Making the leap from domestic sales to an operation that’s doing business internationally comes with a new range of considerations. Not least of these would be to calculate business costs in any new markets.

Any business exploring a new international market needs to taking into consideration new costs such as those associated with international shipping, currency exchange, and methods of payment, many of which are unique to international business and come with associated risks.

Organizations trading abroad must understand the different factors that can affect their business costs. These factors are shown in the following image and explained below.

1. Transmission delays

Transmission delays, an often-overlooked cost of doing business abroad, can affect cash flow significantly. International shipments and the resulting payments are complex enough—delays can slow the transmission of funds from the paying country to the receiving country by a few days to several weeks. The cash budget must consider the possibility of technical or bureaucratic delays along the payment chain.

The delays may be the result of improperly completed documentation or foreign administrative procedures. New exporters may be able to plan for the types of delays experienced in their domestic business, but they can be unpleasantly surprised when international business delays are far longer than they expect.

2. Exchange controls

Resulting from the host government’s attempt to conserve its hard currency reserves, exchange controls can prevent or restrict the payment of funds by the trading parties in a country. Often enforced by a cumbersome and lengthy system of foreign currency authorization, these regulations impose more problems for capital repatriation transactions than for payment of arm’s-length invoices.

At times, export controls can result in all payments being stopped. This can have a devastating effect on a company’s cash flow, and it should be insured against if the amounts involved are relatively large.

Want to learn more about all aspects of how to manage business costs and cash flows, ensure payment and stay profitable long-term? Get started with the FITTskills International Trade Finance online course!

3. Exchange rate fluctuations

Foreign exchange rate (FX) fluctuations can reduce the value of the proceeds from a sale or increase the value of the funds needed to pay for a transaction. Unless planned for and controlled through risk management techniques, such fluctuations can seriously undermine expected cash flows, or surprisingly increase profit, hence the need for the margin on the contract.

4. Political risks

Political risks can also severely affect a company’s cash flow. For instance, the revocation of an export or import permit frustrates performance under an international trade transaction. In the meantime, the exporter may have already covered the costs of arranging for the export sales, purchased supplies, fixed business costs, paid salaries or prepared the products for shipment. Such a situation will have an obvious negative impact on cash flow.

5. Delayed collection of receivables

The slower collection of international accounts receivable can strain a company’s cash position. To avoid this, care must be taken to select appropriate payment terms for each foreign buyer, and to factor likely delays into the cash budget. If the receivables involved are substantial, the exporter should use export credit insurance or export receivables discounting facilities to avoid excess risk.

6. Technology

Trade finance and logistics providers are investing significantly in the enhancement of technology and related reporting capabilities, working to turn the provision of timely information and high transactional visibility into a significant element of their value proposition to importers and exporters on a global basis. Technology—from processing systems to web-accessed software and sophisticated reporting systems—is enabling the delivery of trade finance solutions across the life of a transaction, and doing so at an ever-faster pace, to keep up with the evolving needs and increasing expectations of importers and exporters.

The latest developments in trade finance include significant forays by leading global banks into areas that traditionally have not been the purview of trade bankers but are increasingly so today. Logistics, customs brokerage, supply chain finance and management are all information areas that are of critical value to importers and exporters.

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New exporters may be inclined to use the same sales channels in the international market as they use in the domestic market. However, the methods that successfully reach customers and sell products and services in the domestic market may not work in the foreign market because of different political, economic and cultural influences.

The selection of sales channels is a balance between market coverage and costs. The more sales channels that organizations use, the better the coverage—but the higher the costs. Each additional channel not only adds costs, it can also attract sales from other pre-existing channels.

When selecting the right combination of channels for the sales and distribution of products and services, international trade practitioners consider several factors.

