Last reviewed 14 June 2019
Setting prices for export buyers and customers can seem complicated. It needn’t be confusing though, if we keep in mind the key issues.
It’s much too easy to get bogged down with costs when thinking about prices. Costs are obviously important, but they shouldn’t be the prime consideration. After all, customers rarely concern themselves with the cost of making something when they buy. They do care about value for money, but that’s a very different thing. And when our customers decide whether or not to buy what we have to sell, they will think about the benefit they expect to get, the alternatives, but rarely do we worry about the cost of the item to make.
Marketing courses and books tell us that we should put cost right out of our heads when pricing. I don’t totally agree with this, just because we need to know what margins our products will make, and whether they will meet our business objectives. Cost can not always be what it seems, and we especially need to consider the aspects of exporting that don’t apply to home sales such as we detail below. But that doesn’t necessarily mean our prices will be higher than at home, in fact that is rarely the case.
In many businesses, the true cost of getting a product to market is never fully understood. The discipline of costing is sometimes a dark art, where we overlook or deliberately ignore some aspects of the essential activity in getting a product to market.
In calculating the cost of production, we consider the costs we can attribute directly to the finished product. The cost of material, labour and heat or power. Then we need to add a share of fixed costs; the rent of the building, machinery, overheads, administration, sales and profit. At minimum, the product needs to cover the costs directly attributed to its manufacture plus enough contribution to fixed costs/overheads. Knowledge of our costs ought to give us a notion of a price below which we will not go.
When we calculate costs for export, there are some additional things to include:
The cost of any modifications to the product or packaging.
Costs of arranging customs clearance and associated documentation (depending on Incoterms used).
Costs of delivery (depending on Incoterms used). Costs of payment arrangements.
Costs of currency exchange (where relevant).
Costs of export staff
(Take care not to miss anything.)
But there are costs that shouldn’t be included:
UK sales team
After sales service
Overheads not related to export sales
The cost of producing goods for export will often be substantially different to your costs for the home market.
Having established this cost information, we will not use it to set export prices. Neither will we take our home prices and adjust by a fixed percentage. What we will do is consider the end user. What is the product worth to them, and what alternatives do they have? What are their buying habits? Where do they buy?
Pricing decisions should always start by considering the end of the supply chain. Considering what price our end user is willing to pay will always be something of a guess. As we saw at the beginning of this article, it’s something of a moving target. But our guess needs to be an informed one, based on reliable knowledge. We might be working on information about what our competitors’ products cost. If we have no competitors (and if we don’t, that has ramifications for our export strategy, not just prices), then we need to find another way of reaching a conclusion. For example, by researching the prices of comparable products.
How do we set our prices in comparison to the competition? That really depends on our objectives. Some businesses seek to win market share quickly by setting competitive (lower) prices. This is called Entry Pricing or penetration pricing in marketing and is a way we often see a newcomer behave, particularly in a competitive market. The price might take the form of a special promotion. The newcomer is hoping to tempt you away from your regular choice because of a better price but keep your long-term custom because you find you actually prefer the new product.
Conversely, some suppliers introduce their product at a higher price than their competitors. If done well, it can help to build a brand with a high perceived value, but at the cost of slower initial growth and usually higher costs in market development. This is called price skimming
Price skimming and entry pricing are known as dynamic pricing methods, because they involve a conscious decision to alter prices as the products become established. This is common practice, but when we do this, we face an issue called sticky pricing. In the buyer’s minds, the value of the product is very much determined by what they pay. Just because something is a significantly higher price than it was last time can lead to the impression that it “isn’t worth it.” If we are using entry pricing methods, its important to communicate very clearly that the customer is getting a special deal. Marking the packaging as “special introductory offer! 25% off!” is the kind of message we need to get over, and also helps to get the product noticed. Rather than offering a discount, the offer might take the form of a free gift or additional quantity. Buy two, get one free, that kind of thing. They key is to work hard to ensure the buyer gets the message that what they have just bought is really “worth” more than they just paid.
Such decisions are intended to be temporary and can be seen as part of the initial launch. To make our decisions about pricing strategy we need to consider what the long-term prices to end-users should be. From our previous research, we already know what our planned supply chain would be, and we can work back from end-user price to calculate what margins everyone in the supply chain (including ourselves) could achieve.
If we are going to sell through an intermediary, then we don’t really have control over the final price. But we can influence it, and when negotiating prices with our distributor or other intermediary, agreement on roughly the price that can be charged to the end user will necessarily be a crucial part of the discussion. If our business is in high priced capital goods or large bespoke items such as machinery, there isn’t a role for a distributor as such, and it may be that we retain local sales agents to win business for us. The agent’s reward will be a percentage of the value of the contract, but he may have very different ideas to us about the prices we quote for a job. Setting prices in these circumstances needs a very good understanding between ourselves and the agent. We know what prices we set for comparable products or jobs in other countries, he knows about local market conditions and what the competition are doing. It’s crucial to work as a team in these circumstances, and pitch to agreed criteria.