This section explains how to price and quote export sales as well as what factors influence the “landed cost” of a product. The following text will also cover the various standardized trade terms, including The American Foreign Trade Definitions, and the International Commercial Terms of Sale, known as “Incoterms”.
Examples of the most common types of quotations will be included as well as some tips about the use of consolidators and inland transportation to port. This section demonstrates best practices in: obtaining accurate freight quotes from service providers, designing a pricing worksheet and performing an effective cost analysis.
Pricing Products for Export Markets
Establishing an appropriate price is one of the most crucial parts of the export marketing mix, as it is the one that generates revenue. The costs of the product itself, its promotion and its distribution all need to be included into the final price in order to make a profit. The export price can vary depending on the particular product, the type of buyer, the initial and long term value, the destination and the channel of distribution.
Export pricing can also be more complicated than domestic pricing due to the following conditions:
Essentially, export pricing can be broken down into two categories. First, the price you are willing to sell your product at to any given country and buyer, when it is still on your dock. Secondly, the price you or your buyer is obligated to pay when it has arrived on their dock. This is known as the “landed cost” and includes the export price escalation factors.
Common Export-Pricing Strategies
When you establish a price for your product in a foreign market, you need to consider the kind of pricing concept you will apply to the products. There are three basic concepts commonly used today, which are: competitive pricing, domestic price plus and marginal pricing. Some firms also use what is called a standard approach.
There are many variables in exporting, including quantity and value sold, destination, foreign currency, intermediaries and mode of transport, that it would seem impossible to experience much growth without taking measures to accommodate for them. An alternative to a standard price might be average pricing, when a certain profit margin is maintained on a worldwide basis, including the domestic market.
Exclude the overhead costs of domestic sales, production, rent, heat, lights and capital equipment depreciation. These are fixed costs that would exist without expanding into international markets. Once you have determined the actual costs for expansion into export it will be time to compare the new Ex-Works and/or FOB Factory price to that of the competition. In order to make a proper in-country comparison, add the cost of transportation and duties into the foreign country. Assuming that you find that your price is too low, you can adjust the price up to that of the competition.
Regardless of the method you use to establish the price of your product, it is a good idea to make sure that you will be consistent in most international markets with this price. If you need to reduce the cost for an individual market, consider offering special discounts or financial incentives to reduce the price rather than publishing a different price for each country.
Market Pricing and the Market Builder Service
All of the pricing strategies mentioned so far are designed to develop a competitive and profitable export pricing system. Some secondary market research from FAS lists retail prices for products in the retail market, even indicating who the producers and distributors of these products are. The Top Product/Market Evaluation also provide U.S. export sales that leave the country captured off of the Shipper’s Export Declaration.
Although these are quite helpful in establishing an idea about wholesale and retail in-market pricing, there may still be a need for primary marketing research to get a direct idea about the viability of the export pricing you have established for a given market. The Market Builder Service is Food Export-Midwest and Food Export-Northeast’s program designed to provide primary market research in various countries around the world.
One area of the program provides you with a customized report about whether products similar to yours are being sold in your target market(s). The report will detail brand names, package sizes and retail prices, as well as shelf space allotments for three competitive brands from three different retail outlets. You will receive the three competitive brands’ products sample packages or photos of them for review. You will also receive an importation analysis that describes any tariff and non-tariff barriers, which may affect your export price. For more information on the Market Builder service, please click here.
After building your internal export price and gathering information on in-market pricing, you can develop a landed cost, or the price it actually costs the importer to put the goods in their facility. The challenge is to minimize export price escalation. Export price escalation is the difference between the price of your merchandise and the landed cost.
The nature and size of the product, destination, mode of transportation, financing, tariff and non-tariff barriers, service provider fees, handling, documentation and other factors all effect export price escalation. For example, it is not uncommon for a $25,000 shipment from Harrisburg, Pennsylvania to cost an overseas buyer another $5,000 to land in their facility.
Anything that adds to the product value will raise the landed cost. In most countries tariffs are applied to the cost of the goods as well as the cost of freight and insurance to get it to port. Suppliers who are good at controlling price escalation often benefit from increased sales in the long term.
