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Topic 6: Pricing, Quoting & Terms of Sale

Pricing Products for Export Markets
Export Prices Escalation
Standardized Trade Terms
International Commercial Terms of Sale: INTERCOMS
International Freight Forwarders and Export Pricing
Creating the Pro Forma
Responding to Trade Leads and Requests for Quotation
Pricing Products for Export Markets
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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:

  • The exporter’s motivations, experience and level of managerial commitment. Proactive and reactive exporters often price much differently. Proactive exporters with managerial support often use more aggressive pricing that is aimed to achieve long-term success. Inexperienced exporters may have to troubleshoot issues on mechanics, communications, sales effort, delivery and regulations, and as a result, may charge more to cover unexpected expenses.
  • The effect export expansion has on the overall cost of production. Increased use of capacity may help spread fixed costs over more units. Many domestic expenses can often be removed from the export price component. However, additional costs of international trade may apply. Higher commissions, lower prices, an increased need for communication and travel, staff education and an increased cost of obtaining information may have an effect on your overall pricing strategy.
  • The effect that characteristics of the destination market may have on the price of your product. The buyer’s market may require you to add translations to your labeling or adapt it in some other way. In addition, duties (tariffs) on your products usually have a significant impact on the overall cost.
  • The cost of maintaining your products’ integrity throughout the export process. This includes the added values that export price escalation will have on the landed cost. It is not uncommon for the final price of a product to be much higher than it is for you to ship it off your dock. These factors, added to the country’s tariff and non-tariff barriers usually have a significant impact on your customer’s ability to resell at a profit.

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.

  • Standard Approach
    Some firms use a standard worldwide price approach where the exporter does not adjust the product price, regardless of any outside factors. This method often limits sales potential, because flexibility is often required to successfully enter a market. However, this approach may work with certain products that are in high demand. It may also be possible to price your product from your factory door and leave all other costs and responsibilities to the buyer.
  • 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.

  • Competitive Pricing
    Competitive Pricing is based on evaluating the price of competitive products in the target market. When you determine the price that is being offered by your competitors, also determine what is included in the price. For example: transportation costs, documentation and insurance. It is important that you determine the price and additional cost to the end user of the product for comparison purposes and then determine the amount of financial support you will be providing to your sales distribution network.
  • Domestic Price Plus
    Begin with the “Ex-Works" or the “FOB Factory” price of your product that includes possible sales agents’ commissions or distributor discounts. Adjust the price of your product to include greater commissions or discounts and subsidies for advertising and promotion to determine a higher suggested retail price for international markets. Compare your price to competitor pricing.
  • Marginal Pricing
    By far, this method is the most logical since it considers all of the direct costs relative to international trade, and does not burden export sales with domestic overhead costs. Begin with the actual cost of manufacture. Add the costs of:
  • 1. Product modification for international sale
    2. Distributor discounts or sales commissions
    3. Allowances for promotion or financing
    4. Special packaging for international shipping
    5. Administrative cost relative to international trade

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.

Export Price Escalation
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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
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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.

  • EX (Point of Origin)
  • 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.

  • F.O.B. (Free on Board named inland carrier at named point of departure)
  • 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”.

  • F.O.B. (Free on Board named inland carrier at named point of exportation)
  • 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.

  • “F.O.B Miami”
  • In a previous module there had been mention of what many Caribbean importers are looking for in the way of quotations from food exporters in the U.S. They often require quotes of “FOB Miami,” which matches closely if not exactly with this trade term. In order to build consolidations of their orders in one location, they ask that exporters provide a price making the goods available to their consolidator in Miami, who will assemble the shipments in one container and export it on from there. So if you are asked to make this type of quote, you can use your domestic trucking agency or any other carrier who makes deliveries of cargo from your town to Miami and add on the value of their price for transport onto your invoice so the buyer can pay you for your goods as well as that cost.
  • F.O.B. (Vessel, named port of shipment)
  • 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.

  • F.O.B. (named inland point in country of importation)
  • “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.