1. Target market buying behaviours

It is vital that an organization knows where and how customers want to buy its products and services. Market research is the key to answering these questions. During market research, demographic, psychographic, geographic and behavioural characteristics are considered to answer questions such as: where do customers in the target market buy similar products and services? In stores? Online? From sales representatives? The exporter must also consider the international sales and marketing plan and what the organization wants to achieve in that specific market.

2. Product and service characteristics

The characteristics of products and services are primary considerations when making decisions about how to sell and distribute products to an international market. Is the product light and small or is it a single piece of industrial equipment weighing several tonnes? Is the product perishable or hazardous, requiring special shipping and handling conditions? Can the service be delivered online or does it require face-to-face interaction?

Consider the product or service life cycle. New and unknown products and services are better sold by staff with the required technical knowledge. As the technology gets more widespread and standardized along with the knowledge of how to use it, technical expertise becomes less important. At this stage, using distributors makes sense. In fact, at the maturity stage in the life cycle, delivery time and price become more important than the need for specialized knowledge.

As products and services increase in value, exclusivity or price, exporters may prefer to use personal forms of selling. This can include the use of agents that are familiar with the target market. This is a good strategy for selling products and services that require a considerable degree of cultural awareness. Alternatively, staff from headquarters may be sent abroad to direct the sales effort. This is often the case for products requiring specialized technical knowledge that may not be available locally. Custom-designed products such as industrial machine parts are not good candidates for distributors because of the level of specialized knowledge required to handle them properly and to advise users. In contrast, inexpensive products that are easily stocked and simple to service are good candidates for distributors.

3. Market location

The location of the target market, including proximity to the export location, will influence the sales channels selected. Is it a neighbouring country accessible via a well-established road system or is it on the other side of the globe? Can the market be accessed by established shipping, rail or trucking routes? How long will it take to reach the market and restock supplies? What types of sales channels are available in this location? The geography of the target market, the distances between customers and the availability of different types of sales channels in that location all affect sales channel decisions.

Want to learn more about how to select the best sales channels for your business based on considerations of coverage, cost, partner relationships and location? Check out the FITTskills Selling to International Markets online workshop!

4. Competition

The sales, marketing and pricing strategies used by competitors can help organizations choose the best sales channels for their own products and services. If it has worked for competitors with similar offerings, it can also work for the organization. No matter whether the organization uses similar or different channels, it will strive to deliver and distribute its products and services as well as, or better than, the competition. It can gain competitive advantage by making it easier for customers to access its products and services, and by providing timely deliveries and inexpensive shipping.

5. Local business practices

Local business practices are another factor to consider when selecting sales channels. For example, when retailers make frequent purchases in small volumes, organizations need to find ways to warehouse and distribute products in the local market in response to that practice.

Take the example of agents and distributors in Latin America. In Latin America, agents and distributors are independent businesspeople who tend to look out for themselves. This tendency can be countered by having the organization’s executives build relationships with Latin American industry association leaders. Exporters using this approach are likely to find that new opportunities arise. These are opportunities that a local distributor or agent may not have access to, given the importance of power and status in the Latin American business culture. Even when agents and distributors are successful in visiting prospects and closing sales, their efforts can produce better results when the company executives are simultaneously building relationships and getting involved with senior industry leaders.

6. Legislation

Organizations must consider how legislation influences the sale and distribution of products and services in domestic and international markets. For example, Scotland has restrictions on holding and using personal data. Japan has legal requirements concerning store size and the opening of new retail outlets. Until 2001, China prohibited the direct involvement of foreign companies in its distribution and retail sectors.

Countries may also have special packaging and labelling requirements. This may include determining a permissible number of units per package (single, in pairs, tens, dozens, etc.) as well as what materials can be used in the package—some jurisdictions specify that a certain type of material must be used or that a certain percentage of the packaging materials must come from recycled material. They may also specify what information must be included on product labels as well as the languages to be used.