Example of Export Price Escalation
The following is a basic example of the difference between a domestic sale followed by an export sale where the wholesaler imports directly.
Expense | Domestic Example | Export Example (same channels, wholesaler imports) |
Manufacturing net Transport (CIF) Tariff (20% CIF Value) Wholesaler pays landed cost Wholesale margin (33% on cost) Retailer pays Retailer margin (50% on cost) Retail price | $3.25 NA NA $3.25 $1.08 $4.33 $2.17 $6.50 | $3.25 $1.10 $0.87 $5.22 $1.73 $6.95 $3.48 $10.43 |
As illustrated above, the CIF transport, which includes freight and insurance charges, adds value to the goods prior to their customs clearance. The import tariff is applied to the CIF price, as the cost becomes part of the value of the goods. Wholesale and retail margins increase, which results in a retail price that is over 60% higher than its domestic equivalent.
The impact varies based on geography and tariff rates. However, it is important to understand the costs a buyer must absorb in getting an imported product to retail and how crucial accurate exporting pricing and quoting really are in this process. This leads us to the very important process of issuing pro forma invoices for export quoting and pricing.
The Pro Forma Invoice
Pro Forma stems from a Latin term, which translates “as a matter of form.” This document is very important in the quotation process and is often used as part of a response to a potential buyer’s inquiry.
The pro forma is a “snapshot” of your commercial invoice, lacking some finishing details. The buyer may decide to accept your pro forma offer as is, or request a different trade term, such as eliminating insurance or transportation, if they can obtain a better price for that service than you. They may even ask you to add to the order if they are happy with all of the prices quoted to them.
The pro forma is especially important when it is used as a formal quotation. In a formal quotation, the buyer is using your offer to obtain import permits and currency exchange. This means that if the buyer’s government allows them to buy your product, it may only be at the exact amount and price that you quoted. If you have made a mistake on your pro forma, you may not be able to renegotiate for more U.S. dollars at a later date, and may have to accept the additional payment in the local currency. Proper understanding of international terms of sale and obtaining a competitive quotation from service providers is paramount to success. With our major trading partners in the EU and Japan, formal quotes are rare and easier to negotiate. This is because they can easily obtain dollars to pay you, and have fewer restrictions on imports.
To issue a correct pro forma and to make an effective quotation, you need accurate and competitive costing information from your service providers as well as a realistic price for your product. Understanding American Foreign Trade Definitions and especially International Commercial terms of Sale (INCOTERMS) and having a good relationship with your service providers is vital at this point.
For another look at a pro forma invoice totaled to CIF, or Cost Insurance and Freight, click to view the document.Standardized trade terms were developed to provide common ground between the supplier and buyer. They are a series of 2 or 3-letter codes, such as “FOB” which, when followed by a named location, infers the transfer of title and payment and the terms of delivery of the shipment. There have been two sets of terms of sale used in the past, The American Foreign Trade Definitions of 1941, and another set known as the International Commercial Terms of Sale, or “Incoterms”. The most recent revision of the Incoterms came in 2000, and the publication is known as the “560.”
There is still some confusion about which set should be or is being used on a given transaction. Many U.S. exporters and even many importers are still using the American Definitions, although trade experts have advised against it for many years. Many international traders are still unaware of the changes in international trade terms that took place in the year 2000, causing some confusion and misunderstanding when the incorrect term is used. There is a possibility that the terms may be updated again in 2010, which could further complicate matters.
It is very important when offering your quotation to make clear which set of trade terms is being applied to the transaction. These terms become crucial when doing business under a letter of credit, since U.S. banks will interpret your documents based on the 2000 version of the Incoterms if questions arise about responsibilities and costs that are included in your invoice.
While many trade terms and definitions are very similar, you should never assume that the buyer understands which trade terms you are using. By the same token, you should not insist that you will only accept a contract based on the American Foreign Trade Definitions, but rather assume the responsibility of researching the trade definition requested by the buyer. The best approach is to try to determine which trade terms you both understand and can agree upon. In case of a trade dispute, International courts and arbitrators use the mutual understanding of both parties in drawing a conclusion regarding responsibilities.
