Exporters in developing countries will usually be price-followers, not price- setters. Their products will rarely be so unique in the target markets, that they can actually dictate the price level in that market.
For price-followers the pricing decisions, to be taken by management are:
1. Establish the current market pricing for comparative and/or substitutive products in the target market.
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2. Establish all the elements of the market price, like VAT, margins for the trade and the importers, import duties, freight and insurance costs, etc.
3. Make top-down calculation, deducting all the elements of the expected market price of the products(s) in order to arrive at the price “Ex-works” or “Ex-factoryAVarehouse.”
4. See if this price can be met.
5. If not, recalculate the costs price, by finding ways to decrease costs in the own factory or organisation. Or decrease the marketing budget, which also burdens the export-market price.
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6. Estimate total sales over a three-year period, add total planned expenses, including those of the export department, travelling and canvassing efforts.
7. Make a bottom-up calculation per product item, dividing the supporting budgets over the total number of items to be sold.
8. Set the final market prices.
9. Test the price (through market research).
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These are the nine steps for selling the final price in the market. It will prove a lengthy and difficult process, but it is an essential one. Here are two examples:
1. A “top-down” calculation, enabling one to establish if he can meet competitors’ market prices at cost-price level.
2. A “bottom-up” calculation to help one in setting the final price in the target market.
Example-1 Top-Down Calculation:
This ‘multiplier’ is a calculation aid, cutting short lengthy calculations when price alternatives are to be considered. When using the multiplier, keep in mind that it may cause slight calculation deviations.
Example 2 Bottom-up Calculation:
1. Estimate total sales in the plan year in number of units.
2. Set factory cost price per unit and multiply with total number of units to be sold.
3. Gives total cost price for planned sales volume.
4. Add: targeted profit (or feasible profit indicated by top-down calculation); also add: total budget for export marketing support, or export promotion.
5. Add: total transportation costs, factory to port of shipment (plus possible costs in port).
6. Gives total (planned) turnover at FOB level.
7. Add: total transportation costs to port of destination, also add insurance costs.
8. Gives total turnover at CIF destination level.
9. Add: import duties and handling costs in port of destination.
10. Gives total (planned) value of sales at LCP level (Landed Cost Price). From here on, the calculations are done on unit basis, i.e. broken down into smaller sales units: boxes for the distributive trade, or items for the consumer price setting.
11. Calculate sales price of the importer (assume his margin as 5% of his sales price).
12. Calculate sales price of wholesaler (assume his margin as 12% of his sales price).
13. Calculate net sales-price (excl. VAT) of the retailer (assume VAT is 25%).
14. Calculate consumer price, or retail price including VAT (assume VAT is 18%) unit.
15. Compare with general market pricing. Adjust (sales target, profit target or promotion budget) if necessary.
The feasibility calculations are also executed according to the top-down/ bottom-up method. In this case, the period is usually longer (up to 3 years), since the exporter will have to invest in a market position.
The calculations for industrial goods are less complicated, since there are fewer intermediate levels between supplier and customer. Also, VAT can be left out.