CHAPTER 3:

EXPORT PRICE

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 Contents

Expression of Export price

Pricing Considerations

Calculation of Price

Understanding the Price

Communication of Price

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 Learning outcomes
State the standard form of a price quoted in Int’l trade

Identify the major factors in pricing decision

Calculate basic prices

Understand the function and calculation of

commission and discount

Explain the ratios used to interpret profitability

Define the four stages of price communication

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 Introduction
Price is one the of the key variables in the any
international trade deal and should
incorporate:
 The right quantity
 At the right level of quality
 At the right time
 And at the right cost or price
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 What is the “right”, price?

Many factors affect the

setting of the right price!
Some of these factors are
controllable some not!
Export pricing must be
FLEXIABLE!

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 Pricing Objectives
 To keep, increase or defend market share
 Compare prices with the competition
 Eliminate the competition
 Achieve target profits or maximise profits
 To use excess production capacity
 To project a high quality image
 To survive
 setting the right price for your company
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 Elements of Pricing

The relationship between price and

quantity = the price decreases as
the quantities sold increases

This is known as the law of demand

• However price in only one of several factors
influencing demand and therefore sales.
• Take into consideration: Quantity, quality, time
and cost

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 Price factors

Controllable factors Independent factors

Cost of product Prevailing price levels
Selling and in the target market
distribution costs Market supply &
Cost of marketing demand
supports Competition
Product quality, Foreign exchange
images…

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 Pricing Methods
There are two main pricing policies:
Cost-oriented pricing: is the
simplest. The cost is calculated
for each unit of production. A
percentage or mark-up is added
to this base cost to determine
price.

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The most common methods of applying
the cost plus approach:
 Full cost pricing
 Direct cost pricing
 Marginal cost pricing
 Break-even pricing

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 Full Cost Pricing

This takes into account all the

variable costs & fixed
overheads that are directly
attributable to production, & a
pre-determined profit margin.
Weaknesses: No account is
taken of the demand side this
could result in the firm
producing products they cannot
sell.
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 Direct cost pricing
 Direct cost pricing is represented by a formula:

Direct cost = raw materials + direct labour +

variable factory overhead

 A mark-up is added to the direct cost to cover

estimated overheads and leave a profit, so
identifying the costs directly attributed to each
specific output & using those costs to set
prices.

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 Marginal cost pricing

Marginal costing is an accounting technique whereby a

marginal cost is determined on the basis of additional
variable costs only.

It is the amount by which the total cost is changed if the

volume of output of a product is increased by one unit.

For example: If spare manufacturing capability is available,

export prices at marginal costs may be quoted as the fixed
costs are already being covered by domestic sales
revenue.

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 Break- even pricing

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 Break- even pricing

Break-even pricing allows a firm to

compare the profit outcome of alternative
sets of prices.

Firms can set prices to achieve maximum

profit by concluding the price for given
volumes.

Verifying the volume that will deliver the

most profit.

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 Break- even pricing

Break-even Point =

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 Demand-oriented pricing

This implies that a high price is charge

where customer interest is high and a
low price is charged where customer
interest is low, despite that fact that the
cost may be the same in both cases.

Based on the customer’s perceived

value.

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 Competition-oriented pricing
This is based on the actual or anticipated behaviour of
competitors. Exporters would peg their price to that of their
competitors. The main forms are: going rate pricing and
sealed bid pricing.

Going rate pricing = The price is determined by market

leaders who know what price the market will bear

Sealed bid pricing = Used when firms have to compete

for contracts on the basis of tenders.

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 Dumping
Ranges of dumping
• Predatory dumping
• Is intentional selling at a loss to increase market share
• Unintentional dumping
• Occurs when market factors cause the import’s selling
price to fall below prices in the exporter’s home market
Remedies for dumping
• Antidumping duty
• Are levied on imported goods sold at less than fair
market value
• Countervailing duties
• Are imposed on imports which are subsidized in the
exporter’s home country
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 Export Costing Sheets

 Useful tool which services as a check list to

ensure that no cost has be omitted
 Your freight forwarder  transport rates,
cost of documentation, insurance, packing
and labelling costs etc…
( see page 59)

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 FOB
FOB Free on board Sub-Total
Factory purchasing cost
+ Administrative overhead
+ Profit margin
+ Local transport costs from plant to
shipping port
+ Local transport insurance to shipping
port (optional)
+ Storage costs, terminal handling
charge (THC)
+ Export customs clearance costs
= FOB (Named port of shipment)
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 FOB

FOB = (Total Cost + Profit)/Exchange Rate

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 CFR

CFR = FOB + Ocean Freight

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 CIF
CIF = FOB + Ocean Freight + Insurance

CIF = CFR + Insurance

Insurance Premium (I)= CIF x (1+10%) x Premium Rate

CIF = CFR + CIF x (1+10%) x Premium Rate (R)

CIF =

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 Pricing Including Commission

Commission = Contract value x commission rate

Pricing Including Commission =

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 Pricing with Discount

Discount = Contract price x Discount rate

Actual price = Contract price – discount

= Contract price x (1- discount rate)

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 Example

If the CIF price of a product is

USD100/set, freight charge USD10/set,
insurance premium USD10/set,
commission rate 2%, the commission
payment based on CIF price should be?

