What is Export Pricing?
Many companies new to international sales are unfamiliar with the concept of Export Pricing. Using a domestic Wholesale Price List as an Export Price List can result in an uncompetitive pricing structure in foreign markets and limit sales. The reason is that domestic prices include many costs that are not attributable to products sold outside the country; these costs will transfer to the buyer and be incurred in their market.
Calculating the True Product Cost Basis For Export Sales
Examples of cost items included in the domestic price that should be subtracted out to arrive at an export price include: advertising, promotional activities, sales salaries and commissions, sales staff expenses and benefits, delivery, service, a portion of administrative expenses, etc. Essentially anything that only relates to, or benefits, products that are sold in the US market.
This is important because all of these costs and expenses are not eliminated; they are just transferred to the buyer in the foreign market and will be added to the price of the product before it reaches the consumer. In order to achieve the highest volume of sales, or in some cases any sales at all, the product must be priced as competitively as possible.
Keys to Export Pricing
- Domestic price list is not suitable for export
- Exclude any cost item that does not directly apply to, or benefit, an international sale:
- Marketing, promotions, advertising, sales and sales support expenses, etc.
- After sale tech support, service and repair costs
- A portion of other costs such as administration as they apply to sales and marketing
- Consider the benefit of higher sales volume using Marginal Cost Pricing (see below)
Marginal Cost Pricing is a marketing strategy often used in international sales. The concept of marginal cost is that if the company is currently making a profit selling domestically, the annual fixed costs are being met. Therefore, only variable costs and profit margin should be used to establish the selling price for goods that will be sold in the international market. This results in a lower price for the goods sold internationally, yet maintains the profit margin, which can yield substantial benefits through higher sales volumes.
Benefits of Accurate Export Pricing
- Product price reflects true cost relative to foreign sales
- Allows buyer to add required costs on their end and maximize competitiveness
- Sales volumes are higher because price is more competitive
- Higher volume means lower unit costs for all production
A distinct advantage of pursuing international sales is that they can generate additional production volume and thus lower unit costs for all products produced. As fixed costs are spread over more units and additional cost leverage is realized, the result is better profit margins for all units sold. Consequently, it is important to consider the Cost-Volume-Profit equation carefully when calculating export pricing and the Johnson Group can assist you with structuring prices to maximize profits.
