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Chapter 4Instructor Shan A. Garib, Summer 2013

Pricing

Overview

•Financial dimension of contracting • Cost factors and determining appropriate pricing

• Exporter’s view

Pricing

Costing Considerations

•Export Costing and Transaction Viability • Entrepreneurs loose money because they didn’t

manage risk or couldn’t determine export costs

• Large businesses usually underestimate costs

• Need a good cost-accounting system for exported products

Pricing

Costing Considerations

•Incoterms• After estimating correct costs then set price using

incoterms: clear uniform technology that helps define the terms of trade and determine the costs, risks, obligations and responsibilities the importer and exporter face at various points in the trade transaction

•Export Costing

Pricing

Costing Considerations

•Export Costing• Price export costs step-by-step using a costing sheet

• Breakdown cost into categories eg production, marketing

• Makes easy to revise costs

• Checklist of elements to be considered when costing

Pricing

Costing Considerations

•Export Costing

PricingCosting Considerations

•Determining the export sales price• Sale price determines whether transaction determines profits

• Exporters don’t price for a single transaction but in terms of volume targets of profitable sales

• Pricing Strategies:• Static Pricing- same price for all customers

• Flexible pricing- different prices for groups of clients

• Penetration pricing- prices that undercut competition

• Market skimming- premium prices to max profit

• Market-maintenance pricing- prices held firm

PricingCosting Considerations

•Determining the export sales price• Legal or regulatory constraints such as anti-dumping

legislation, resale maintenance legislation, price ceilings, and price-level reviews or quotas can undermine a pricing strategy

PricingCosting Considerations

•Transaction Viability• Export pricing and pricing strategies are influenced

by two elements: • Environmental factors in the target country eg FX rate

• Market factors in the target country eg competition

• Internal factors within the exporting company eg profitability

PricingCosting Considerations

•Transaction Viability STEPS:1. Determining the export cost

– Determine all costs then add profit margin– Exporters can determine cost according to different

commercial terms eg CIF or FAS (free alongside ship)

2. Elaborating a pricing strategy– Choose pricing strategy according to environmental and

market factors eg economic and political– Environmental factors eg FX rate, CPI, laws and regulations– Market factors eg competition , market share, purchasing

power of potential clients

PricingCosting Considerations

•Transaction Viability STEPS:2. Elaborating a pricing strategy

– Internal factors eg profitability, costs of production, and distribution, negotiations with importer

3. Assessing the Transaction– Compare cost of sales with price

– Adjust cost to pricing strategy

– Consider the number of people in transaction

PricingCosting and Trade Terms (Incoterms)

• The object of Export costing• Evaluates the viability of an export trade transaction

• Export Costing and Trade Terms• Trade terms affect costs and size and timing of

revenues

• Trade Terms and Incoterms• Trade terms evolve from negotiations bewteen buyer

and the seller

• They establish responsibilities of the exporter and importer for the shipment of goods

PricingCosting and Trade Terms (Incoterms)

• To make trade easier the international chamber of commerce created Incoterms, as set of rules

– International Commercial Terms– Current edition is Incoterms 2000– Exporter can refer to subsequent disputes– Helps avoid litigation– Four categories of Incoterms:

– “E” – Ex works (EWX) exporter makes good available to the importer at the importer’s premises

– “F” – Free Carrie (FCA) Free Along side Ship (FAS) and free on board (FOB) covers cases where exporter delivers goods to a carrier appointed by the importer

PricingCosting and Trade Terms (Incoterms)

– Four categories of Incoterms:– “C” – Cost and Freight (CFR) Cost, insurance, and freight

(CIF), Carriage Paid to (CPT) and Carriage and Insurance Paid To (CIP) describes cases where exporter contracts for carriage to a named destination but does not assume the risk of any loss, damage or additional costs once goods are delivered to named destination

– “D” – delivered at frontier (DAF), delivered Ex Ship (DES), Delivered Ex Quay Duty Paid (DEQ), Delivered Duty Unpaid (DDU) and Delivered Duty Paid (DDP) require exporter to bear all costs and risks needed to bring the goods to the country of destination

–

PricingCosting and Trade Terms (Incoterms)

– Four common Incoterms:– EXW, exporter obligation to deliver fulfilled when it makes

goods available to the importer at the exporters premises» Least amount of responsibility of EXPORTER

– FOB, exporter bears all costs and risks until the goods pass the ships rail

» Only used in sea or inland waterway (maritime) transport

– CIF, used in maritime transportation situations» exporter bears all costs and risks until the goods pass the ships

rail, then goes to IMPORTER

– DDP, exporter obligation ends when goods have been made available at the named place in the county of importation

PricingCosting and Trade Terms (Incoterms)

– READ from:– Incoterms and Trade Finance pp98-115