Geopolitics and doing business in Hong Kong and China.
One of the challenges that I see companies face frequently as they start selling overseas is deciding how much to charge for their product and service. As you begin pitching your product overseas, lots of people will want to know your price, so it’s important to have your pricing worked out before you approach international prospects.
While many businesses put a lot of effort into understanding how to price correctly in their home market, most don’t put in the same amount of effort when it comes to international markets. Without it, your competitiveness and the profitability of your international business are likely to suffer. Charge too much and you won’t be able to compete effectively against brands which are already established in-market. Charge too little and you won’t make enough to cover the sometimes significant costs of an international operation.
While some companies do just charge their domestic price, those that are internationally successful in the long term almost always invest time and energy into getting their international pricing right.
So, how do you decide what the right price is?
The first thing to realise is that international pricing and domestic pricing are quite different. That’s because different overseas market conditions, different costs, different quoting formats and different currencies all affect what you charge your customers for your products or services.
The starting point to getting your export price right is to understand the relative costs, demand and competition in your target market.
The total cost of selling overseas
Before you can work out how much to charge for your goods or services in international markets, you need to how much it costs your business in total to export that product or service.
Developing international markets can involve various costs that don’t apply at home. These include expenses like:
- International market research
- Travel to overseas markets
- Marketing collateral for overseas markets
- Marketing costs (website translation and localisation, SEO, trade fairs, advertising, etc)
- Modifications to your product or service
- Packaging and labelling for overseas markets
- Product liability insurance or other insurances
- Compliance with foreign standards
- Credit checking
- Export financing charges
These are the ‘fixed costs’ of selling internationally – general costs that aren’t specific to an individual contract or shipment.
It’s up to you to decide how much you recover of these costs per unit or per order, but you should factor international overheads into your price before you start adding shipping costs and duties.
Different prices for different markets
You also can’t afford to assume that you will sell your product for the same price in each overseas market. That’s because:
- The price that customers are willing to pay for your products or services will vary from country to country.
- How your competitors price their products or services often differs from market to market. You have to take competitor pricing into account when setting your prices.
- For products, distributor, wholesale and retail mark-ups are often different in each market and industry, which will affect the final price of your products. Remember to include questions about these mark-up costs when you are doing your initial market research.
Should I extend credit?
You should also think about whether you’re willing to extend credit.
When you’re selling overseas, you may be asked to offer credit terms or discover that you need to match your competitors on credit terms. Extending credit terms will have a real cost impact on your company because cash flow is critical to any business.
If you decide to offer credit terms you will have to estimate the cost of the time it takes to receive payment at the end of the credit period and build this cost into your price.
Pricing for products
No matter who arranges and pays for freight and costs such as import duties (it could be you, or the client, or a distributor), you should know what costs your product attracts through the supply chain. Otherwise, you won’t fully understand where your product fits into the market and you won’t be able to compare your prices with your competitors’ prices.
Some examples of costs in the supply chain include:
- Shipping ex-factory to the port of departure
- Air or sea freight and insurance
- Import duty and taxes
- Customs clearance/broker fee
- Ground transportation from the port of entry to the warehouse or the customer
- Warehouse fees
- Break-bulk fees, if third party warehouse applies
- Agent’s commission or importer’s mark-up
International quotes for products
The way prices for products are quoted in international business is different to domestic sales. To ensure that both the buyer and the seller are clear about who pays for which costs, and where ownership transfers from seller to buyer, exporters use terms known as Incoterms. You can read more about how Incoterms work here.
How do I calculate my product price?
There are many different ways for calculating prices … here are two of the key ones.
Cost Plus Pricing
To calculate Cost Plus pricing, you begin with your ex-factory price and add on additional costs and margins until you arrive at what you will charge the end customer.
Top Down Pricing
To calculate Top Down pricing you begin with the ideal end customer price and work backwards.
Cost Plus and Top Down are two of the best methods to calculate your international price, but they are best used in parallel. That’s because each method has its weaknesses. Using the Cost Plus method alone may result in a price that is too high, which means that you won’t have many customers. And, if you sell at a price that customers prefer and calculate by using the Top Down method, you may end up losing money on each order.
