lower than the closest analogue that has already proven itself on the market, so that the consumer has a concrete interest in your price offer.

Then, the markups in the sales channel links through which the product will reach the consumer are calculated and "unwound" backwards. Actually, this is why it is so important to choose the optimal scheme of work with the export market, reducing the length of the product distribution chain if possible.

For some countries, it is important to understand what additional costs the partner and/or exporter will incur in connection with the import of your products, and therefore include them in your price. The list of such costs can be very large (here we are not talking about tariffs and "import" taxes). For example, the cost of packaging disposal in the countries of the European Union.

Next, the actual "customs clearance" is assessed, meaning we must take into account both the amount of import duties of the target export country and the amount of value-added tax (VAT) that the importer or, possibly, the exporter will pay if the delivery basis provides for these obligations (but for Russian companies, such practice is rather an exception).

Then, it is necessary to subtract the expenses per unit of goods for logistics, insurance, etc., which the company (or its partner) incurs when physically moving the goods from point A to point B.

At this stage, one can understand - what approximate price (cost + markup) should be to "fit" into the market. And if it corresponds to the company's capabilities to include it in the contract, then the "economics" of the export project will work out; otherwise, the risks of non-sale will be significant, and therefore it is necessary to work either internally with the cost and markup or externally - along the entire chain presented above.

Information sources necessary for forming an export price

Given the importance of different types of information for determining the correct price for an exported product, the approach to its collection and processing becomes paramount, but, first of all, it is necessary to learn how to work with the main sources of information.

What do we need, at least at a minimum level, to approach a potential foreign partner with an interesting commercial offer in terms of price?

You can start with yourself - adequately calculate the cost of the product, if possible, based on direct costs for its production and sale within a specific export project. Then set a small markup that should meet the criterion of reasonableness, in any case not exceeding the markup on the traditional market of presence. The sources of information here are internal, and there are no problems with the initial data.

Then it is necessary to assess logistics costs. To do this, it is enough to request commercial proposals from specialized companies, compare them and choose the optimal option taking into account the risk factor, delivery speed, and others. Include these expenses in the price per unit of goods through the cost of shipping the entire batch.

To determine the cost of releasing goods into free circulation in a foreign market, it is necessary to know the amount of customs duty, fees, and the import VAT rate. All this information can be found on the websites of the state customs authorities of the potential export country.

Sometimes collecting this data can be difficult due to the language barrier, as customs and tax legislation is published in the state language of a particular country and is not always duplicated in English. Moreover, the documents themselves can, for example, be posted as files that browsers do not automatically translate. As a last resort, you can seek help from a partner in the export country or involve a specialized agency on outsourcing.

Calculating the costs of overcoming non-tariff barriers, especially those related to various types of product certification, production, label preparation, compliance with packaging requirements, etc., is usually much more difficult than finding out tariff restrictions. Of course, this issue is not relevant for all goods and country markets, but if we are talking about a conditional food product or chemical raw material supplied to the countries of the European Union, then marketing research of barriers becomes extremely important. The costs can be very significant, and therefore cannot be directly "allocated" to the first batch - in this case, it will guaranteed become unprofitable.

The costs of overcoming non-tariff barriers of export markets should be attributed to the cost and, consequently, the price of the goods, taking into account the long terms of the project, as this is essentially an investment in sales development. On the other hand, healthy rationalism must be shown, because if expenses of this type pay off in a year or more, then the probability of "negative economics" of the export project is very high. In this case, it may be worth abandoning work with this market or making significant adjustments to the market entry plan, including in terms of sales volumes and product positioning on the market.

From the point of view of collecting information for decision-making and analytical work, the most problematic area is usually the study of channel markups and the justification of the final price in the export market.

In some cases, and many exporters adhere to this model of behavior, pricing in a foreign market is done by the Russian company up to the stage of the wholesale price, which is indicated in the foreign trade contract with the partner. This may be sufficient, especially for the first shipment, but thereby the exporter becomes dependent on the commercial policy of the counterparty, which can lead to a significant shortfall in profit due to subsequent low sales volumes.

For some groups of goods, for example, raw materials consumed in the production process abroad, a short sales channel also does not impose high requirements on the depth of pricing policy development. Nevertheless, more often the exporter faces the need to deeply immerse themselves in the issues of pricing in the target market, markups in the product distribution chain, and actual competition in the market based on price criteria, for which, at a minimum, it is necessary to conduct a desk study.

Sources of information for forming a correct price in this case can be open data presented on the Internet, methods of competitive intelligence in the field of pricing policy of market players, census of retail outlets abroad, conducting various surveys, both mass and expert.

It is especially worth noting that when researching export markets for which your product is an import, such a source of information as customs statistics databases is well suited. Not every country sells databases of customs declarations (naturally, not directly), but if it is possible, then such a data source should be used. With its help, you can look at objective information about who, to whom, what, and at what price (customs value) supplies. The most "economical" option in this direction is to purchase a database of Russian exports to the target country for the HS code of interest. However, domestic goods constitute a significant share in a small number of export markets. Still, it is more correct to use the import databases of the respective countries.

As we can see, export pricing is a rather serious process that requires a lot of preparatory work and analytical skills. Also, in modern foreign trade activities, it is important to operate not only with the final price but also with related financial instruments and offers.

Pricing in export activity – not only "price"

In export, the final price is extremely important, but there are also many other significant aspects assessed by a potential partner when making a decision on cooperation with a Russian company.

To begin with, as in the domestic market, a foreign buyer wants to see a targeted price offer that should be both flexible and transparent. Therefore, all working tools related to promotional offers, discounts (at least for volume), retro bonuses, etc. should be actively applied when developing an export project.

The second point is exclusivity and, in general, various preferences for the partner within the framework of cooperation in a foreign market. This issue is difficult to attribute specifically to the second P (Price) in the marketing mix concept, but it is very close to it, taking into account the influence of any exclusivity on the price aspect of the contract. It is good when the exporting company has a prepared and justified position on what consequences for prices will be caused by additional guarantees for the buyer in case of long-term cooperation.

Perhaps the most problematic area in negotiations on the financial aspects of supply abroad is the system of payments between the seller and the buyer. Russian companies often insist on full or almost full prepayment for the shipment, while the importer considers only post-payment (or a small share as an advance). Here, besides the issue of price, the very possibility of supply is often discussed, as the risks are very high.

When entering an export market, company management must realize that there are established rules of operation there, and therefore it is unlikely that a newcomer will be able to dictate their own rules of the game. It is more reasonable to make concessions on the form of payment, compensating for the risks with a price offer (especially since other players do this, except for those very entrenched in the market). There are also technical options, for example, a letter of credit form of payment. Cash Against Documents (CAD) is an established business practice in many markets, especially those with a large trade turnover relative to domestic consumption (UAE in the Middle East or the Netherlands in Europe), and therefore agreeing on a contract on such terms is much easier and ultimately less costly, although the letter of credit service is not free. Its cost can be reduced by contacting a specialized bank through the line of State support for exporters.