Knowing your price when selling internationally is crucial for your success. Product pricing can make your business profitable in the local market, but when exporting to a foreign market, it can make the product noncompetitive depending on the added expenses. We know that there is no simple formula, especially when calculating all the costs related to import/export of a product that might be successful in the local market but may not be well suited to exporting because the transportation cost is too high due to the weight.
So how do we calculate all these additional expenses? 1-First, you need to know what landed cost is.
Landed cost is when you accurately know the cost of getting a product delivered from the seller facility to the end user. When a buyer is importing goods from a foreign seller, in most cases they don’t realize that transportation is not the only cost. There are other considerations including exchange rates, tariff rate, incoterms, CIF, value added taxes. In many cases after calculating all the import/export costs, your product may have a competitive price until you realize how much tariff taxes were applied to your product by the foreign governments to give locally produced products a competitive advantage.
2- Second, know the harmonized tariff system.
The calculation of your landed cost won’t be accurate if you don’t include this tariff tax. Each product has its own classification number and in many countries, the tax is not applied simply on selling price. This tax can also be called ad valorem duty, which is calculated against the CIF (Cost + Insurance + Freight) and it is different for every product. The process to estimate landed cost can be a challenge, especially if you want to calculate costs for a large product line. Tariff duties are not applied to locally produced products or member countries of a free trade agreement. On top of that, being up to date on trade war information can prevent ugly surprises. Not long ago, we saw countries creating retaliatory tariffs placed on U.S. products, which drastically changed tariff tax percentages on several products. That can change the landed cost of your product, which can impede exportation or make you consider an alternative entry mode.
3- Third, stay on top of your markup.
When importing and exporting a product, it will be difficult to have the same markup as your product in the local market. After calculating your landed cost, you now want to know how much more in percentage your price is compared to your landed cost. This can be tricky; your product might still be inexpensive after all costs and might not be an unique item, in which case you might face a lot of competitors so it is important to set your profit margins low so you can be competitive. In the global market, you need to understand how much money you are making on each item relative to its landed cost. It’s easy to confuse markup and profit margins. The point of markup is to understand in percentage how much more you are selling per product compared to the landed cost. This way you have better control to determine your margins per item. This is important and can put you at a more competitive advantage.
Just as in a domestic pricing strategy, establishing your price when expanding internationally requires you to understand your customers and competitors. The approach can vary depending on the industry standard or simply due to accepting a lower profit margin on international sales than domestic. The price can also differ depending on product modifications for the export market or the entry mode you choose to enter the foreign market.
Given the potential impact of import/export costs on your international planning, an adequate evaluation of the cost for your product to be exported must be done for all markets prior to entry. This is particularly important for markets with traditionally restrictive trade regulations, such as Brazil.