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 Understanding the Price

Export Profit Export cost for

Margin= Foreign exchange =
(Revenue –Cost)
Revenue Cost in Local currency

Revenue in Foreign
Currency

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Export cost for foreign exchange
Export cost for foreign exchange ratio is
calculated the total amount of home currency
cost (Ce) to an unit of foreign currency turn-
over (Te) on FOB basic.

If Re < E/R  export?

If Re > E/R  export?
E/R: commercial exchange rate

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Import cost for foreign exchange
Import cost for foreign exchange ratio is
calculated the total amount of home currency
turn-over (Ti) to an unit of foreign currency
expense (Ci) on CIF basic.

If Ri < E/R  import?

If Ri > E/R  import?
E/R: commercial exchange rate

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 Presenting an Exp-Imp
Price/Quotation

Communication is one of
the most important
aspects of any
international trade
transaction. Most
transmission of
information/
communication is done
through the issuance of
documentation

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 Price Negotiations
Be aware that price is only one part of a
comprehensive package  Avoid early price
concessions.
Carefully consider concessions  reduce price
or profitability.
- discounts, payment terms, product features
Know conditions in importer’s market.
Focus negotiations first on substantive issues
(quality and delivery), then on price.

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 Business Letter

Inquiry
Counter-offer
Offer

Order

Acceptance

Confirmation

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 Letter Components
 Essential Components
 Writer’s Address
 Date
 Inside Address
 Salutation
 Letter Body
 Complimentary Close
 Signed Name
 Typed Name
 Optional Components
 Subject Line
 New Page Notations
 Writer’s and Typist’s Initials
 Enclosure Notation
 Copy Notation 34
 Inquiry/ Enquiry
Buyer states simply and concisely what he
wants

Not only price, but also other relevant issues

such as: sample, payment, shipment...etc…

Buyer has no legal engagement

If supplier is whom buyer has not previously

dealt with
• Tell: How buyer has obtained the supplier
• Introduce: some details of buyer’s business
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 Re: Softwood for Pulp and Paper
Dear Sirs,
Your name and address have been given to us by the Japan-
Vietnam Trade Association.
First of all we would like to take the opportunity of introducing
ourselves as one of the country's leading trading companies
dealing in all kinds of materials for industry such as woodchips,
iron ore, coal, scaps, etc...
At present we are extensively engaged in importing hardwoods
and now proposing to extend our business into the softwood area
and are investigating the possibility of importing from Vietnam.
We would therefore, be obliged if you will kindly let us have your
offer of the goods in question. Please quote your latest price, the
price is preferred to be quoted CFR HCMC port, and the most
favorable terms of payments.
We are looking forward ro receiving your reply.
Yours faithfully,
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 Offer
Supplier make in writing usually state:
• Description of goods
• Quality
• Quantity
• Packing and marking
• Price
• Payment
• Shipment
Offer may be firm or w/o engagement

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 Free Offer

An offer w/o engagement  do not bind the

seller

Sent to several buyers

If the buyer accepts  need seller’s

confirmation having sold or not

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 Offer without engagement for
grinding machine
Dear Sirs,

We wish to inform you that we have started producing a new

model of Grinding Machine DA75 in which we think you may be
interested.
From the Catalogue enclosed you will see that the machine is of
high efficiency, performance and is comparatively easy to handle.
Most of the good points of the ealier types have been
incorporated in the model. In addition, it has many advantages as
compared with the existing models.
We are pleased to offer you those machines at the price of USD
245 per unit. The price is to be understood to be CIF Haiphong.
We feel sure that our offer will be of interest and assistance to
you and we shall be glad to send you further information should
you require it.
This offer is made without engagement on your part.
Yours faithfully,
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 Firm Offer

An offer with offeror’s engagement w/i a stated

period of time

Express/ imply these words: firm offer, for

acceptance within X days or similar qualifying
words

Once accepted, firm offer can not be withdrawn

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 Firm Offer for Drilling Rigs
Dear Sirs,
We thank you for your enquiry of 8th Sept. for our drilling rigs
MdB 32. We are pleased to make you an offer, subject to
acceptance within 21 days for 10 machines at the price of USD
12 per unit CIF Saigon including packing.

