Export advice & info

A detailed analysis of the export trade statistics is conducted on a quarterly basis and distributed to members with the view to assessing product and destination country strengths which provides the building blocks for product and market diversification.

Guidance for inexperienced exporters is provided for aspects such as government incentives www.thedti.gov.za, SARS registration procedures, certificates of origin requirements and tariff classifications www.sars.gov.za.

Should you need export advice or need additional information please click here, fill out the online form and we will get back to you.

Advise on Export Export can be one of the best ways to grow your business:
*Grow your bottom line.
*Smooth your business cycles.
*Use production capabilities fully.
*Defend your domestic market.
*Increase your competitiveness in all markets

DEVELOPING AN EXPORT STRATEGY

When you look at, or even consider exporting you must first ask yourself the following

  • Is your company ready to export?
  • How will exporting affect your company?
  • How do you create an export plan? Does your Product have Export Potential

First examine the domestic sales of your product. If your company is successful in the South African market, there is a good chance that it will also sell in Global Markets.

Does your product have unique or important features. A unique product has less competition and therefore demand for it will be great. It gives good competitive edge.

Important Point
Even though many companies assume that they can’t compete globally there are factors that can make any company competitive, such as need, quality, innovation, service, and consumer taste.

Assessing Your Company’s Export Readiness
How can exporting enhance your company’s goals. First check your export readiness.
Ask yourself the following –

  • Is exporting consistent with other company goals?
  • What demands will exporting place on your company’s key resources, such as management, staff production capacity, and financing, and how will these demands be met?
  • When assessed, is exporting worth the invested costs or could this money be used elsewhere in the business?

Benefits

  • By selling internationally, your company can gain insights into different ways of doing business.
    If your product quality or expertise is superior, you’ll have a competitive edge in the Global marketplace.
  • Your company should seek multiple benefits from exporting, such as expanded customer networks and exposure to new ideas and technology.
  • You will acquire better leadership abilities, and collaborate better with customers and suppliers.

Important Point
The size of a company does not matter when it comes to exporting. Most small to medium sized businesses have built their companies on export revenue

Is your product ready to export?

  • Is your product a success domestically. What are the factors contributing to why it sells. Take into consideration your PESTEL ( Political, environmental, Social, Technological, Economic and Legal )
  • Check governmental regulations that require special testing, safety, quality, and technical conformity measures in the countries you intend to export to.
  • Products that have unique features enjoy a competitive advantage. Such unique features include, superior quality, cutting-edge technology, and adaptability.

Developing an Export Plan
The plan includes

  • Specific objectives
  • Time schedules for implementation
  • Measurements to see if your are successful

Remember to ask yourself and to do the following.

  1. Which products will you select (You, cannot choose all your products. Be selective)
  2. Can the Product be changed to suit International consumers.
  3. Choose at least three countries to target. ( Taking on the whole world is a recipe for disaster)
  4. Investigate the Customers Profiles, Competition, Demographics, Culture, barriers to entry and population of each Country you have chosen.
  5. Have you costed your final product. ( include all related costs like electricity, staff, rental etc)
  6. Do you have production time frames in place and who will manage this.

Objectives in the plan should be compared with actual results to measure the success of different strategies. Your company should not hesitate to change the plan and make it more specific as new information and experience are gained. “ Plan, Implement, assess change and add.”

DEVELOPING A MARKETING PLAN

Researching foreign markets

  • Research the largest markets for your product and the fastest-growing markets
  • Market trends and outlook
  • Market conditions and practices
  • Competing companies and products

Look at trends over the past three years. Has growth been consistent year to year? What has sold the most? Look at types and colours as well demographics of the countries you have been successful in.

TARGET THE MOST PROMISING MARKETS

Of the markets you have identified, select three of the most promising for further assessment.
Note that many small companies could sharply boost exports by entering new markets.

