Doing business in international markets is different from handling domestic business transactions on many levels.

A company that has decided to export its product or service to a new market or to buy from a new supplier in a different country cannot take for granted that the transactions will be viable, profitable or provide goods and/or services at a price and quality that are competitive. An exporter must ensure acceptable and timely returns on their financial investment in proportion to the associated costs and risks.

A transaction may prove unrealistic if the cost of entering a market is too high, the competition is too challenging or the price in the new market is not competitive. It is also not viable if the resulting sales generate losses or cannot adequately support the cost of doing business.

An importer needs to be sure that the product or service remains appealing even after factoring in the landing costs (all costs associated with the delivery of the goods and/or services to the country of destination), the packaging and the expense of any up-front travel and due diligence.

Exploring and entering new international markets is expensive, as costs can involve:

• Travel
• Communication
• Market research
• Packaging
• Insurance
• Professional services fees
• Banking charges

While the costs and risks of new trade ventures may be considerable they can be mastered with careful planning and preparation. With any new business venture, financials must remain a top priority.

Identifying cost and price elements

Conducting business internationally requires planning for foreign exchange rates, varying inflation rates and applicable laws and regulations—at home and abroad. Market factors to consider include competition, market share and the purchasing power of potential multinational clients.

Pricing a product for export is one of the most important steps in evaluating the viability of transactions and should be as accurate as possible. The cost of the sale will set the lower limit at which the export price will be set, and this will in turn set the basis for the negotiation between the exporter and importer.

2 approaches to product costing

1. The most frequently used – cost-plus approach

Cost-plus is a method where product costing is based on a calculation of the Cost of Goods Sold (COGS) and a calculation of Selling, General and Administrative (SG&A) expenses. These two broad categories of costs, COGS and SG&A, are used to determine the underlying product cost. On top of this, an additional profit margin is also expected. In exporting, additional costs must be recovered within the pricing structure that is used for export sales.

While cost-plus pricing is fairly straightforward, it does not work well in many export markets. For example, a cost-plus approach does not account for the incremental costs within the distribution channel. It also does not account for an understanding of market pricing, leading to the situation where a price could, in some circumstances, be too low. This can result in a deal with an importer or distributor that produces a disproportionate share of the profits.

Often, a cost-plus approach will result in a price that is too high. Export pricing tends to be market-driven, which means that pricing is generally dictated by market conditions.

The margin expectations of retailers and distributors are not particularly flexible, and supply chain costs (e.g. shipping costs, insurance, trucking) are similarly constrained. Consequently, many exporters are faced with a scenario where market-driven pricing is the starting point for calculations. From here, they must work backwards from the customer to ensure that suitable margins for the retailer and the distributor are available, and that all other supply chain/ distribution costs can be covered. This leaves the company in a position where normal Ex Works (EXW) pricing of their product is often not low enough, leading to potential deals falling through and additional market share remaining elusive.

EXW pricing stands for Ex Works which is an Incoterms® rule that specifies that, for the price being quoted, the exporter of goods is responsible to make the products readily available for pick-up at the company’s location for the importer. In other words, this price doesn’t include any additional costs associated with getting the product to the importer.

Want to learn more about how to ensure your business remains financially viable by analyzing the cost and pricing or your imports or exports? Check out the FITTskills Cost and Price Analysis online workshop!

2. Marginal-cost approach

Many exporters use a marginal-cost (or variable-cost) approach to export pricing. In this approach, a company that is already profitable in its own domestic market will make a strategic decision to carry the burden of all the company’s SG&A expenses or overheads on domestic sales. New/incremental overheads incurred specifically for export sales might be added as burden to the cost of exported goods, but, otherwise, the company uses only the COGS as the baseline product cost for export pricing.

This gives the exporter a much lower cost basis and the ability to be responsive to potential export sales, for example, where market-driven pricing and supply chain costs demand a very low EXW price for export.

There are also incremental costs for export which are largely inflexible and market-driven. Exporters receive proposals from importers that have been based on market pricing and must then work backwards to ensure that distributors and retailers can earn adequate margins that cover, for example, duties, shipping and insurance.

Consequently, the price target that the exporter needs to meet for EXW pricing is often too aggressive for the cost-plus approach and results in unfeasible deals. By contrast, those who use the marginal-cost method start with the COGS and add only the amount of incremental margin they can get away with to meet the target price.

In general, the use of a marginal-cost pricing approach for export markets will generate incremental sales that improve the overall profitability of the business. The additional sales volume will often result in better supplier pricing, and the incremental margins earned when the sale price is greater than the COGS will still contribute toward overall profits.

This is not always intuitive since many companies are used to seeing domestic “cost” breakdowns that include COGS, SG&A and profit. But marginal-cost pricing begins with COGS as the baseline cost, and it is therefore much more aggressive. This approach gives the export sales department a stronger position to make export deals.

Before applying a marginal-cost pricing approach, a company must already be profitable, and the domestic forecast should be conservative and achievable to ensure that SG&A is covered with margins earned on domestic sales.

