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Twenty Essential Factors to Consider Before Going Global (Part 8 of a series)
10/31/2005
by Laurel Delaney, Global TradeSource, Ltd.
According to Laurel Delaney, there are twenty essential factors to consider before going global. This article covers one of those factors. Factor 13: Prepare pricing and determine landed costs. Be ready to test out your price on your customer. See what reaction you get and then negotiate from there.
There are several critical steps in the international sales operation: pricing a product for the overseas market; determining landed costs; and presenting them in quotation form. In this article we'll discuss how to determine an appropriate exporter's markup and how to work with a freight forwarder to arrive at good shipping rates that will meet with your customer's approval. We will also show you how to use these figures to put together a pro forma invoice, a key document in every export transaction.
Product Markup
Typically, exporters take a 10-15% markup over cost, which is the price a manufacturer charges you when you buy products from them. In other words, if your supplier charges you $1.00 per unit for his product, you might mark it up to anywhere from $1.10 to $1.15 per unit. That markup becomes your profit or commission.
Test your price out on your customer, with whom you have hopefully cultivated a strong relationship and to whom you've presented your product's positive sales attributes. See what reaction you get and then negotiate from there. If you priced the product with only a slim margin for yourself – so slim that you cannot afford to go any lower – and your customer still balks, consider re-negotiating with your supplier. Oftentimes, if you explain that the only way to sell the product overseas is to price it more competitively, they will agree to go back to the drawing board and see if they can rework the numbers. Don't pull this too often, though; if you continue to have price problems, the supplier will catch on sooner or later that you haven't properly checked out what the foreign market will bear.
Complete Your Quotation with a Competitive Shipping Rate
Let's say you've given your product a markup of $0.15 on your $1.00 cost per unit. By the time it lands at your customer's port, it costs him $1.25 per unit. How does that happen?
Just as in a domestic sale, you will be billing your customer for the costs of shipping your product. To finish your price quotation, you must first contact a freight forwarder who will provide you with a competitive shipping rate.
Generally, an efficient freight forwarder can get back to you with a quote within a few hours. If it's a large firm and a busy time, expect a callback the next day. The forwarder should give you a very detailed analysis about how they arrived at their rates. If there is anything you don't understand, stop them and ask about it. Also, ask for a rate confirmation number so that when you call them back, whether in a week or several months, they will have their quote on record. And don't forget to ask how long the rates are valid! After you've called a few forwarders, sit down and compare quotes.
Selecting the Best Freight Forwarder for Your Needs
Once you have a few quotes, you'll need to compare more than the numbers to determine which freight forwarder offers the best value. Ask your customer which of the following should take priority:
1. Low-cost transportation?
2. A timely delivery?
3. Safe handling of product?
4. Their choice of transportation method?
5. All of the above?
Try to select a forwarder that offers No. 5, is always pleasant to talk with, and is financially solvent. Then stick with them through thick and thin.
Reading Your Quotation
When your freight forwarder gives you a quote, the total charge will be broken down into the following lines:
Inland transport: $______
Ocean transport: $______
CAF 57%: $______
Documentation: $______
TOTAL: $______
- Inland transport is the cost to move the product from a factory door to a port of exit within the same country.
- Ocean transport is the cost to move the product from the port of exit to the port of entry of the country of destination.
- CAF stands for Currency Adjustment Factor, which is the going rate of exchange from one currency to another (for example, U.S. dollars to Japanese yen).
- Documentation represents the freight forwarder's fee for handling all documentation associated with the shipment, including letters of credit.
You should also familiarize yourself with the following most commonly used terms of shipment. These are known as "Incoterms," and you can order a copy from ICC Books, telephone 212-703-5066, or via e-mail at (mailto:iccbooks@uscib.org or visit www.iccbooksusa.com). These will affect the final numbers on your export quotation, as well as your financial responsibility for the shipment.
For example, CIF (cost, insurance, and freight): you are responsible for paying the freight and insurance costs in advance. You will collect these later when you invoice your customer. Normal practice is to insure a shipment for 110% of its CIF value. Let's say you are insuring a shipment to the Far East (Japan, Korea, Taiwan) at a rate of $0.6175 per $100 (which includes war and all risk coverage).
Invoice Value: $12,000.00
Freight: $ 1,200.00
Clearance/Handling: $ 100.00
TOTAL: $13,300.00
110% of TOTAL: $14,630.00
INSURANCE: $ 90.34
CIF TOTAL: $14,720.34
Here's how you arrive at the CIF total: add the invoice value (cost), freight, and clearance/handling charges. Multiply this total by 110%, then divide by 100. Take the resulting figure and multiply it by $0.6175. In this case, the result is your insurance charge of $90.34. Add this to your invoice, freight, and handling total of $14,630 for a CIF total of $14,720.34. It's good to know how this is done, but you won't have to concern yourself with this calculation or actual issuance of the certificate if you use a freight forwarder. All you have to do is ask the freight forwarder to quote you insurance coverage at the 110% CIF rate.
Preparing the Cost Analysis and Pro Forma Invoice
Your next step is to enter these itemized charges on your own invoice form which will become what is known as a pro forma invoice. Your document will have all the familiar components of an ordinary domestic invoice – a description of the product, an itemized listing of charges, and sales terms. Let's say you want to get your customer a landed price quote for a shipment of widgets to their port of entry, in this case CNF Tokyo:
U.S.A. Widgets to Tokyo via Ocean – Calculating Landed Price per Unit
You have 100 cases of widgets, packed 12 units to a case. Each case is priced $120, or $12 per unit. Total cost for the order is $12,000
Selling price: $12,000 – F.O.B. factory door in U.S.A.
Inland transport: $ 700
Ocean transport: $ 1,500
Duty: $ 300
CAF: $ 1,250
Documentation: $ 125
TOTAL LANDED PRICE (or Total CNF Tokyo): $15,875
The selling price is your cost to buy the product from the manufacturer, plus your markup. Add that figure to the total shipping costs and divide that total by the number of cases. That gets you your landed price per case. Divide that figure by the number of units in a case. That gets you your landed price per unit. In front of the word "invoice," type "pro forma."
You have now finalized your price quotation and created a pro forma invoice. Don't forget to specify a precise time period during which your quote is valid, and add the freight forwarder's quote reference number. Once your customer approves the pro forma invoice, it will become your actual invoice for the order. The customer will also use the pro forma invoice to obtain any necessary funding or import licenses. Your customer should communicate acceptance in a short written sentence or two such as the following (usually via fax), with a signature: "We accept your pro forma invoice No. 1234 against our P.O. No. ABCD." You will then respond: "Acknowledge and confirm your P.O. No. ABCD against our pro forma invoice No. 1234."
That's it. You have a sale. You're in business! From this point on, no additional changes should be made to the transaction by you or your customer until after the expiry date given on the pro forma. Before you release the order, though, you and your customer must negotiate terms of payment. Read next month’s article (Factor 14) for an overview of the most common – and the most secure – methods of arranging payment for export goods, as well as an array of export financing sources.
Copyright ©2005 Laurel J. Delaney. All rights reserved.
Next Month: Implement an extraordinary after-sales service plan.
About the Author: Laurel Delaney runs GlobeTrade.com and LaurelDelaney.com, both Chicago-based firms that specialize in international entrepreneurship. She is also the creator of "Borderbuster," (www.globetrade.com/generic21.html) an e-newsletter and The Global Small Business Blog (http://borderbuster.blogspot.com), which are both highly regarded for coverage on global small business. Laurel can be reached at ldelaney@globetrade.com.
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