Payment is to be made against a Bill of Lading, an invoice, and

a Work's Test Cerfiticate, by an Irrevocable Letter of Credit to
be opened in our favour with the Commercial Bank, London,
for the full value of the goods intended for the shipment.

The machines can be despatched within 6 months from

receipt of your formal order. We enclose a list of firms whom
we have been supplying with our machines for the past few
years for your reference.
Yours faithfully
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 CISG/ Article 15

(1) An offer becomes effective when it

reaches the offeree.
(2) An offer, even if it is irrevocable, may be
withdrawn if the withdrawal reaches the
offeree before or at the same time as the
offer.

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 CISG/ Article 20
(1) A period of time for acceptance fixed by the
offeror in a telegram or a letter begins to run
from the moment the telegram is handed in for
dispatch or from the date shown on the letter
or, if no such date is show, from the date
shown on the envelope. A period of time for
acceptance fixed by the offeror by telephone,
telex or other means of instantaneous
communication, begins to run from the moment
that the offer reaches the offeree.

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 CISG/ Article 20
(2) Official holidays or non-business days
occurring during the period for acceptance are
included in calculating the period. However, if
a notice of acceptance cannot be delivered at
the address of the offeror on the last day of the
period because that day falls on an official
holiday or a non-business day at the place of
business of the offeror, the period is extended
until the first business day which follows.

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 CISG/ Article 22
An acceptance may be withdrawn if the
withdrawal reaches the offeror before or at the
same time as the acceptance would have
become effective.

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 CISG/ Article 23
A contract is concluded at the moment when an
acceptance of an offer becomes effective in
accordance with the provisions of this
Convention.

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 Counter - Offer

Offer can not meet all satisfaction of the

offeree  he may amend and add some
new terms and requirements.

Counter-offer is the refusal of an offer 

The offer from one party will be of no
effect after the other party’s counter-offer
 a new offer needed

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 CISG/ Article 19
(1) A reply to an offer which purports to be an
acceptance but contains additions, limitations
or other modifications is a rejection of the offer
and constitutes a counter-offer.
(3) Additional or different terms relating, among
other things, to the price, payment, quality and
quantity of the goods, place and time of
delivery, extent of one party's liability to the
other or the settlement of disputes are
considered to alter the terms of the offer
materially.
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 Dear Sir,

We have received your letter of August 1, offering us 2,000 dozens of

No. 208 ladies’ pajamas at USD26.00 per dozen. In reply, we regret to
inform you that our client has found your price much too high.
Information indicates that similar articles have been sold there at
approximately USD19.00 per dozen.
We don’t deny that your pajamas are slightly better in design, but your
price difference should in no case be as big as USD7.00 per dozen. To
step up the trade, we, on behalf of our clients, counteroffer the
following, subject to your reply here on August 3, 2007: 2000 dozens of
No.208 ladies’ pajamas at USD22.00 per dozen CIFC 2% San
Francisco, other terms remaining the same as stated in your letter
dated August1, 2007.
As the market is declining, we recommend your acceptance.
Yours sincerely,
Dare Holland
Brother Trading Company
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 Acceptance

The absolutely necessary step for successful

business conclusion and contract.

The offeree absolutely accepts all points offered

by the other party within the validity time when
receiving the offer or counteroffer.

It is an intention of agreement by the offeree to

place an order or sign a contract with the offeer.

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 CISG/ Article 18
(1) A statement made by or other conduct of the offeree
indicating assent to an offer is an acceptance. Silence or
inactivity does not in itself amount to acceptance.
(2) An acceptance of an offer becomes effective at the
moment the indication of assent reaches the offeror. An
acceptance is not effective if the indication of assent does
not reach the offeror within the time he has fixed or, if no
time is fixed, within a reasonable time, due account being
taken of the circumstances of the transaction, including the
rapidity of the means of communication employed by the
offeror. An oral offer must be accepted immediately unless
the circumstances indicate otherwise.