Domestic governments also have requirements for goods and services being exported from their country. The requirements vary based on the nature of the products and services, but they likely include obtaining a business number, providing a detailed description of the goods including country of origin, and reporting the goods at a designated export office within the required time frame. In some cases, they require permits and export declarations as well.

7. Market coverage

The extent of market coverage—the percentage of the total market that may be reached through marketing or sales activities—is a crucial consideration for entering a market. This applies to both selling and distribution activities. If an agent or distributor only operates within a specific geographic jurisdiction within the market, the company must decide if that geographic market coverage is sufficient for its needs. In some cases, particularly when entering a large market for the first time, some companies may decide to limit market coverage due to supply concerns or as a way to test the market.

Market coverage also refers to the extent that selling and distribution activities will access the targeted customers or market segments. For example, an exporter of luxury products may not require their market coverage in a foreign country to extend beyond the major urban centres.

8. Customer support services

Regardless of the distance between headquarters and the international market, today’s communications systems enable parties to communicate almost instantaneously via telephone, instant messaging, text messaging and emails. Communication technology helps to avoid some of the constraints posed by earlier communication methods and allows agents, distributors and consumers to have their queries answered quickly.

International markets and customers may be several time zones removed from the source of the information or service. As a result, exporters find themselves under pressure from competitors to provide 24/7 services to international customers. Customers increasingly expect customer service agents and technicians to be available around the clock. The complexity and newness of products and services will determine whether exporters choose to have their own employees or intermediaries provide customer support services. If the exporter requires little to no customer service, they can use intermediaries such as agents or distributors. For complicated products, like computers and other equipment, exporters need to provide access to local technicians for repairs and maintenance.

9. Cost

An obvious consideration when developing a sales channel strategy is cost, particularly the cost-benefit analysis of one strategy versus another. Every link in the sales network implies a cost. The level of control and customer reach may be lower for certain distribution methods but could also be less expensive. Thereby offsetting loss in sales volumes.

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Despite a massive trend towards automation, exporting services still requires a high-degree of human involvement in development and delivery. It still requires a human touch.

When exporting services, the same basic rules for trading goods apply, but there are key differences. These include how the services are marketed and which taxes and regulations are applicable. These differences affect costing.

The services being provided tend to be less tangible than goods, and there is more variability in quality.

International clients often demand a high-degree of customization of the service to fit their particular needs and context.

This can make the cost and pricing analysis for service exports challenging compared to an analysis for tangible goods.

To ensure a venture will be profitable, all these factors, as found in the FITTskills Feasibility of International Trade course,  must be considered carefully during the costing and pricing analysis.

The service export sector is growing

Services are becoming a dominant driver of economic growth, both in developed and developing countries.

However, awareness of the services sector’s potential is still at a relatively low level. Developing countries are making the shift towards services much sooner than their developed counterparts.

Services can provide an alternative engine of economic growth, enabling late-comers to development to by-pass the traditional manufacturing route. Meanwhile, despite strong global growth, service exports continue to make up less than 25% of the world exports. This discrepancy between the size of the sector and its importance in exports points to a major untapped potential in the services trade.

The process of analyzing service export cost and pricing

The process of cost and pricing analysis for services involves the same three stages as for goods:

1. Determine the cost of exporting services.
2. Elaborate a pricing strategy.
3. Assess the viability of the transaction.

The approach to exporting services is similar when exporting tangible goods, however, there are some important differences to be considered. Organizations may be exporting services linked to goods, for instance training related to exported software. An organization may be exporting pure services, such as management consulting, education, or health services. It is sometimes more challenging for an organization exporting only services simply because establishing an international profile without a tangible product can be difficult and requires serious resources.

Step 1. Determine the cost of exporting your service

Service exporters must fully account for all of the costs involved in delivering internationally. Once the delivery mode is determined, a costing sheet must be developed or customized to address all relevant factors. The export of services is a highly variable field, and the potential costs will differ depending upon the delivery mode, the type of service, the industry sector, and the target market. Organizations should consider potential after-sales costs that apply, such as providing ongoing client support.