Your best bet is to do two separate calculations and then compare one against the other to achieve a balanced result.
Pricing for services
Selling services overseas usually involves a high degree of human involvement in the development and delivery of that activity. Here are some of the things you should consider as you put a price on your service.
- Specific costs associated with services – withholding tax, visas, flights, establishing a presence (local or virtual), accommodation, transport, pre-sales visits, freight, insurance, wages, translation, IP protection, currency/exchange rates.
- Business and cultural practices specific to the country eg. fixed price or negotiable, pre-sales effort required.
- Competition within the market – local and international companies.
- Ease of entering markets – local barriers, regulations, language etc.
- Maturity of your industry in the target market – frontier v’s established.
- Unique service offering – ability to charge premium prices, perception you want to create about the service offering.
- Accounting for after sales costs.
- Meeting the costs of complying with applicable international standards.
- Opportunity costs – impact on domestic business, existing commitments, hiring of additional local staff.
How do I calculate my services price?
Cost Plus Pricing
Cost plus pricing requires you to really know your total costs for delivering the service into the target market and ensuring sales success. Once you know what that cost is, you can add a margin that reflects your perceived market position. You also need to know the average margin for your industry in the target market.
If you use the cost plus method you may find that you aren’t competitive in some markets (under or over-priced).
You might be able to reduce the price or match a competitor’s price if local resources are cheaper than in Australia. Decide your final pricing by finding a balance between affordability for customers and your profit.
Competitive pricing can be good for market access, especially if you can launch new services soon after you enter the new market, with demonstrable benefits and features. Competitive pricing is fine if you can deliver at a similar cost structure to others in the market. If that’s not the case, you may experience margin squeeze.
However, competitive pricing can make premium pricing difficult in the future as it often signals a “value for money” or “affordable” market position. Input from market research, competitive analysis, discussions with representatives and customers about the competitiveness and positioning of your services will increase your understanding of the competitive pricing point of your service.
Premium pricing is developed around a strategy of what the market will bear. It’s a good export strategy because it is more profitable, and provides more margin to cover cost increases. Premium pricing may also allow you to maintain a price in a foreign currency, absorbing negative impacts of changes in exchange rates. It will allow you to establish a premium brand in the market and allows you to reduce pricing to loyal clients without damaging your profit. There is perceived value in innovative and uniquely packaged services. If you can charge premium prices for your services, you can meet competitive threats over time.
Beachhead pricing means pricing your service so that it is perceived as excellent value for money. Beachhead pricing can speed up the time it takes to get traction in a new market, by sacrificing early margins.
If you do decide to use beachhead pricing, you’ll need to control the process so that your representatives and partners understand that your initial prices will increase if you are successful in the market and that these increases will cover lost margins and achieve rightful market positioning.
Beachhead pricing can be a great pricing strategy for your representatives and partners as it will allow them to access distribution channels more easily as you launch in the new country. That said, I recommended using this strategy with caution, so that you don’t lose margin unneccessarily over the longer term.
Top tips on international pricing
- Know your profit margins and break even points. If you don’t have this information available, you won’t be able to make an informed decision if a customer asks you for a discount.
- Set a price that reflects your brand and promotion, but remember that an unknown foreign brand may not be able to charge the same prices as well-known competitors,especially if the competition is local.
- Remember to factor in the promotional costs associated with supporting your services in-market, before you start quoting prices to your customers.
- If you quote a low price initially in order to get business, and assume that your prices will naturally increase over time, you could create big problems for yourself because customers tend to expect the exact opposite. In other words, clients often expect to get a price reduction to reward them for ongoing business, particularly if the amount of business they give you increases over time.
- Discounts are a cost; before you offer a discount to a customer, reflect on the effect it will have on your bottom-line.
- Learn about Incoterms so that you can quote using the correct international trade language. Both you and your customers should know who pays for what, and be absolutely clear at what precise point in the transaction ownership of the goods transfers from you to your customer.
- If you have a website and successfully sell on-line you need to be careful that you don’t undercut either your in-market suppliers or in-market retailers.
- And a final tip? We know that shipping costs can change quickly and exchange rates can fluctuate alarmingly. Both of these will affect your end costs, so be sure to regularly review your prices.