Export pricing and costing is a part of the marketing mix that often is neglected until quite late in the planning process. However, getting this wrong can sink your project so you need to do a certain amount of analysis at an earlier stage to see if your export pricing strategy in international trade gives a good product market fit.
After all, you need to be sure that your product or service will sell before you make further investments of time, energy or resources into an overseas market. On the one hand, customers have to be willing and able to buy your products and on the other hand, you need to be sure that you’re able to make a profit in the market as otherwise you’re wasting your efforts.
Table of Contents
Price Positioning in Overseas Markets and the Marketing Ps
Almost everyone has learnt at some stage about how your pricing strategy for export is a key part of the marketing mix. However, “marketing” is normally something that you decide upon once you’ve already made the decision to enter a market, whereas the analysis of the export pricing and costing needs to be done up front.
There’s no point in doing the work of researching a market and finding a suitable distributor only to find that your products are too expensive to meet the targets that you have set.
At this stage though we’re not finalising the price positioning, but rather calculating some scenarios to establish whether or not we can be profitable. If there’s no possibility of that, you don’t need to worry about fine tuning your shelf optics so that you’re the perfect 4.79% (or whatever you’d ideally like to have) above your main competitor.
Export Pricing and Costing Out your Project
Of course there will be some unknown variables at this early stage of your research, but you may need to make some reasonable assumptions in order to reach a conclusion about the product market fit. I’m not an accountant, but I see a lot of companies assume too much here. Make sure you document your assumptions too, because for sure, they will not all be correct.
The Product Itself
Do you need to redevelop your product in order to comply with the regulations of the market you wish to target?
Does that mean that you need different raw materials that could be a different price to the originals? If you need an additional supplier that probably means extra costs in terms of an audit as well as in administering the account.
Will you have to produce extra for the market – in probably smaller batches than you are used to, or can you combine the production with the production for another market?
Do you need special packaging in order to serve your export clients? This might be a different package size and/ or printed with the local language (some countries don’t allow stickers with the translations). Don’t just think about your retail packaging though: you might need stronger transport packaging for export shipments which can also add to the costs.
I don’t want to write a massive post on full cost accounting, but you have to know what the products are really costing you. One off costs such as packaging forms or redevelopment have to also be covered somehow, unless you decide that those are investments that will be financed out of your existing business. If your domestic business is already covering your fixed costs of running the business easily, or if the product you intend to export is already obsolete at home, you might decide that your pricing strategy for export doesn’t need to make a contribution to those expenses.
Transporting the Goods
I already mentioned packaging above with regards to protecting the product during transport and making sure it’s legal to sell. One point though that can influence your export pricing strategy in international trade is how your pallets are configured in order to maximise use of space in the container.
Even though the price of containers in intercontinental freight have come done from the peaks of 2020 and 2021, you still don’t want to be transporting fresh air. Nobody has budgets for that! This is something that can be complex to calculate though especially if you are planning to sell a range of different products and also because there are weight limits on containers.
That means that if you are transporting something light such as nappies (diapers) then you can stuff that container to the roof and there’ll be no problem. If you want to transport wine or body lotion though, chances are that the container will be at the weight limit even though there’s still loads of space available. Whichever type of product you have, you want to be sure that you’re maximising the value that you can pack in your containers in order to keep costs as a % down.
Also remember to calculate 1-2% of the product value for freight insurance. You may not need it often, but if something goes wrong, you’ll thank me… That could cover damages in transit (cranes are not always that gentle with containers – I’ve seen a full load of juice bottles ruined because the container was unloaded too roughly and it popped all the seals on the bottles) or even the loss of a container. A container of mine was once lost overboard in the English channel in a winter storm… It’s really not fun.
Import costs can heavily impact your pricing strategy for export
Are there tariffs /customs duties that apply to your class of products in the markets you are targeting? These are mostly in the form of a % of the CIF value of the goods, but might be a fixed amount per unit. Bear in mind that countries sometimes use these kinds of taxes to either protect local industries (eg fruits to Taiwan) or to “protect the population” from consuming too much of something eg strong alcohol to Vietnam. Of course, it also helps the government when money flows into their coffers.