Export Pricing and Terms of Sale
In preparing for a trade event, such as a trade show, trade mission or buyers mission, it might not make sense to develop export pricing which includes terms of sale other than your factory price at a competitive wholesale level. Unless the buyers have indicated a specific type of pricing in advance, you cannot be sure of the shipment size, mode of transport, port of export and import and ultimate destination they may request, so it is best to keep your pricing simple and realistic, and discuss pricing specifics and quotations during or right after the event.
Most trade leads requested by buyers contain trade terms for responding back with a quotation. The terms might be difficult to determine without contacting the potential buyer first for clarification, as many requests for quote can seem vague. Consider this lead from the USDA, Foreign Agricultural Service from Taiwan, requesting a quotation for ginseng.
AG 08/10 GINSENG (Taiwan).
Source: LEADAG (USDA Agricultural leads)
Posted: 08/10/04 | 0408 | 040810 | PD0408 | PD040810
Title: GINSENG (Taiwan).
HS Codes: 12112000000 | HS12112000000 | 121120 | HS121120 | 1211 | HS1211
Quantity: minimum shipment of ginseng root, ginseng powder
Quality: A grade
Package: bulk
Delivery: immediately
Quote: FOB
Bank ref: Bank of Taiwan
Contact: Ms. Fu, YU ZONG FOODS CO., LTD., 7, Fong Pin 1 Rd., Da Liao
Hsiang Kaohsiung Hsian
Phone: 07-7013111
Fax: 07-7012631
E-mail: yuzong@ms42.hinet.net
(Ref Number: 200407300242TW1)
HS codes are used to sort trade leads by product in various databases. You might notice that the HS code for ginseng have been included here, and they are requesting “A” grade bulk packaging for immediate delivery by “FOB”. There are a variety of terms of sale which begin with FOB, and there is no reference to a mode of transportation, port of export, or import, so an exporter would be wise to go back and introduce themselves and request clarification in order to quote this shipment correctly.
American Foreign Trade Definitions
As mentioned previously, these terms are not recommended for use by international trade professionals, but still can be found in requests for quotation on a worldwide basis. They are presented here for the purpose of recognition and definition and because it is possible to re-define the term as an Incoterm 2000.
The seller agrees to quote a price at the point of origin, making the goods available to the buyer at this location on the date or within the period agreed upon. Many exporters would use this term referencing their city and state, such as “EX Detroit Michigan” as well as “EX Factory (named place)”, “EX Works (named place)” or “EX Warehouse (named place)”.
An exporter can use this type of pricing on a price list to distribute to potential buyers at trade events or as a general sales sheet. Those new to export and those experienced in domestic shipping refer to this as “FOB” which implies all charges are paid by the buyer. This term is actually used domestically as part of the Uniform Commercial Code of the United States, and means essentially that the freight is “collect”. These differing definitions often cause confusion when quoting for export and are best resolved by clarifying the quote with the buyer prior to making it.
There are various uses of this term, including one similar to “EX” when used as “FOB Factory, Indianapolis Indiana”. It is also used to quote a price to an inland shipping point, with the seller either pre-paying the freight charges and adding them to the invoice, or sending these charges on a “freight collect” basis. In some cases, the seller might also be responsible for obtaining a bill of lading or transportation receipt to prove shipment has taken place. For example, it could read as “FOB Container Freight Station, Columbus Ohio, dock receipt signed by carrier”.
This term is used to quote a price to the buyer including the costs of inland freight delivered to the port of export, by any mode of transport, including responsibility for loss or damage incurred up to that point. “FOB Boston Logan Airport” would be an example, with the origin actually having been Burlington Vermont. The seller pre-pays all of the charges to get the goods delivered to the carrier in Boston, and then adds them onto the value of the invoice, unless directed to send freight collect.
