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Chapter 13: Pricing, Quotations and Terms

IN THIS CHAPTER

  • Determining the best price for your product internationally
  • Handling quotations and the pro forma invoice
  • Defining the terms of sale
 

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SUMMARY

Pricing your product properly, giving complete and accurate quotations, choosing the terms of the sale, and selecting the payment method are four critical elements in selling a product or service overseas. Of the four, pricing can be the most challenging, even for an experienced exporter. If your prices are too high, your products may not sell. If they are too low, exporting may not be profitable or may even create a loss.

The traditional components for determining proper pricing are costs, market demand, and competition. When you’re exporting, a number of additional factors will complicate your analysis of each component compared to domestic sales. Clarifying your objectives may also be more complicated. For example, your main focus may be the penetration of new markets, long-term growth, or finding an outlook for surplus production or outmoded products. Your objectives may be either generalized or individually tailored to particular foreign markets. Costs of course are key to determining whether exporting is financially viable. One complicating factor here is the need to take into account additional costs that are typically borne by the importer. These include tariffs, customs fees, currency fluctuations, transaction costs (including shipping), and value-added taxes (VATs). These can lead to importers paying double the price charged in the United States.

More broadly, you may have to look at different ways of calculating the costs you use to set prices. Many new exporters use a traditional cost-plus method, which may escalate prices into the uncompetitive range. Marginal-cost pricing, which considers the direct out-of-pocket expenses of producing and selling products for export as a floor beneath which prices cannot be set without incurring a loss, is a more competitive pricing method for market entry.

Gauging market demand is similarly more complicated when exporting. Per capita income can be a good gauge of a market’s ability to pay for consumer goods. Simplifying the product to reduce its selling price may be one answer in markets with low per capita income. It’s also necessary to keep in mind that currency fluctuations may alter the affordability of goods. In any case, it’s important to anticipate the kinds of customers who will buy your product. Even in developing countries with low per capita incomes, selling at higher prices to expatriates or local people with high incomes might be feasible.

Evaluating the competition is complicated by the fact that you have to do so in each potential foreign market. If there are many competitors within a given market, you may have little choice but to match the market price or even underprice your product or service for the sake of establishing a market share. By contrast, if the product or service is new to a particular foreign market, it may actually be possible to set a higher price than is feasible in the domestic market.

Quotations and Pro Forma Invoices
Many export transactions, particularly initial ones, begin with the receipt of an inquiry from abroad, followed by a request for a quotation. A quotation describes the product, states a price for it, sets the time of shipment, and specifies the terms of sale and of payment. A pro forma invoice, which is a quotation prepared in the format of an invoice, is the preferred method in the exporting business. It may include many more details than you’re used to incorporating in your quotations, but all that extra detail can save time and prevent errors later on.

Terms of Sale
In any sales agreement, it is important to have a common understanding of the delivery terms because confusion over their meaning may result in a lost sale or a loss on a sale. Terms of sale define the obligations, risks, and costs of both the buyer and seller involving the delivery of goods that make up the export transaction. The terms in international business transactions often sound similar to those used in domestic business, but they frequently have very different meanings. For this reason, the exporter must know and understand the terms before preparing a quotation or a pro forma invoice. Chapter 13 of A Basic Guide to Exporting includes a comprehensive list of terms of sale.

This chapter’s Success Story is Alignment Simple Solutions, which sells compact portable wheel alignment diagnostic systems. With the help of the U.S. Commercial Service in Birmingham, Alabama, and other agencies, the company expanded from exporting to the Australian and Mexican markets via eBay in 2010, to the point where it now sells to more than 75 countries, with exports accounting for 10 percent of total sales.


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