Company Export Readiness

  1. Are you an established presence in your industry domestically?
  2. How do you sell and distribute your products in the domestic market?
  3. Do you customarily conduct market research and planning for your domestic operations?
  4. How would you handle any new or additional export business within your organization?
  5. What is the current status of your export activity?
  6. What payment terms would you be willing to offer reputable foreign buyers?
  7. Would you be willing to adapt your product and/or packaging to better suit foreign markets?
  8. Are you registered for Export? If Not

To download the import and export forms refer to the following SARS link: www.sars.gov.za
Applicants must submit the relevant completed forms to their nearest SARS customs and excise branch office

CONDUCTING BUSINESS INTERNATIONALLY

Companies should be aware of basic business practices that are essential to successful international selling. Because cultures vary, there is no single business code. The following basic practices transcend culture barriers, though, and will help your company conduct business overseas.

  • Keep to your promises. The biggest complaint from foreign importers about South African suppliers is failure to ship as promised. A first order is particularly important because it shapes the customer’s image of a firm as a dependable or an undependable supplier.
  • Be courteous, and friendly. It is important to avoid undue familiarity or slang, which may be misinterpreted. Some overseas firms feel that the usual brief South African business letter is lacking in courtesy.

Service is a feature expected by the consumer. Foreign buyers of industrial goods typically place service at the forefront of the criteria they evaluate when making a decision about a purchase.

All foreign markets has its own expectations of suppliers and vendors. South African manufacturers or distributors must therefore ensure that their service performance is comparable to that of the predominant competitors in the market. This level of performance is an important determinant in ensuring a competitive position, especially if the other factors of product quality, price, promotion, and delivery appeal to the buyer.

One of the most important things when making an International Sales is confirming the Method of Payment. In most cases when dealing with Africa, one would advise Cash in Advance Payments, but below are other recommended methods you might consider.

METHOD OF PAYMENT

The basic methods of payment are:

  • Cash in advance
  • Documentary letter of credit
  • Documentary collection or draft
  • Open account
  • Other payment mechanisms

CASH IN ADVANCE

Receiving payment by cash in advance of the shipment might seem ideal. A wire transfer is commonly used and has the advantage of being almost immediate. This can be tracked and is preferred over and above cheque payments which can lead to delays and Fraud.
For the buyer, advance payment tends to create cash flow problems and to increase risks. Furthermore, cash in advance is not as common in most of the world. Buyers are often concerned that the goods may not be sent if payment is made in advance or that they will have no leverage with the seller if goods do not meet specifications. Exporters who insist on advance payment as their sole method of doing business may find themselves losing out to competitors who offer more flexible payment terms.

DOCUMENTARY LETTERS OF CREDIT AND DOCUMENTARY COLLECTIONS OR DRAFTS

Documentary letters of credit or documentary collections or drafts are often used to protect the interests of both buyer and seller. These two methods require that payment be made on presentation of documents conveying the title and showing that specific steps have been taken. Letters of credit and drafts may be paid immediately or at a later date. Drafts that are paid on presentation are called sight drafts. Drafts that are to be paid at a later date, often after the buyer receives the goods, are called time drafts or date drafts. A transmittal letter is used, which contains complete and precise instructions on how the documents should be handled and how the payment is to be made because payment by these two methods is made on the basis of documents, all terms of payment should be clearly specified in order to avoid confusion and delay. For example, “net 30 days” should be specified as “30 days from acceptance.” Likewise, the currency of payment should be specified as “US$80,000.” International bankers can offer other suggestions.

Banks charge fees—mainly based on a percentage of the amount of payment—for handling letters of credit and smaller amounts for handling drafts. If fees charged by both the foreign and South African banks are to be applied to the buyer’s account, this term should be explicitly stated in all quotations and in the letter of credit.

The exporter usually expects the buyer to pay the charges for the letter of credit, but some buyers may not agree to this added cost. In such cases, you must either absorb the costs of the letter of credit or risk losing that potential sale. Letters of credit for smaller amounts can be somewhat expensive because fees can be high relative to the sale.