Under this term, the exporter provides a quote that includes the cost covering all expenses up to and including the loading of the goods onto the vessel on behalf of the buyer at the named port of export. This is the term most buyers use when they request “FOB” but unless they name a port after it and you are working on container size shipments, it is difficult to confirm without asking for more specifics, such as with the trade lead illustrated from Taiwan. This also matches the only Incoterm to use “FOB” in it, as you will read about shortly in this section.
“FOB Toronto” would be an example of this term, and is commonly used by buyers there. This means an exporter would be quoting a price for the goods and all costs of transport to a named point in the country of importation, including the customs clearance but without cargo insurance unless otherwise agreed upon.
Cost and Freight to a named port of import (destination) implies that all of the charges to get the shipment to the country of import will be pre-paid by the seller and added onto the invoice for reimbursement by the buyer when the invoice is paid. This quotation, like the one above it does not require the seller to obtain cargo insurance, but verification of that fact is always a good idea when using terms of sale that do not imply that by definition. Some importers use the older term “CNF” for this as well.
This term is used when the buyer wants the seller to quote a price that includes the cost of the goods, all of the freight and handling of the goods, insurance on both and an additional 10% of those values. The 10% additional value is to cover the value for insurance purposes as well as any unexpected additional costs in transport such as storage, handling and inspections.
Here is an example of a request for quotation that uses the term “CIF”.
AG 07/26 OIL, SALAD AND COOKING (Taiwan).
Source: LEADAG (USDA Agricultural leads)
Posted: 07/26/04 | 0407 | 040726 | PD0407 | PD040726
Title: OIL, SALAD AND COOKING (Taiwan).
HS Codes: 15179000000 | HS15179000000 | 151790 | HS151790 | 1517 | HS1517
Quantity: trial order: one container
Quality: grape seed oil. Pale yellow with a light green cast. Contain around 18% crude oil
Package: flexi tank
Delivery: immediately
Other: fatty acid: 905g/L, Linoleic acid: 68-74%, oleic acid: 15-17%,
Alpha Tocopherols: 0.12g/L, density:
Quote: CIF
Bank ref: Chung Haw Bank
Contact: Mike Tsai, Manager, Y&C International Corp., 2F, 392 Nek Hun Rd., Sec. 1, Taipei
Phone: 02-26599395
Fax: 02-26599799
E-mail: miketskimo@yahoo.com.tw (Ref Number: 200407230231TW1)
To view an example of building a CIF quotation including the 10% add-on, click here.
Although rare, this term refers to the seller quoting a price to the buyer that goes beyond the port of import, and includes customs clearance and delivery to the buyers “dock” or warehouse. In Europe, importers have referred to this term as “Free Domicile” or “Free House” delivery. We might refer to it as “Door to Door” in the U.S., but in either case it is not practical for either party and is used only in rare circumstances, often when the importer is a subsidiary of the exporter, for accounting purposes.
This term implies the seller would quote a price to the buyer that includes the delivery of the goods alongside the vessel; where it would then be loaded on board the vessel. This makes the most sense to quote when the goods are in an ocean container by themselves. If the shipment were part of a consolidation, or for a bulk loaded vessel would not be realistic with value-added food exports.
Note: In addition to it also being an Incoterm, it is important to point out that this is the same 3-letter abbreviation used by the USDA, Foreign Agricultural Service as well.
Under this term, the exporter provides a quote that includes the cost covering all expenses up to and including the loading of the goods onto the vessel on behalf of the buyer at the named port of export. This is actually the term most buyers use when they request “FOB” but unless they name a port after it and you are working on container size shipments, it is difficult to confirm without asking for more specifics. This also matches the only Incoterm to use “FOB” in it, as you will read about shortly in this section.
To review a chart illustrating the American Foreign Trade Definitions, click here.
International Commercial Terms of Sale: INCOTERMS
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INCOTERMS are published by the International Chamber of Commerce. The most recent update is in the year 2000, and is known as ICC Pub. 560. INCOTERMS are designed to eliminate obstacles such as language and distance, helping parties understand each other’s responsibilities regarding the transfer of title and assumption of loss and risk.
Breakdown of the INCOTERMS
INCOTERMS are divided into four main components and are built around the main carriage of the shipment.
