Price is a significant factor in the product marketing mix so it’s vital to get your export pricing strategy in international trade right. If you look at what do distributors want then the right pricing strategy for export and how you manage that is a key element of the relationship.
I don’t want to dive too heavily into the theory around pricing and how you may choose to manage that, but to go more into the practical details of how you can use product price calculations.
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Company Culture influences your Pricing Strategy for Export
There are many factors that can influence your approach to pricing in addition to the pure question of turnover or profit. For instance:
- Your market growth ambitions
- plans for market share vs the present reality
- the need for corporate stability or expansion
- your corporate image (eg. Mondelez is in a different position to a small challenger start up)
- Public opinion and consumer views
- research and development
- costs and efficiency
- the competitive landscape of the market you are targeting
- your need to fill production capacity
Additionally, your export pricing strategy in international trade will be closely linked to your company approach to managing your distributors.
eg. 1. Evi’s Chocolate is a well known premium brand & the company wants to control all the activities of their international distribution partners, including having the last word on the recommended retail prices.
eg. 2. Smith’s Distillery is happy to do export business as it helps ensure that the production is always running at full capacity. Any enquiries are immediately sent a price list and might receive a small discount on larger volumes.
Those two examples show 2 extremes of the debate and there are many variations in between. The first (Evi’s) would probably want to agree as much of the price calculation in writing as is legally possible, whilst Smiths let the importer do what he wants as long as he buys from them at the price specified.
The Law with regards to Export Pricing and Costing
I’m not a lawyer so this isn’t official advice – you need to go investigate the details for yourself.
In many countries around the world, price fixing in any way, shape or form is illegal and can be accompanied by heavy fines (certainly in both the US and the EU).
What do I mean with “price fixing”? Here I mean agreeing with a business partner or a retail chain what their prices have to be. So for example if Evi’s wanted to make a contract with Wholefoods that Wholefoods were not allowed to sell their chocolate for less than $6 this would be illegal as it counts as price fixing. You can only make a recommendation, even if you know that certain retailers will sell below that price as a point of principle, however much it may annoy you.
On the other hand, there are also limits eg in the EU on selling products in retail below their cost price as this can falsely distort the competitive landscape. It’s allowed only under certain circumstances eg for sales promotion (not regular prices), liquidation of stock, short shelf life etc.
Why do you need product price calculations for export?
A calculation is simply a tool to help you do one (or more) of three main things within your international business:
- It can help you together with your distributor establish the pricing on the market
- you can use it to analyse your cost situation & help confirm product market fit
- it can be used for scenario planning if you need to change prices
There are companies who don’t work much with product price calculations for export as I mentioned above but this is a bit of a laissez faire approach which can come back to bite you if you’re not careful.
Being too rigid in your approach to your product price calculations and the way you agree them with your distributors can be risky as it stifles their freedom to manage the market according to needs – you don’t want this to become a massive battle ground between you. However, on the other hand, just leaving everything up to the partner can also result in lost sales if you are then wrongly positioned.
What do distributors want from your export pricing strategy in international trade?
To make a profit, quite simply.
Sure, there’s a bit more to it than that but they of course want to know that their work will be rewarded with an adequate margin to not only cover their costs but also leave them a profit.
They also want to have a reasonable recommended list price so that they will be able to sell the products. It’s no good knowing that your supplier will offer you a good margin if the absolute returns are too low due to the price positioning in retail being wrong.
Also, the way a supplier works with the distributor on a product calculation is an indicator of the entire way of working. This obviously works both ways. Some distributors are not used to working with binding calculation structures and are unwilling to do so – that can be a sign that your partnership will be difficult if this is something that you set great store by. It’s all a question of making sure that your values are aligned.
How to calculate export price
Making the export calculation in detail is one of the first detailed discussions you’re probably going to have with a partner. I mentioned in my post on the price aspect of product market fit that you need to do some calculations before actually deciding to enter into the market, but these discussions with the distributor are a more concrete and potentially detailed form of that.
Analyse the Competitors Pricing
There are different ways of doing this kind of analysis, but in short you need to be sure you are comparing like with like.
In the example above (I’ve taken out the filter to make it easier to see) you have information about the brand, the product, type of packaging, special features or benefits the unit price and also a kilo price as well as a photo of the product.
If you want you can also group products by category so you might split pasta into lasagne, spaghetti, fusilli etc. You could consider marking the category leader as 100% (basis the kilo or litre price) and benchmarking the rest of the brands on the market against that so that you see how they are positioned and whether their positioning is consistent. It’s a bit fiddly to set up but can be a useful tool going forward for when you do regular retail audits on the market.
Discuss the Ideal Price Positioning for your Brand with your Distributor
How do you want to be positioned? Is your brand a premium or perhaps a great value product? Decide together what would be best for your individual situation, taking into account international competitors.
eg perhaps you are always 5% cheaper than Nestle or 10% more expensive than Heineken?
Calculate backwards from the ideal recommended shelf price
Here you need to really discuss in detail with your distributor as perhaps your initial product market fit calculation had some assumptions that might not be 100% correct.. or perhaps you just made a rough calculation whereas now you can include all the details.
Make sure you’re 100% clear about what is the calculation basis for each type of cost or charge. Eg customs duty is often calculated on the basis of the CIF value of the goods, but for alcohol there is also a duty often on the volume or alcohol by volume content.
- which level of sales tax is relevant for this product?