Letters of Credit

A letter of credit adds a bank’s promise to that of the foreign buyer to pay the exporter. A letter of credit issued by a foreign bank is sometimes confirmed by a South African bank. This confirmation means that the South African bank (the confirming bank) adds its promise to that of the foreign bank (the issuing bank) to pay the exporter. If a letter of credit is not confirmed, it is “advised” through a South African bank and is thus called an advised letter of credit. South African exporters may wish to have letters of credit issued by foreign banks confirmed through a South African bank if they are unfamiliar with the foreign bank or are concerned about the political or economic risk associated with the country in which the bank is located. An Export Assistance Center or international banker can assist exporters in evaluating the risks to determine what might be appropriate for specific export transactions.

A letter of credit may be irrevocable, which means that it cannot be changed unless both parties agree. Alternatively, it can be revocable, in which case either party may unilaterally make changes. A revocable letter of credit is inadvisable because it carries many risks for the exporter.

To expedite the receipt of funds, you can use wire transfers. You should consult with your international banker about bank charges for such services.

A TYPICAL LETTER OF CREDIT TRANSACTION

Here are the typical steps in issuing an irrevocable letter of credit that has been confirmed by a South African bank:

  1. After the exporter and the buyer agree on the terms of a sale, the buyer arranges for its bank to open a letter of credit that specifies the documents needed for payment. The buyer determines which documents will be required.
  2. The buyer’s bank issues, or opens, its irrevocable letter of credit and includes all instructions to the seller relating to the shipment.
  3. The buyer’s bank sends its irrevocable letter of credit to a South African bank and requests confirmation. The exporter may request that a particular South African bank be the confirming bank, or the foreign bank may select a South African correspondent bank.
  4. The South African bank prepares a letter of confirmation to forward to the exporter along with the irrevocable letter of credit.
  5. The exporter carefully reviews all conditions in the letter of credit. The exporter’s freight forwarder is contacted to make sure that the shipping date can be met. If the exporter cannot comply with one or more of the conditions, the customer is alerted at once because an amendment may be necessary.
  6. The exporter arranges with the freight forwarder to deliver the goods to the appropriate port or airport.
  7. When the goods are loaded aboard the exporting carrier, the freight forwarder completes the necessary documentation.
  8. The exporter (or the freight forwarder) presents the documents, evidencing full compliance with the letter of credit terms, to the South African bank.
  9. The bank reviews the documents. If they are in order, the documents are sent to the buyer’s bank for review and then transmitted to the buyer.
  10. The buyer (or the buyer’s agent) uses the documents to claim the goods.
  11. A sight or time draft accompanies the letter of credit. A sight draft is paid on presentation; a time draft is paid within a specified time period.

TIPS ON USING LETTERS OF CREDIT

When preparing quotations for prospective customers, you should keep in mind that banks pay only the amount specified in the letter of credit—even if higher charges for shipping, insurance, or other factors are incurred and documented.

On receiving a letter of credit, you should carefully compare the letter’s terms with the terms of the pro forma quotation. This step is extremely important because the terms must be precisely met or the letter of credit may be invalid and you may not be paid. If meeting the terms of the letter of credit is impossible or if any of the information is incorrect or even misspelled, you should contact the customer immediately and ask for an amendment to the letter of credit.

You must provide documentation showing that the goods were shipped by the date specified in the letter of credit or you may not be paid. You should check with your freight forwarders to make sure that no unusual conditions may arise that would delay shipment.
Documents must be presented by the date specified for the letter of credit to be paid. You should verify with your international banker that there will be sufficient time to present the letter of credit documents for payment.

You may request that the letter of credit specify that partial shipments and transshipment will be allowed. Specifying what will be allowed can prevent unforeseen problems at the last minute.

Documentary Collections or Drafts

A draft, sometimes called a bill of exchange, is analogous to a foreign buyer’s check. Like checks used in domestic commerce, drafts carry the risk that they will not be honored. However, in international commerce, title does not transfer to the buyer until the buyer pays the draft.

SIGHT DRAFTS

A sight draft is used when the exporter wishes to retain title to the shipment until it reaches its destination and payment is made. Before the shipment can be released to the buyer, the original “order” for the ocean bill of lading (the document that evidences title) must be properly endorsed by the buyer and surrendered to the carrier. It is important to note that air way bills do not need to be presented for the buyer to claim the goods. Risk increases when a sight draft is used with an air shipment.