Avoid “dumping”

Marginal-cost pricing can also be considered “dumping” by the importing country in some situations. Dumping occurs when the price of a product sold in the importing country is less than the price of that product in the market of the exporting country, and when competitors that are based in the importing country are injured.

Goods sold into the export markets at extremely low prices should be sufficiently different from the goods sold in the domestic market, for example with different packaging/labelling. This will minimize the risk that the exported goods will be shipped back to the exporter’s home market and sold back to the company’s existing customers via the gray market.

Which pricing strategy will work best for you?

Before adopting a certain pricing strategy, a company will need to carefully consider international pricing constraints in the form of local regulations or legislation, including anti-dumping legislation, resale price maintenance regulations, as well as price ceilings and price level reviews.

A pricing strategy, like other aspects of the financial plan, will be flexible and fine-tuned according to the dynamics of the global market.

The ultimate viability of a company’s international business strategy will depend on how well a product or commodity is priced to optimize profitability.

The post How to price your import or export products and remain profitable appeared first on Trade Ready.

To set the stage for an emerging markets deal, there is a lot of work that has to be done:

Understanding the market by analyzing data, arranging for focus groups and surveys, or working with an expert who understands industry dynamics. Assessing the regulatory climate and macroeconomic conditions. Defining a clear value proposition as well as a viable pricing strategy.

Even if all of these details are well-thought out and meticulously planned, signing a deal with the wrong partner can lead to spectacular failure.

Working with a partner translates to a loss of control, as all decision-making power is not housed under the same corporate structure. Incentives, however carefully aligned, can diverge, leading to friction and loss of profitability.

These issues arise in all business, but are dramatically exacerbated in the emerging markets environment, which is often defined by a weaker rule of law.

While the contract is the first and last step in maintaining a partner relationship in a developed nation, in the emerging markets context, the contract is just one piece of the puzzle. In this context, contracts should not be used as the sole point of compliance leverage, and very careful relationship management needs to be active, ongoing, and taken seriously.

Signing the deal with the right partner can lead to spectacular profits. The emerging markets partner has a lot to offer, including on-the-ground intelligence on the constantly shifting market, regulatory, and macroeconomic landscape of an emerging market.

They can leverage their local resources and relationships on your behalf, allowing you to maintain a leaner, more efficient operation at home.

So how can you find the right partner and make sure that the relationship functions profitably and smoothly?

1. Identify potential partners

Consider how your domestic networks translate into foreign networks – college alumni groups, World Trade Centers, Rotary Clubs, and various U.S. government resources are great places to start. Also consider engaging outside expertise that can bring their networks to your table- one of the main benefits of working with SH International is the access that we give our clients to our emerging markets’ networks.

Meet as many people as possible. For a recent deal we put together for one of our clients, we arranged for two weeks of meetings with various foreign companies. We came to our last meeting extremely frustrated, as we had not yet identified the right partner for our client. We were not even going to share this particular deal with the gentleman we met that day, since he was from a different industry.

However, at the last minute, we did, and he referred us to some connections of his. We ultimately inked the deal with this party that was not even on our initial radar.

2. Understand that face-time is critical

It is critical in emerging markets to meet people in person. It is entirely normal to see absolutely no interest or progress in any commercial transaction or relationship except when you are in the emerging market country itself.

As shared in our last FITT article, make sure to visit people with whom you have key business relationships in person at least once a year, and preferably more frequently. When your international trading partners have not seen you, they may start making business decisions without taking you into account. They may simply forget about you, or, more insidiously, figure that you will never find out about some of their decisions.

3. Conduct upfront due diligence on the partner

There are various services that can help you ensure that you know who you are doing business with, from services provided by the U.S. Commercial Service to private investigators. You can also ask the partner for references from clients, suppliers, or other third parties.

Finally, do not underestimate the power of a solid internet search. This due diligence is critical – you do not want to find out that you ended up doing business with a known thief, money launderer, or terrorist.

Your company may not recover from the reputation damage or associated liability.

4. Make compliance natural

While investing in top-notch local legal counsel will help mitigate the risk of unenforceability, it is critical to, as much as possible, provide the distributor with natural incentives to maintain compliance with the contract.

A simple, yet powerful strategy that we use on behalf of our clients is to build relationships slowly over time, and to consistently bring new value to the relationship.

For instance, we have promised to help the foreign partner with their own growth objectives in other countries where we have relationships. This reminds them that keeping the deal running smoothly can have benefits outside of the currently contracted relationship.

5. Look for early warning signs of trouble

We have seen great partnerships fail because the foreign partner has problems in their other business dealings that cripple their ability to effectively fulfill their contractual responsibilities. Some of the strongest early warning signals can be related to the foreign partner’s financial solvency.

Be aware of and monitor any such indications, such as increasing demands for more lenient payment terms.

Signing a contract is only the first step of a successful emerging markets deal. To ensure a functioning and profitable partnership, it is necessary to be active, dynamic, flexible and creative.

Emerging markets are constantly changing, so if you want to profit from the rise in emerging markets’ spending power, it is necessary to stay on your toes.

What’s your next step in finding or building successful emerging market partnerships?

The post 5 effective strategies for building successful emerging market partnerships appeared first on Trade Ready.