You might need to also account for other kinds of costs such as analyses or inspections. Even if your importer takes over those responsibilities, they all flow into the cost of the product in the end and the customer has to finance them. So at this stage you need to be really sure you’re accounting for ALL related costs.
Costs of Distribution and Sales
What does it cost to sell your product?
That is going to depend on the type of product, the market in question and also the channels that you have chosen to sell in.
Obviously, it will cost more to distribute products across a huge market such as Brazil than to deliver from one end of Singapore to the other. That is one side of the costs “in market”, but you also have to consider the margins of everyone who will touch your products: importer, potentially sub-distributor and retailer (be that on- or offline). These are the points that you will probably have to estimate but there will be industry and market norms that you can lean on.
For example retail margins are higher on spices than on basics like bread & milk, and importer margins are usually fairly standard across a market if you are really comparing services offered like for like.
What about marketing costs? They could be partly included into margins (both yours and those of the distributor) but could also be listed as a separate cost item.
Also, don’t forget to account for sales tax. It’s not a cost as such, but is a factor in comparing the price and therefore an element of your export pricing strategy in international trade.
Arriving at your final costing
If you have the answers to all the points I’ve mentioned so far then you are well on your way to being able to analyse your cost situation.
It can be a strategic decision whether or not to include all of the factors such as developmental costs or special certifications into the final pricing strategy for export, but you should certainly include them in your costing process. There’s no point lying to yourself – it will only come back to bite you later.
Analysing what prices the market will carry to see if you have product market fit
To be honest, you can sell products at almost any point in any country, no matter how poor, however you have to accept that the target market may be tiny if you are unrealistically expensive. There’s no point putting all the effort in just for minimal sales each year so you need to find the right balance.
There’s all kinds of theory out there on “price elasticity” and how you can reach your ideal prices, but I’d generally go with an in depth analysis of the competition and the shelves. If you haven’t read it already, have a look at my post also about doing a retail audit.
It’s really important when you look at the products your competitors are selling to make sure you’re comparing apples with apples. Sometimes a brand that is positioned as medium high quality in one market, will be marketed as premium in the next, although the recipe may be even a cheaper one. It pays here to really look at what you’re comparing.
Makes sure that you account for:
- product composition or formulation
- package size (converting into a kilo or litre price can help to compare directly, but remember that if smaller packages are usual on the market you’re researching then products may be more expensive than if in the package size you have at home)
- distribution channel (don’t compare say your proposed lotion prices in discount stores, with your competitors prices in a premium pharmacy as the margins in the product calculation are different)
Accept that the local competition doesn’t have to pay tariffs or international transport and has to pay fewer margins.
Are there other competitors from your home market present (where you’re intimately familiar with their general pricing structures)? This can be a great way to get a feel for where you stand. If you’re always 15% more expensive than “Brown’s soap” at home, then you can analyse what 15% more expensive means in your target market as a starting point.
Export Pricing Strategy in International Trade
A lot of companies don’t really have a pricing strategy for export – they simply add a fixed margin onto their costs and offer the products on EXW or FCA terms (check this article about INCOTERMS if you’re not sure about those), effectively washing their hands of what happens after that. There’s no full analysis to fix the optimal price positioning in overseas markets.
I wouldn’t recommend that you go that route as you could be either leaving money on the table or pricing yourself out of a market for no good reason. It’s far better to discuss the topic of price positioning in detail with your importer, and whilst you can’t dictate to the market (that’s illegal in most places and can bring HUGE fines down on your head), you can set guidelines by giving recommendations.
I’m getting ahead of myself now though as that’s a discussion for another day – setting prices in your export markets.
For your initial analysis of product market fit then you should make an assumption as to what the market price can be, based on relative positioning to your international competitors. You can then calculate backwards to arrive at a fictional purchasing price for the importer (eg. FCA your warehouse). Compare that price with your production costs and ideally there should be a gap between the two meaning you can have a margin and be profitable in the market.
Talking with industry specialists in the market will also give you valuable insights about which parts of your range offer the most value for local customers and which they are most ready to pay for. In the end, your international success depends on your customers being willing to pay the price you demand for your products, and that price allowing you to be profitable and to invest in the market.
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