In actual practice, the ocean bill of lading is endorsed by the exporter and sent by the exporter’s bank to the buyer’s bank. It is accompanied by the sight draft, invoices, and other supporting documents that are specified by either the buyer or the buyer’s country (e.g., packing lists, commercial invoices, and insurance certificates). The foreign bank notifies the buyer when it has received these documents. As soon as the draft is paid, the foreign bank turns over the bill of lading, thereby enabling the buyer to obtain the shipment.

There is still some risk when a sight draft is used to control transferring the title of a shipment. The buyer’s ability or willingness to pay might change between the time the goods are shipped and the time the drafts are presented for payment. There is no bank promise to pay standing behind the buyer’s obligation. Also, the policies of the importing country could change. If the buyer cannot or will not pay for and claim the goods, returning or disposing of the products becomes the problem of the exporter.

Time Drafts and Date Drafts

A time draft is used when the exporter extends credit to the buyer. The draft states that payment is due by a specific time after the buyer accepts the time draft and receives the goods. By signing and writing “accepted” on the draft, the buyer is formally obligated to pay within the stated time. When this is done, the time draft is then called a trade acceptance. It can be kept by the exporter until maturity or sold to a bank at a discount for immediate payment.

A date draft differs slightly from a time draft in that it specifies a date on which payment is due, rather than a time period after the draft is accepted. When either a sight draft or time draft is used, a buyer can delay payment by delaying acceptance of the draft. A date draft can prevent this delay in payment, though it still must be accepted.

OPEN ACCOUNT

In a foreign transaction, an open account can be a convenient method of payment if the buyer is well established, has a long and favorable payment record, or has been thoroughly checked for creditworthiness. With an open account, the exporter simply bills the customer, who is expected to pay under agreed terms at a future date. Some of the largest firms abroad make purchases only on open account.

However, there are risks to open-account sales. The absence of documents and banking channels might make it difficult to pursue the legal enforcement of claims. The exporter might also have to pursue collection abroad, which can be difficult and costly. Another problem is that receivables may be harder to finance, because drafts or other evidence of indebtedness is unavailable. There are several ways to reduce credit risk, including export credit insurance and factoring.

Exporters contemplating a sale on open-account terms should thoroughly examine the political, economic, and commercial risks. They should also consult with their bankers if financing will be needed for the transaction before issuing a pro forma invoice to a buyer.

CONSIGNMENT SALES

International consignment sales follow the same basic procedures as in South Africa. The goods are shipped to a foreign distributor, who sells them on behalf of the exporter. The exporter retains title to the goods until they are sold, at which point payment is sent to the exporter. The exporter has the greatest risk and least control over the goods with this method. Also, receiving payment may take a while.

It is smart to consider risk insurance with international consignment sales. The contract should clarify who is responsible for property risk insurance that will cover the merchandise until it is sold and payment is received. In addition, it may be necessary to conduct a credit check on the foreign distributor.

FOREIGN CURRENCY

A buyer and a seller who are in different countries rarely use the same currency. Payment is usually made in the buyer’s or seller’s currency or in a third mutually acceptable currency.

One of the risks associated with foreign trade is the uncertainty of future exchange rates. The relative value between the two currencies could change between the times the deal is concluded and the time payment is received. If you are not properly protected, a devaluation or depreciation of the foreign currency could cause you to lose money. For example, if the buyer has agreed to pay €500,000 for a shipment, and the euro is valued at $0.85, you would expect to receive $425,000. If the euro later decreased in value to $0.84, payment under the new rate would be only $420,000, meaning a loss of $5,000 for you. If the foreign currency increased in value, however, you would get a windfall in extra profits. Nonetheless, most exporters are not interested in speculating on foreign exchange fluctuations and prefer to avoid risks.