Step 2. Elaborate a pricing strategy

Once the costs are identified, service exporters must choose an appropriate pricing strategy. Market research will provide market intelligence related to the offered service.

Before setting a final price, exporters need to ensure they have considered the promotional costs of providing the service in-market.

Three reasons calculating a separate price for each export market is important are:

• Costs vary between markets
• Competitors’ pricing strategies will differ depending on the target market.
• The price end users are willing to pay will differ depending on the target market.

Some common pricing models for services include: cost plus pricing, competitive pricing, premium pricing, and penetration pricing.

Cost Plus Pricing

Cost plus pricing requires an accurate understanding of total costs for delivering the service into the target market as well as how to reflect a price compatible with the perceived market position.  It is important to have an understanding of the average margin for the industry in the export market. A drawback to using cost plus pricing is that an organization may not be competitive in some markets (for instance, this may be by over or under pricing). Organizations may be able to discount or match a competitor’s price, if local resources are less expensive than domestic ones. Final pricing should reflect a balance between affordability for customers and the desired profit.

Competitive Pricing

Competitive pricing involves setting the price of a service based on what the competition is charging. This is due to the assumption that the market has already reached a price equilibrium and competitors are setting their price to that. This can improve market access, especially if new services can be released shortly after market entry with demonstrable benefits and features. This is an acceptable strategy of service, if the service can be delivered at similar cost levels to other providers in the market; otherwise, it may not be feasible. Competitive pricing can make premium pricing difficult in the future, as it signals a ‘value of money’ or ‘affordable’ market position.

Premium Pricing

Premium pricing is a static strategy based on what the market will bear. It is a good export strategy as it is more profitable and provides a greater profit margin to cover cost increases. This strategy may allow an organization to maintain a price in foreign currency by absorbing negative impacts in exchange rates. As there is perceived value in innovative and uniquely packaged services, premium pricing can be an acceptable strategy. It also allows an organization to establish a premium brand in the market, offer discounted rates to loyal customers without reducing profit, and meet competitive threats over time.

Penetration Pricing

As with the export of goods, service exporters can choose to price their service low so that they are perceived as excellent value for the money. This strategy can reduce the time to get market entry, while sacrificing early profit margins. This process must be tightly controlled. Representatives and partners must understand that market success will bring future price increases to cover lost margins and achieve rightful market positioning. This strategy must be used with caution and its implementation carefully monitored.

Step 3. Assess the viability of the transaction

Finally, as with the export and import of goods, organizations must conduct a final assessment to determine whether the transaction is viable.

Comparing a comprehensive listing of costs that will affect the final price will provide critical information regarding the potential profit. Service exporters can then decide whether or not to move forward with a particular venture.

What strategies did you use when you took your service international? Let us know in the comments down below.

The post The 3 step process to price your service export appeared first on Trade Ready.

• Is the company entering a new market and hoping to attract customers’ attention and gain acceptance? If so, it should probably charge a low introductory price.
• Is the company looking to position itself in a particular way? If the company wants customers to view its products as luxury or quality goods, it should price accordingly.
• Is the company seeking to maximize the market opportunity by addressing all portions of the available market? If so, it may want to price flexibly to capture every part of the market.
• Is the market so far away that the company wants to minimize the administrative and operational costs of selling? If so, perhaps it should charge a single price.
• Is it seeking to recoup its investments within a narrow window? If so, it should charge whatever the market will bear before competitors drive down prices.

Companies’ marketing plans should also address day-to-day tactical marketing concerns. For example, should companies offer discounts for volume purchases? What kinds of special sales and promotions are appropriate?

Flexible pricing

Flexible, or variable, pricing involves offering identical products to different customers in the market at different prices. In essence, the seller positions the product differently, pointing out different sources of value to different groups of customers.

