Price fixed for the export products or services which the exporter intends to sell in the overseas market is called export pricing. Export price of a given product is determined by many factors.
The Government has fixed minimum floor price on a certain item (garments, textiles etc) where an exporter has no option for reduction of the price below such limits.
Factors Determining Export Price:
- Cost: One of the most important factors in fixing export price for goods is the cost. It constitutes a large part of the price. It includes the cost of raw material, the cost of processing, packaging cost, labor cost, labeling etc.
- Demand: Price of goods to a great extent depends on the shape of the demand curve for the product. If there is a lot of demand for the goods it will result in profit maximization, even if there is no rise in costs and a rise in cost may justify an increase in price
- Competition: The competition in the foreign market is much more severe than in the domestic market, as the exporters have to compete with foreign producers who manufacture under different environment and conditions, as well as their country’s regulations.Competition from developed countries would be tough because of the certain established advantages, and developing countries may have to mark the price to compete in the foreign market.
- Product differentiation and brand image: If products are well differentiated and if they have built a brand image for themselves, manufacturers would be in a comfortable position to charge competitively higher prices. Brand names like iPhone, BMW, Mercedes etc., command higher prices due to their brand image.
- Terms of delivery: Export price also depends on terms of delivery entered into by seller with the buyer as C&F price will always be higher than FOB.
- Government Assistance:
- 1. Controlling the prices directly on certain items by fixing minimum floor price or fixing maximum ceiling price, beyond which the exporter cannot quote the prices.
- Assistance and incentive: Government of exporting country may provide a number of financial assistance such as Duty Drawback Scheme, Exemption of Sales tax, exemption of Excise Duty, Exemption of income tax, Marketing development Assistance (MDA.) etc.
- Custom duties and taxes: The governments of the importing countries impose duties and taxes. The exporter should take such expenses while fixing the export price.
- International Agreements: Export prices, at times are bound by international agreements which may be bilateral or multilateral. The exporter has to abide by this price fixed by agreement and he cannot fix more price.
Export Costing: Every organization or every trader/manufacturer use different methods of calculating the export costing of the product. Other than the above-discussed parameters, most of the companies use either of the following two methods.
- Cost Plus Pricing
- Marginal Cost Pricing
1) Cost Plus Pricing: Cost-plus pricing is a cost-based method for setting the prices of goods and services. Under this approach, you add together the direct raw material cost, direct labor cost, and overhead costs ( Interest + Freight + Insurance + Premium + Average of Fixed Cost) for a product, and add to it a markup percentage (to create a profit margin) in order to derive the price of the product.
2) Marginal Cost Pricing: Marginal–cost pricing, in economics, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor.
In simple language we can say, Marginal cost pricing is the practice of setting the price of a product at or slightly above the variable cost to produce it. This approach typically relates to short-term price setting situations
Example: ABC International has designed a product that contains Rs. 5.00 of variable expenses and Rs. 3.50 of allocated overhead expenses. ABC has sold all possible units at its normal price point of Rs. 10.00, and still has residual production capacity available. A customer offers to buy 6,000 units at the company’s best price. To obtain the sale, the sales manager sets the price of Rs. 6.00, which will generate an incremental profit of Rs. 1.00 on each unit sold, or Rs. 6,000 in total. The sales manager ignores the allocated overhead of Rs. 3.50 per unit since it is not a variable cost.
The total cost of production is divided into
a) Fixed Cost
b) Variable Cost
The Fixed cost while remains unchanged up to certain point, whereas variable costs go on changing with the change of volume of production / output.
Fixed Cost includes Cost of land / building or rent, Lighting, Heating, Cooling, Office expenses, Research / Development, Plant Machinery, Advertising etc
Variable Cost includes Raw material, Components used in the production of export products, Labor cost, Transportation Packing, Labeling, Sales expenditure, commission etc.
Other factors which help to drive the cost of the export products are
Incentive For Exporters: Various incentives are available to the exporter to consider while calculating the cost of export products.
a) Special Import License: The special import licenses (SIL) are issued to allow import of specific items in the negative list of import to Export Trading / Start / Super Star trading houses and other exporters. SIL can be sold at the premium which is considered financial assistance for making the export goods competitive.
b) Draw Back of Customs & Central Excise Duty: On export of finished products in which duty paid inputs whether imported or indigenous are used, part or whole of the amount of such duty is allowed to be drawn back by the exporter as the refund. Drawback rates are divided into custom and excise or both. To claim the drawback, the exporter should open an account in any bank and advice the same to Draw Back Department of the concerned custom house through which exports are affected.
c) There is the nearly total exemption from payment of income tax on export profit.
d) Marketing development assistance (MDA) is given with a view of an overall development of an overseas market. The scheme has been formed by Ministry of Commerce. MDA provide airfare for to travel abroad and also give daily allowance etc. It also helps in research and development, setting up of ware houses abroad and for the opening of foregin offices by the export house.
e) Sales Tax Benefits: Any dealer who is registered under section 5 of sales tax act can claim for exemption from sales tax in respect of sales made for the purpose of export. An exporter can also buy goods from trader / manufacturer for the purpose of export. The basic requirement is that exporter customer should be registered with sales tax authorities.