E-Terms (origin terms):
F-Terms (pre-main carriage terms): These terms represent some responsibility upon the buyer to quote the price of making the goods available at an airport, usually with FCA, or a seaport, with FAS and FOB.
C-Terms (main carriage terms):These terms include the price of freight as well as all other incidentals, including insurance in the case of CIF and CIP.
D-Terms (post-main carriage or arrival terms):
A Note on “D” Terms
Exporters are rarely required or willing to quote beyond the main carriage terms. One exception is DAF, or Delivered at Frontier, which is a common procedure with Mexican customers, where goods are consigned to a customs broker, freight forwarder or other agent on the US side of the border – usually, Laredo, Texas. In this term the seller is responsible for paying freight and should include the costs on the pro forma invoice to recover the expense. The bill is sent to the supplier, as the freight is prepaid when using C terms.
Trade Terms & the Law
Trade terms do not carry the force of law, but instead rely on the “intent” of what is inferred by using them. In a dispute over damage or loss of cargo, courts will evaluate the trade term used to establish ownership of goods, among other considerations, and judge accordingly which party was responsible for ownership of goods, carriage and handling and insurance coverage. An exporter should always confirm the expectations of the buyer based on the trade term they request, and obtain that confirmation in writing. Specific responsibilities should be noted in any sales contract generated, especially for an ongoing business relationship with an established distributor.
International freight forwarders are involved in over 80% of the commercial transactions in international trade and are a valuable asset to exporters. They can help you with almost all of the costs you need for a pro forma invoice, and understand what pricing is needed based upon the trade term used, the mode of transport and the destination and service level required. If a letter of credit is being used, they also can provide the processing fees, along with your bank, so you may incorporate these costs into your final pricing.
The Transportation Services Branch of the Agricultural Marketing Service, AMS, has published a listing of international freight forwarders which you can sort by state, products shipped, destination and services offered which is available at the AMS website.
Click on the AMS Web site link.
What Freight Forwarders Need from You
To construct an accurate and competitive quote, the forwarder needs to know many or all of the following details (in no certain order):
Depending on the product and shipping variables, the price for each quotation may vary. Generally speaking, the further down the list of trade terms you go, the more the invoice price will increase.
Many of the charges for freight, handling and insurance will need to be pre-paid by your company. You will need to invoice the buyer accordingly when billing him or her. Some of these changes may need to be included in your product price as they are internal costs to you, and some represent the cost of doing business. For the most part, importers expect what to see on your quote based on the term of sale they require. These costs normally include:
It is entirely possible for many forwarders and a carrier to quote “All in” today, which means you obtain a price for all of these applicable fees in one number instead of broken down. This may or may not be acceptable to the buyer, when they may need to identify their costs on a pre-paid versus collect basis.
Exporters need to be comfortable with consistently filing quotations using the pro forma invoice as a tool as well as a cover letter, and in many cases instructions on payment terms, such as opening a letter of credit. The seller should provide the following to begin negotiations of an export transaction:
Respond to all trade leads as soon as possible. After a few days, follow up, even if it’s only as a courtesy to ask the buyer if he or she received your quotation. Many buyers need time to sort out various quotations they are getting from the U.S. and elsewhere, so some patience is required. If you make accurate and competitive quotes on a consistent basis and in a timely manner, your chances of succeeding in the export market are much greater. Having a proactive export pricing and quoting policy and an understanding of trade terms and international logistics is a vital part of the exporting process.
For more detailed exporting information relative to your specific business please register for our Food Export Helpline™ service. There are always specific issues and questions that are unique to your company, products, and export markets. With the Food Export Helpline™, you’ll speak with an industry expert who’ll put his more than 20 years of experience to work for you. There are no canned answers, only insightful, customized advice specifically for you.
Click here for the Food Export Helpine.
Or, register for our Market Builder program. This service provides customized, in-market research to help you determine if a market is right for your product. Exporters can find new distributors or importers, receive valuable feedback about their product and gain industry insights on topics such as the distribution process and import regulations and restrictions for 18 international markets.