For example, one target group might be well-to-do and care about prestige. It may be possible to charge this group a high price by positioning the product as an imported luxury item.

Another group, such as middle-income earners, may be more concerned about getting value for money. The company would use mid-range pricing and position the product as offering quality or durability.

How high a price is depends on a customer’s bargaining ability, which in turn depends on the level of competition.

By addressing all possible market sectors, companies can maximize returns on their export investment and market position within a specified period. This strategy risks alienating customers who have paid the higher price.

Flexible pricing to a distribution network requires particular caution. The company’s distributors may hear of this practice and resources may be tied up in extended bargaining for the lowest prices.

There is also a natural inclination to divert supplies of the product from the lower to the higher priced territories.

Want to learn more about how to meet the needs of your customers by adapting products and services for specific international markets? Check out the FITTskills International Sales & Marketing online course.

Static pricing

Companies using static or uniform pricing offer the same price to all customers. Benefits of this strategy include the ease of administration and the customer goodwill created by such a policy.

The main disadvantage is that a rigid uniform pricing policy can easily be matched or undercut by competitors.

Another disadvantage is that a single price will not satisfy all parts of the market. Some high-end customers will think of the price as low, and may consider the product as less attractive and look for a superior (i.e., more prestigious) alternative.

There will be others at the low end that will find the price too high and will not buy it. With static pricing, there is no possibility of capturing every part of the market continuum.

Penetration pricing

The penetration strategy aims to capture market share by initially offering customers a low price. The company foresees that larger market share will enable it to achieve greater economies of scale. This means that its costs of production will come down, thereby opening up the margin for profit.

The target market becomes familiar with the product, accepts it, and ultimately comes to rely on it. In addition, as marginal competitors are forced out because they cannot match the low price, the original producer faces less competition. Then the company can slowly increase price and generate higher profits over time.

For example, the very first Japanese goods to enter North America several decades ago were offered at extremely low prices. In the 1950s and 1960s, “Made in Japan” was a byword for cheap and often shoddy merchandise.

Once the Japanese were established in the North American marketplace, however, they began to emphasize superior quality.

The success of this strategy can be seen in consumer electronics, where Japanese and Asian manufacturers now dominate the North American marketplace. It is also evident in the number of Japanese cars driven on North American highways.

Other Asian countries quickly imitated the Japanese strategy and, in some cases, overtook the Japanese.

Not all companies are in a position to adopt this strategy. It takes deep pockets and an ability to wait out a situation. Those that are in a position to do this must watch that they do not price so low that they violate a country’s antidumping laws.

International trade agreements prohibit the sale of goods at prices that are lower than the costs of production and delivery. Since costing is often inexact, considerable controversy can arise over what should be charged.

If they wish to avoid costly litigation, companies pursuing a strategy of penetration pricing should exercise caution.

Price skimming

With a price-skimming strategy, the company charges a high price in an attempt to maximize returns on a new product before competition materializes.

For example, the developers of a new technology (a more powerful computer, a new way of recording sound or video) will have incurred significant R&D costs that they will want to recover as quickly as possible.

They will also want to get whatever returns they can from their innovation before competitors figure out how to imitate it.

Because they have not incurred those R&D costs, imitators can easily offer the product at a lower price and still make a profit. Thus, the initial innovator has a narrow window in which to recoup the investment.

Weighing the benefits and drawbacks

Where demand is uncertain, high prices can establish an initial fix on the level of demand and then be reduced later as appropriate. The disadvantage is that the higher the pricing, the more attractive the opportunity will appear to competitors.

Companies need to think carefully about how long they have to pursue their strategy and what market position, if any, they hope to be able to maintain once competition appears.

Being the innovator that first brought the product to market may ultimately be less appealing than being the quality or the low-cost provider to mass markets.

Which of these plans fits best with your company’s marketing needs?

The post Which pricing strategy is the best fit for your international marketing plan? appeared first on Trade Ready.