Key factors to consider in an export pricing model
This article comes from our interview on Pricing and Getting Paid with Kevin Shakespeare from the Institute of Export & International Trade.
What are the key factors in setting an export pricing model?
The company should look at the prices they set from their own perspective first. What’s the nature of the product they provide? If it’s a higher quality product it might attract a higher price. If it is a mass-produced product in a competitive market, the business may want to set a lower price. Costs of production should also be a consideration, to ensure the company maintain an acceptable profit margin.
Your target audience will also influence pricing. If you’re selling to big retailers, for example, they’ll expect a significant discount, for a distributor likewise – both parties may also purchase in bulk in order to justify larger discounts. If it’s the end-customer you’re proactively targeting then the likelihood will be that you will be more competitive on pricing. If it’s an enquiry over the website or an order from a customer or company you’ve not considered yet, you may want to factor in a higher price to reflect more uncertainty in your pricing model.
It also depends on how much you want to win the business and how much you’re in it for the long term. If you’re trying to establish a presence in the market it could be that initially you will offer lower prices or price discounts. This, though, is unlikely to be sustainable and can be a risky strategy if your customers get used to price discounts. Should you go on to increase the price the buyer may then be less inclined to purchase from you.
Also think about the competition. Who is the competition locally in the overseas market? And don’t think about only the competition in the country itself but consider regional competition as well – especially if it’s in a trading bloc such as the EU. Consider global competition as well, though their importance will depend on the nature of the product you are providing.
The payment terms will also influence pricing as well. If you’re asking for money upfront then the likelihood is that you may have to price more competitively to get your buyer to pay. If you’re offering 90-day credit terms you are being very flexible and you also bear more risk which should also be reflected in the pricing.
Then there’s also the pricing impact of things like currency movements, transport and tariffs to consider as well.
How can a company mitigate against cash flow issues brought about by a lower price point entry strategy?
The more flexible a business is on payment terms the more likely they are to win the business, but if they are offering credit terms – be that 30, 60, 90 day credit terms for example – they will have to fund the production of the goods and services and that will have an ongoing impact on the business.
If you were to get finance from the bank, for example, you will still have to pay costs for this in terms of an overdraft, a loan, or an alternative financing facility. The pricing model, whether you’re tendering or quoting for business, should be factored into this.
From the point of view of the buyer, they’re not going to be too interested in all that – they just want a competitive price that they can compare and benchmark with the competition. From the exporter perspective they need to factor in the cost of financing.
If an exporter is cash rich or has money available whereby they don’t have to borrow to cover the credit terms they will still need to consider the other impacts of not receiving the money for 90 days – like a loss in interest or loss of funds to invest in other parts of the business at the time.
Other articles in this feature:
- Ways your bank can help you with getting paid internationally
- Invoice discounting and factoring – what you need to know
- Forward rating and how to avoid losing out to currency fluctuations
Need further support setting an export pricing model? These courses with the Institute will give you in-depth training:
- http://www.export.org.uk/page/AdvancedFinancing
- http://www.export.org.uk/page/Letters_of_Credit
- http://www.export.org.uk/page/Business_Essentials