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 Order

Order is used to order goods in

accordance with the amount which is
required by company

There are two ways in making order:

• 1. Order without using official order form  an
order letter
• 2. Order by using official order form  a
purchase order (P.O)

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 An order letter An official order form
Used in great
 Made by only writing a
companies
letter with all details of Cover letter
A purchase order (PO)
orders by directly
usually consists of
enclosed it in that letter these rows:
 No. (number)
 The content must clear,
 Description/ items
brief and direct to the  Quantity
 Unit price
purpose
 Amount
 Delivery date
 Terms of payment

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 Economic Order Quantity (EOQ)

Where:
D = demand
R = reorder cost
H = holding cost

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 Definition
1. Unit cost (U): the price for an item charged by the supplier
one unit of the item. It may be fairly easy to find this by
looking at quotations or recent invoices from suppliers
2. Reorder cost (R): the cost of placing a repeat order for an
item. This might include allowances for preparing an order,
correspondence, receiving, unloading, checking, testing, use
of equipment and follow-up. In practice, the best estimate for
a reorder cost often comes from dividing the total annual
cost of the purchasing department by the number of orders it
sends out.
3. Holding cost (H): the cost of holding one unit of an item in
stock for a unit period of time. Other holding costs are for
storage space, loss, handling, special treatment, such as
refrigeration, administration and insurance.
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 INDONESIAN MODERN OFFICE EQUIPMENT LTD
Jln.Samudra Raya No. 35B
Bandung 23001
Your ref: MP/DC/ 21
Our ref : AM/ L/ 2B

27th November, 2006

Mr. William C Parker

Marketing Manager
International Corporation Ltd
Jln. Rafflesia no. 23 Jakarta

Dear Mr. William,

Subject: Purchase Order No.365 T.

Thank you for your letter of 15 November, enclosing your catalogue, price-list, and terms of payment.
We have studied your catalogue very carefully and are very pleased with the quality of the typewriters
you offered.
We enclose our purchase order and shall pay by D/A at 30 days sight.

Yours Sincerely,

Alan P. Mardinata
Salles Manager
56
 INDONESIAN MODERN OFFICE EQUIPMENT LTD
Jln.Samudra Raya No. 35B
Bandung 23001

Purchase Order
No.356T
To. International Corporation Ltd.
Jln. Rafflesia no.23 Jakarta Date: 26thNovember,2006
QTY Item Catalogue N0: Unit price $/ pc Total $

100 Silver reed 254 250.00 25,000.00

150 Canon 126 200.00 30,000.00
50 IBM 232 300,00 15,000.00

100 Remington 305 150.00 15,000.00

Total 85,000.00
Delivery date Required Payment:

10 December 2006 D/A at 30 days sight

Allan P. Martadinata
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 Confirmation

If the exchange of letters or faxes or telexes

eventually leads to the conclusion of business
 should confirm the deal

A Sale/Buy Confirmation  a document

regarded as a contract

A letter confirming an order or a sale should

be very simple as the relative Confirmation or
Contract or is almost always enclosed.

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 Sales Confirmation
Dear Sirs,
Thank you for your order No.86-AM007. Enclosed is our
Sales Confirmation No. 86-AM007CB in duplicate, of which
one copy is to be countersigned and returned for our file.
We wish to point out that the stipulations in the relevant
credit should strictly conform to the terms stated in our sales
confirmation thus avoiding subsequent amendments
We hope you can establish the covering L/C in April 2009.
You may rest assured that we shall make up your order upon
receipt of the credit and effect the shipment within the time
you requested.
Thank you for your cooperation and we are looking forward
to your further orders.

Yours sincerely,

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 Example 1
ABC Co., Ltd. buys stationery for XYZ Motors. The
demand for printed forms is constant at 20 boxes a
month. Each box of forms costs Usd50, the cost of
processing an order and arranging delivery is Usd60, and
holding cost is Usd18 a box a year. What are the
economic order quantity, cycle length and costs?

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 Example 1
ABC Co., Ltd. buys stationery for XYZ Motors. The
demand for printed forms is constant at 20 boxes a
month. Each box of forms costs Usd50, the cost of
processing an order and arranging delivery is Usd60, and
holding cost is Usd18 a box a year. What are the
economic order quantity, cycle length and costs?

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 Example 2

Demand for an item is constant at 20 units a week, the

reorder cost is £125 an order and holding cost is £2 an unit
a week. If suppliers guarantee delivery within 2 weeks
what is the best ordering policy for the item?

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 Worked example
Supposed you receive 02 inquiries from a Japanese customer
for X as:
Proposal 1: FOB price at Usd35/MT, payment term: 80%
pay for 1 month after shipment date, 10%- 8 months after
shipment date, 10%-12 months after shipment date.
Proposal 2: CIF price at Usd57/MT, payment term: 30%- 2
months after shipment date, 30%-6 months after shipment
date, 40%-10 month after shipment date
Known as:
 Sea freight rate HCMC-TOKYO: 21 USD/MT
 Insurance rate: 0.25%
 SIBOR: 6%/ year

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