5.1 Export Costing and Pricing
You can define production costs, which may include the components of fixed costs (depreciation of fixed assets – defined as objects with value over VND5 million and being used for more than a year like machines and premises) and variable costs (materials, transportation or labor costs). However, there are a number of additional costs that must be considered when calculating your offer based on different terms of delivery (FOB, CIF...)2. These should all be put into your cost calculation before you engage in a discussion with your customer.
You may run into considerable problems if you just set a price for your export product by calculating your production costs and adding a 15% margin or so. Technically, this means that you determine the “Ex Works” price, which covers the production costs plus a certain percentage for profit, and offer it on FOB basis to an importer abroad. This method is common practice but it is far from best practice because your calculated market price may be either too low or too high, as you have not considered many other costs resulting from customs clearance, inland transportation, quantity of export orders etc.
A better technique for price setting is based on a simple calculation. You can either start from a cost calculation side by adding the costs of getting your product to the customer - which should give you the selling-price. Or you can calculate down from the final market price by deducting all costs from that price until you have arrived at your product price.
So, the point that you have to decide upon now is which technique you should apply for your price calculation. This decision depends on the kind of products you offer to the market. In principle, you might think that your products are new in the marketplace and that they can actually dictate the price level in that market just based on their costs and desired profit margin.
But in that case, you should also consider the substitute products available on the market. Bed cloth that is made of bamboo fiber with beautiful decorative embroidery patterns is an example.
It is a very unique product and you have a better chance to ask for a higher price, but you should know that your customers may shift to the silk cloth instead and increase its value by trendy and creative designs.
To set your price based on the cost-price method, you should be aware of the different cost components (not only add 15% margin as above), which often depend on the terms of delivery
2 FOB stands for Free on Board: A pricing term indicating that the quoted price covers all expenses up to and including delivery of goods upon an overseas vessel provided by or for the buyer. CIF stands for Cost, Insurance, Freight: A pricing term indicating that the cost of the goods, insurance, and freight until the final port of destination are included in the quoted price.
(will be mentioned in the later part). The following table describes different cost components need to be included for calculating FOB and CIF prices.
Cost components Cost (US$) /Mark- up (%)
Price (US$) 1 Factory price or producer costs of making the products
(labor, materials, packing, overhead...)
1.0 1.0
2 Profit of the producer 20% 0.2
Producer’s price/Ex-works (1+2+3) 1.2
3 Inland transportation (e.g. to Haiphong port) incl. loading and unloading
0.3 1.5
4 Customs declaration/export clearance, export agent fees 0.1 1.6
5 Port receiving charge (usually CFS) 0.1 1.7
FOB Haiphong port 1.7
6 Ocean freight & Insurance 0.2 1.9
CIF Destination port 1.9
7 Charge in destination port (DDC-destination delivery charge, AMS-Advance Manifest System...)
0.1 2.0
Landed price to importer 2.0
If your customer finds your offer too high and requests you to review it, take such feedback as a chance to improve your costing. Keep in mind that a sound costing system is very important.
But to simply reduce the price and your profit margin is not the right way, until you have considered and checked the following matters:
Is the ocean freight you obtained the most competitive? (Are you sure that your selected shipping line/ forwarder is the most competitive in terms of price?)
Does the agreed delivery deadline still allow you to change to other shipping companies/forwarders that can offer you lower prices but longer delivery times? Does your customer accept this change?
Can your buyer recommend other shipping companies/forwarding agents that offer lower freight rates? If yes, will they accept your offer on FOB basis?
Have you offered your customer a quantity-based price yet (especially for LCL3 shipment)?
Can you suggest to your customer to switch to bigger quantities in order to reduce freight and other handling charges (customs declaration, CFS, inland transportation...)?
Can you optimize your packing to minimize the volume?
Do you have other chances to reduce the unit costs (review supplies, productivity,
3LCL stands for Less than a Container Loaded
marketing expenses)?
Another option to calculate your prices starts from the selling price. Being an exporter in a developing country, you are most probably a price-follower rather than a price-setter. In this case, you can:
Find out the current market price for comparative and/or substitute products in the target market;
Establish all the elements of the market price, like Value-Added Tax (VAT), margins for traders and importers, import duties, freight and insurance costs etc.;
Make a top-down calculation, deducting all the elements of the expected market price of your product(s) in order to arrive at the price “Ex Works” (traditionally called “Ex Factory”) or ex warehouse;
See if you can meet this price.
Price mark ups of importers and retailers vary a lot depending on market segments and distribution channels. The following table may serve as a rough average calculation.
Landed price to importer 2.0
1 Import duty (10% of landed price) 0.2
2 Price upon arrival at the port 2.2
3 Wholesaler mark up (warehousing, distribution, marketing, profit)
80%
4 Wholesale price 4.0
5 Retail mark up (store, personnel, advertising, profit etc.) 100%
Final consumer price 8.0
If you find that your price is very competitive (much lower than your competitors’ ones) then at which price you should offer your products? Your primary aim in the target market is to offer your products at a price level that does not exceed that of your competitors. You can apply
“Penetration pricing” – offer the product at a price that is slightly lower than the one of your competitors.
After fixing your price, it is important to create stability and reliability in your pricing. It is difficult to increase prices later, if you started with very low prices. However, in practice, the market price is always changing, up or down and as a player in the marketplace; you should adjust your prices accordingly. Whatever your (forced or voluntary) changes in your prices may be, always make sure that your customer and trading partner understands the reasons for it.
Those reasons should be made acceptable and justifiable in their minds.
The choice of currency in which you calculate your offer is very important. You can offer the products in VND to avoid complicated and expensive currency transactions with your bank, but in general, your customers will not accept a quotation in VND but ask for a quotation in their own currency, e.g. JPY in Japan. In those cases, you should consider some hard foreign currency; say Euros or US dollars because of their stability.
5.2 Quotations and Proforma Invoices
A quotation describes the product, states a price for it, sets the time of shipment, and specifies the terms of sale and terms of payment. The description should include the following points:
Buyer's name and address, buyer's reference number and date of inquiry
Listing of requested products and brief description
Unit price and quantity of each item
Gross and net shipping weight
Terms of delivery & Terms of payment
Validity period for quotation
Estimated time of Departure (ETD) and Estimated time of Arrival (ETA).
Sellers are often requested to submit a pro forma invoice with or instead of a quotation. Pro forma invoices are not for payment purposes but are essentially quotations in an invoice format.
In addition to the foregoing list of items, a pro forma invoice should include a statement certifying that the pro forma invoice is true and correct and a statement describing the country of origin of the goods.
Also, the invoice should be visibly marked "pro forma invoice." These invoices are only models that the buyer uses when applying for an import license or arranging for funds.
As an example of a quotation, have a look at the following quotation for sea-grass baskets for a Japanese customer.
GREEN WORLD CO., LTD.
No.20 Lane 192 Giap Bat Str., Hoang Mai Dist., Hanoi - Vietnam Tel: 84.4.6642866 Fax: 84.4.6642983 E-mail: greenworld@fpt.vn