- What are the average margins (or mark ups) that retail are working with?
- Do you need to calculate for a sub-distributor or will your importer sell directly to retail?
- what about domestic transport charges
- importer margin or mark up
- import costs (remember than customs duty may change from one SKU to the next depending on the ingredients)
- exchange rate
- freight costs
I’d keep the calculation as detailed as it needs to be but as simple as possible at this stage so work with “average margins” for retail etc (later you/your distributor) will probably have calculations in detail for each client, but for now, you are aiming to reach the export FCA price.
Margins or Markup?
Margins are calculated from the top down “in 100”.
eg if a retail price is 100 and the retailer has 20% margin, his net purchase price would be 80.
Mark Up is calculated from the bottom up.
eg if the net purchase price of the retailer is 80 and he has 20% markup then the retail price would be 96
If you need to calculate the retail price from the bottom up where the margin is fixed then you do the following calculation:
Purchase price divided by (1- the margin %)
so in the example above
80/0.8 = 100
That way you can easily calculate in both directions.
Distributor Margins (or MarkUps)
Make sure that you’re on the same sheet as your partner when talking about pricing. Even in sales, people are not always sure about the difference between the two terms and often use them interchangeably which can result in conflicts due to misunderstandings. (And there are few things more detrimental to any relationship than arguing about money).
It doesn’t matter whether you agree a margin or a markup as long as you are both clear about it – I’ll use “margins” from now on for simplicity. You can also agree different percentages for different product groups if that will help both of you to be more effective on the market. The main thing is that you have an agreement about the “standard” amount that your partner needs in order to cover their costs and have a suitable profit.
It’s a bit of a minefield as you can imagine because you probably have a figure in mind from other markets. That might not be realistic due to:
- differences in costs in the new market (Romania and Bulgaria are neighbours but a product calculation looks quite different in both markets)
- differences in the responsibilities which the distribution partner will take over for your company (you can’t expect a distributor who is taking care of all of the marketing and branding in Serbia to earn the same % as the company doing a purely logistical operation for you in Croatia)
- different understandings of what constitutes “a reasonable profit” (eg Europe vs Asia)
Your distribution partner is certainly your “extended sales organisation” in the market in question, but they are also an independent organisation so they have to be able to earn a typical margin for that market otherwise you can’t expect them to focus their attention on your product sales.
Exchange Rates
This is a complex issue, which probably warrants a whole post on it’s own so I will just say here:
- Your product calculation should include an exchange rate and the date (don’t just take the interbank rate though – be reasonable. Assuming your importer is paying you in your currency, what rate could he expect to get at the bank?)
- make sure that you agree a mechanism for adjusting this as necessary. You don’t want your partner to be losing money due to a move on the international currency markets, but equally if your home currency slumps you want to decide together how to manage that situation.
Can both sides make a profit?
This calculation for your export pricing strategy in international trade should show that you are both able to make a profit. It may be a relatively “quick & dirty” version of the true market situation because it’s using average values but should be enough to allow you to fix your FCA prices to the importer (& know that you will both be making a profit).
Does it reflect the market reality?
At this stage, the most important thing is to get down on paper how the pricing structures on the market work in general terms so that you can fix your prices to the importer and your RRP (recommended retail prices) and the importer can fix their wholesale price list.
In order to check whether both sides are REALLY earning the margins that they both need in order to have a sustainable business then you need to revisit the calculations at a later stage and dive into more details. You can weight the calculation with quantities for each SKU, make calculations (from the importer through to the end consumer) for each key customer or channel (eg for pharmacies or off-licences) including all of the relevant conditions which have been agreed.
Pricing is a really complex topic so it’s important not to go overboard when your starting out in a market, whilst still getting an overview of the details you need. It’s better to have a line item: “average discount to retail” than to overwhelm a new partner with too many details. You don’t want (hopefully) to micromanage them, but to establish a mutual working basis that can be used in the coming months to manage the market and grow your sales.
Possibly the most important takeaway here is to make sure that your calculations, even if using averages, are based on reality. Don’t just put figures in the calculation to make it look good – if any of the stakeholders in the supply chain are not making money because you put “pie in the sky” figures into the calculation then you’ll not have sales success for the long term.
Drop me a comment below if it would help you to receive a template for product price calculations for export & I’ll put something together that you can personalise.
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- Factors to Consider when Deciding on Payment Terms
- Advantages of Working with a Distributor in Export Markets
- Making the Best First Impression in International Business Meetings
- Finding the Perfect Partner: Distributor Dating in a Hybrid World
- Store Checks in International Sales: a Retail Audit Example
- How to Make an Export Plan Part 1
- How to Make an Export Plan Part 2
- Starting to Think About Your International Distribution Agreement
- An International Distribution Agreement Checklist Part 1
- A Distributor Contracts Checklist Part 2
- The Legal Requirements in an International Contract 3
- Types of International Distribution Channels
- International After Sales Service
- 55+ Questions to Ask When You’re Looking for International Distributors
- International Customer Service in Korea: Dealing with Media Crises
- Why an Integrated Business Planning Framework could Improve your Exports
- Export Pricing Strategy in International Trade as a Key Factor of Product Market Fit
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Kathryn firmly believes that business is done between people, and therefore places her focus on building strong relationships that form a solid foundation for doing business.
When she's not travelling around the world, Kathryn enjoys playing clarinet in her town's wind orchestra or sharing her love of the outdoors with her Scout group.