  • C&F (Cost and Freight, named port of destination)
  • 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.

  • C.I.F. (Cost, Insurance and Freight, named port of destination)
  • 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.

  • EX Dock (named port of importation)
  • 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.

  • F.A.S. (Free Along Side Ship named port of exportation)
  • 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.

  • F.O.B. (Vessel, named port of shipment)
  • 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.

    In order to obtain an official copy of the 2000 INCOTERMS, you can contact the ICC Publishing Corporation in New York.

    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):

    • EXW/Ex-Works (named place): This represents the least amount of responsibility on the part of the exporter in moving the goods to the destination. It indicates the seller makes the goods available to the buyer at the seller’s premises or other location, not cleared for export through customs and not loaded on any vehicle. It closely resembles the American Term of “EX” (point of origin) or “FOB Factory.” It is used with all modes of transport. The buyer assumes all of the costs and risks from this point forward. This type of pricing is recommended to have on hand when meeting with buyers at trade promotions unless they have asked for another term of sale in advance. It does not always work that way, as the U.S. Government requires customs clearance on the outbound shipment be the responsibility of the “U.S. Party of Interest” which in most cases is the supplier. It is always important to detail the responsibilities of each term with a recap prior to export.

    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.

    • FCA/Free Carrier (named place): The seller delivers the goods to the carrier named by the buyer, at a specified price, cleared for export. The seller is responsible for loading the goods on the mode of transport at any location indicated. This term is also used for all modes of transport.
    • FAS/Free Alongside Ship (named port of shipment): This term is used for maritime and inland waterway only, and indicates the sellers’ responsibility is to deliver the goods along-side the vessel at the named port of shipment, also customs cleared for export.
    • FOB/Free on Board (named port of shipment): This term is also used for maritime and inland waterway only, as the seller delivers the goods across the ships rail, cleared for export. This term is closely matched to the American Term “FOB Vessel” and is what most buyers mean when they just use the term “FOB” without any further specification, although the exporter should verify this fact.

    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.

    • CFR/Cost & Freight (named port of destination): This term indicates that the seller would deliver the goods across the ships’ rail and also prepay the ocean transportation charges to the port of importation. It is intended for use on maritime and inland waterway shipments only, and requires customs clearance for export. Insurance is not included in this type of quotation, which most closely resembles the American term C&F.
    • CIF/Cost Insurance & Freight (named port of destination): This term is an extension of CFR, adding the responsibility of the seller to obtain and prepay for insurance against loss on behalf of the buyer. Other than that, you could say it is “CFR + Insurance” and matches the American Term CIF as well, except for that it is for maritime and inland waterway only.
    • CPT/Carriage Paid To (named place of destination): This term is similar to CFR with the exception that it is for all modes of transport. The seller must deliver the goods to the carrier; customs cleared for export and prepay the freight charges to the destination. It does not include the responsibility of the seller to obtain and prepay for insurance against loss on behalf of the buyer.
    • CIP/Carriage & Insurance Paid To (named place of destination): This term is similar to CIF with the exception that it is used for all modes of transport. The seller is obligated to place the goods on board the carrier; customs cleared for export, and prepay the freight charges to the destination and obtain insurance against loss on behalf of the buyer.

    D-Terms (post-main carriage or arrival terms):

