export pricing bottom up and top down models (cost plus and target pricing) by günter schranz

Export Pricing“Bottom up” and “Top Down” Models(Cost Plus and Target Pricing)

by Günter Schranz

Export Pricing - why

Prices are depending on…

• Relative costs

• Demand• Competition

How to get the right price

* export literature, translation, freight forwarding, logistics, export packing, product modifications, packaging, labeling, compliance with foreign standards, insurance, credit checking, export documentation, export financing, charges and of an overseas staff training …

Relative CostsExport Costs*DemandCompetitionPrice

Relative CostsExport Costs*DemandCompetitionPrice

Relative CostsExport Costs*DemandCompetitionPrice

Some Pricing Strategies

• Bottom Up – Pricing applying the traditional „Cost Plus“ approach to get the right price

• Top Down – PricingTarget Pricing to become competitive at a given price level on a price sensitive market

• SkimmingGet what you can!

Bottom Up - Pricing

• Export Price is calculated on base of domestic price

• Cost for export is just added to domestic price

Pros & Contras ?

Bottom Up - Pricing

Variation: Marginal Costing– direct cost of procuction and sales – fixed costs apportiond to sales volume

Conditions for Marginal Cost-Pricing– Stable Volumes– Marginal price is aplicable to new market

Marginal Costing may allow to find a moreagressive price on a competitive market

Bottom Up - Pricing (1/2)

Free On Board (FOB) % US$

Wholesale Price (EXW Named Place)+ Transport to carrier (airport, wharf)+ Customs clearance+ Additional packing/labor for transport+ Agent’s commission (Based on FOB price)

100+8+4+5

+12FOB (Named Place) =129

Cost and Freight (CFR) % US$

FOB Price (FOB Named Place)+ Sea/air freight charges to wharf/airport+ Sea/air document fees (Airway Bill, B/L)+ BAF (Bunker Adjustment Factor)+ Transport contingency

129+25

+8+2+2

CFR (Named Place) =166

Ex Works (EXW) % US$

Wholesale Price 100

EXW (Named Place) 100

Bottom Up – Pricing (2/2)

Carriage Paid To (CPT) % US$

CFR (Named Place)+ Cost for off-loading at destination

166+1

CPT (Named Place) =167

Cost, Insurance Freight (CIF) % US$

CPT (Named Place)+ Cost Insurance premium / agio

167+2

CIF (Named Place) =169

Delivery Duty Paid (DDP) % US$

CIF (Named Place)+ Import duty, taxes (% on CIF price)+ Customs clearance fees+ To door delivery

169+32

+5+12

DDP (Named Place) =218

Top Down - Pricing

• Calculate backward from a given market price to an EXW – price

• Compare with your EXW - price

• Take Actions:– Change / Develop your EXW price using such

tools as supply management, re-engineering, lean production, outsourcing …

– Go for other strategies, i.e. maximizing volumes, profit, market share

– Back out?

Top Down - PricingTrading Stage Price Per

unit (%)CalculationTip

Glass of honey at Dutch retail store 117Deducting VAT (here: 17%)* 17 117 – (117/1,17) Retail price excluding VAT 100 117/1,17Retailer Margin (52%)* 52 100 x 0,52 Retailer buys at / Importer sells at 48 100-52Importer Margin (Profit and Cost: here37%)* 13 48-(48/1,37)Importer buys at (including a 20% duty on CIF)* 35 48-13Duty 6 35-(35/1,2)CIF Price at Importer 29 35-6Deduct your fright cost 4 QuotationDeduct your insurance cost 4 QuotationFOB Price 21 29-4-4Deduct FOB cost 2 QuotationEXW Price ** 19 21-2*See local rates of target market** Deduct Broker / Agent commission if applicable

Export Costs

Problem:• Export costs are not always

calculable or known right from the beginning

• However it is crucial for the outcome to determine them as exact as possible

• Sometimes only export experience can help you out

Typical reasons for cost explosion

• Wrong trading terms applied or terms not understood => fright / logistical costs

• Packing (labeling requirements are not met• For any reason: Last minute product

modifications / last minute product adaption => additional, not calculated costs

• Wrong /incorrect / incomplete documentation

• Unforeseen delays (check reason for delay: document / certificate / label?)

Also have a look at…

• Fixed or variable costs are changing after accepting an order

• Currency changes - cover foreign exchange risk

• Rapid change of market prices – forecasting

• Changing conditions: legal / state of the art / other requirements

Assignment

• Prepare a price analysis for your company• Use quotations & calculation tables as

tools• Give recommendations on actual pricing• Prepare small presentation