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.

This involves gathering information about competitors in order to determine their possible future actions and strategies and gain a competitive advantage.

Competitive intelligence is an ongoing process that involves gathering data about:

• competitors and their strategic intentions;
• technology, especially emerging trends and possible future developments;
• legal and regulatory changes;
• suppliers and changes to supply and distribution systems;
• materials;
• industry and market trends; and
• political and economic changes that affect the competitive environment.

People sometimes confuse competitive intelligence with stealing information from or spying on competitors. Although finding out about competitors is an essential component of competitive intelligence, it does not involve covert gathering of information.

Developing competitive intelligence includes   all factors in the competitive environment, not just competitors.

In competitive intelligence, all information is gathered from publicly available and non-proprietary sources. The information is analyzed constantly to answer the questions raised by a company’s strategic planning and objectives.

Competitive intelligence keeps a company informed about critical issues that might influence its profitability and ability to compete in the marketplace. It also enables decision makers to make more effective planning decisions.

The need for competitive intelligence

Companies need to develop competitive intelligence as well as market intelligence because it enables a company to be more profitable and avoid losses.

For example, market intelligence might indicate that customers in a new market desire a certain new product. A company might invest considerable time and financial resources into developing that product and preparing a marketing plan, only to see a competitor also develop the same product and release it first.

Competitive intelligence enables a company to make better decisions regarding long-term and short-term planning, research and development programs, and marketing focus.

It also enables a company to react quickly to legislative and regulatory changes in the competitive environment.

The intelligence that is developed can be used to aid in decisions about whether entering certain product markets is worthwhile. It can also be used to help decide on the method of market entry and to assess potential profitability.

An important part of your global business success

With international trade, competitive intelligence becomes even more important.

Developing an understanding of the competitive situation prevailing in foreign markets is invaluable for making a decision about whether to enter a market.

For example, market research might show that the target market is dominated by a few large and powerful corporations, which might make securing an initial market foothold prohibitively expensive.

In this situation, a company might decide that it would be a strategic move to develop a partnership with one of the large corporations already in the market.

Competitive intelligence can contribute to a company’s international activities in other ways. A company might be able to find out why competitors have succeeded or failed in a new market and learn from their mistakes.

New product ideas and design considerations might be uncovered, or a company might gain advance warning of new product introductions.

Other monitoring activities might reveal competitors’ prices, which can help in making decisions about cost structure.

The competitive intelligence model

Competitive intelligence works best when a clear, concise question is formulated after a company conducts a needs assessment.

This method will identify knowledge gaps and enable questions to be developed. For an international marketer, the needs assessment might lead to the development of questions such as:

• What is the financial strength of a competing firm in our target market?
• What are the critical success factors in the market leader’s promotional campaigns?
• What are the company’s strategic intentions?
• Who are the company’s partners?
• What markets is the competitor targeting?

There are ten phases in the competitive intelligence model:

• Conduct a needs assessment
• Formulate questions
• Organize the process
• Gather the data
• Organize the data into information
• Assess the accuracy of the information and fill information gaps
• Analyze information to create competitive intelligence
• Disseminate intelligence to decision makers
• Formulate a strategy and implement it
• Evaluate action effectiveness and adjust the needs assessment as required

The model is cyclical and continually builds on and refines the competitive intelligence that has been obtained from earlier projects.

What types of competitive intelligence do you need to gather to increase your international profitability?

The post Gather strong competitive intelligence to maximize your profitability in international markets appeared first on Trade Ready.