    • DAF/Delivered at Frontier (named place): The term frontier is another name for border. The seller is responsible for delivering the goods for the buyer’s disposal on any means of transport. This does not include the cost of unloading the goods or clearing the goods for import, but does require export clearance.
    • DES/Delivered Ex Ship (named port of destination): This maritime and inland waterway only term is rarely used for U.S. exports because of the modes of transport available to us, and is where the seller makes the goods available to the buyer on board a ship at the port of import not cleared for import and without the container off-loading charges.
    • DEQ/Delivered Ex Quay (named port of destination): This term is rarely used from the U.S., and implies that the seller also pays for the off-loading charges beyond DES. Quay is another term used for pier or wharf.
    • DDU/Delivered Duty Unpaid (named place of destination): This term is used for any mode of transport, and involves the seller delivering the goods to the buyer, but not with customs clearance for import and not including off-loading from the delivery vehicle. The buyer is responsible for customs clearance, duties and brokerage. This term is more useful for smaller shipments and samples delivered via courier without seller responsibility for customs procedures at the destination.
    • DDP/Delivered Duty Paid (named place of destination): DDP represents the greatest responsibility on the part of the exporter, who is quoting to pre-pay and be responsible for everything in getting the goods delivered to the buyer’s facility, including customs clearance and the payment of duties. This is the international equivalent of “door to door” shipping, which also resembles Free House (domicile) or EX Dock of the American Terms. This should be avoided in most cases, as it is truly an American invention. Most importers of note have their own customs broker and clearance procedures in place and are not in need of having the seller endure them on their behalf.

    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 and Export Pricing
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    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):

    • A description of the merchandise: For pricing, insurance and tariff information, if required. Knowing your HS code is helpful.
    • The total value: Directly impacts insurance and tariffs.
    • The trade term requested: Specifies what will be paid by the exporter and the importer.
    • The payment method: Documentary collections and letters of credit are often processed by forwarders, who charge for these services.
    • The mode of transportation: Prices vary greatly based on whether the shipment is by ocean, air, truck or rail.
    • The approximate date of shipment: Transport prices may vary seasonally and price increases are often advised in advance by carriers.
    • The origin of shipment: Applies to picking up goods or dropping off a container for you to load.
    • The port of export: Inland freight lies between origin and port of export, and the port may influence the price as well.
    • The port of import: Also influenced by price as well as transit time and carrier.
    • The ultimate destination: Delivery beyond the port of import may be required and needs to be quoted.
    • The pieces, weights and dimensions of the cartons, boxes or pallets: Crucial information that is required for proper quoting.
    • Any extra crating or packaging needs: This is an additional service the forwarder may offer.
    • Documentary requirements: Forwarders charge for a variety of needed document preparations.
    Creating the Pro Forma
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    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:

    • Product packed for export: May include fees for pick up and delivery of your cargo or the materials for crating (Note: many exporters charge for 2-3% of the product value basis or a flat fee for cost recovery).
    • Loading, blocking, bracing: Preparing the goods for shipment within the container.
    • Cartage or drayage: Cartage is the term used for local pick up and delivery of export cargo that is not in an ocean container and drayage fees are usually for “spotting” a container at your facility for loading and then delivering it to the port.
    • Inland transport: For delivery of goods between the local origin and port of export.
    • Pier delivery: Charge for delivering containers to the ship from the container yard.
    • Terminal handling charge: For loading the goods onto the vessel.
    • International transportation: Main carriage from port of export to port of import.
    • Bunker surcharge: Fueling and refueling costs not associated with the main carriage charge.
    • Currency adjustment factor: Fee charged by the carrier in order to cover their costs for paying prices in other currencies and converting them to dollars.
    • Freight forwarder fees: Handling, communications, courier fees.
    • Documentation preparation: Charges for preparation and presentation of documents to customs, banks or inspection agencies.
    • Marine insurance: Depending on the trade term, the forwarder can also provide cargo insurance.
    • Bank fees: Depend on the method of payment and are usually absorbed by the exporter, as the importer has their own fees to pay for.

    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.

    To access a worksheet for doing a cost-quote analysis, citing most of these elements of an export quotation, click here.

    Responding to Trade Leads and Requests for Quotation
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    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:

    • Product specifications including weights and measures in the metric system.
    • Price specifications for each type of product if more than one.
    • All associated costs relative to a fixed geographic location, from your dock to the port of import and perhaps points in between.
    • All conditions in the clearest terms possible without overlooking any details.
    • A term of sale appropriate for the responsibility you want to assume, or based on the specific request of the importer.
    • Requests for clarification when needed.
    • Options in size of shipment, method of shipment and terms of sale, if available.

    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.

    So what’s the next step?

    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.

    Return to the Export Essentials Topic List