One of the simplest ways for you to avoid such risk is to quote prices and require payment in U.S. dollars. Then the burden of exchanging currencies and the risk are placed on the buyer. You should also be aware of any problems with currency convertibility. Not all currencies are freely or quickly converted into U.S. dollars. Fortunately, the U.S. dollar is widely accepted as an international trading currency, and U.S. firms can often secure payment in dollars.

If the buyer asks to make payment in a foreign currency, you should consult an international banker before negotiating the sales contract. Banks can offer advice on the foreign exchange risks that exist with a particular currency.

PAYMENT PROBLEMS

In international trade, problems involving bad debts are more easily avoided than rectified after they occur. Credit checks can limit the risks. Nonetheless, just as in a company’s domestic business, exporters occasionally encounter problems with buyers who default on their payment. When these problems occur in international trade, obtaining payment can be both difficult and expensive. Even when the exporter has insurance to cover commercial credit risks, a default by a buyer still requires the time, effort, and cost of the exporter to collect a payment. The exporter must exercise normal business prudence in exporting and exhaust all reasonable means of obtaining payment before an insurance claim is honored. Even then, there is often a significant delay before the insurance payment is made.

The simplest and least costly solution to a payment problem is to contact and negotiate with the customer. With patience, understanding, and flexibility, you may often resolve conflicts to the satisfaction of both sides. This point is especially true when a simple misunderstanding or technical problem is to blame and there is no question of bad faith. Even though you may be required to compromise on certain points—perhaps even on the price of the committed goods—your company may save a valuable customer and profit in the long run.

However, if negotiations fail and the sum involved is large enough to warrant the effort, your company should obtain the assistance and advice of its bank and legal counsel, which can often resolve payment problems informally. When all else fails, arbitration is often faster and less costly than legal action. The International Chamber of Commerce handles most international arbitration and is usually acceptable to foreign companies because it is not affiliated with any single country.

FACT:

Even exporters who take precautions occasionally experience payment problems.

INSIGHT:

If you experience payment problems, try these three avenues:

  1. Try to negotiate directly with the customer.
  2. Work with your bank, legal counsel, —particularly if negotiations fail and the sum involved is large.
  3. Try arbitration through the International Chamber of Commerce if other means fail. This route is often faster and less costly than legal action.

SHIPPING YOUR PRODUCT

  • What documentation and insurance you may need
  • International shipping companies and what services they offer

DOCUMENTATION

Your company should seriously consider having the freight forwarder handle the documentation that exporting requires. Forwarders are specialists in this process. The following documents are commonly used in exporting, but which of them are necessary in a particular transaction depends on the requirements of the South African government and the government of the importing country:

  • Air freight shipments are covered by air waybills, which can never be made in negotiable form.
  • A bill of lading is a contract between the owner of the goods and the carrier (as with domestic shipments). For shipment by vessel, there are two types: a straight bill of lading, which is not negotiable and does not give title to the goods, and a negotiable, or shipper’s order, bill of lading. The latter can be bought, sold, or traded while the goods are in transit. The customer usually needs an original bill of lading as proof of ownership to take possession of the goods.
  • A commercial invoice is a bill for the goods from the seller to the buyer. Many governments use commercial invoices to determine the true value of goods when assessing customs duties. Governments that use the commercial invoice to control imports will often specify the invoice’s form, content, and number of copies, language to be used, and other characteristics.
  • A consular invoice, a required document in some countries, describes the shipment of goods and shows information such as the consignor, consignee, and value of the shipment. Certified by the consular official of the foreign country, it is used by the country’s customs officials to verify the value, quantity, and nature of the shipment.
  • A certificate of origin, also a required document in certain nations, is a signed statement as to the origin of the export item. Certificates of origin are usually validated by a semi-official organization, such as a local chamber of commerce. A certificate may be required even if the commercial invoice contains the same information.
  • An inspection certification is required by some purchasers and countries to attest to the specifications of the goods shipped. The inspection is usually performed by a third party, often an independent testing organization.
  • A dock receipt and a warehouse receipt are used to transfer accountability when the domestic carrier moves the export item to the port of embarkation and leaves it with the shipping line for export.
  • A destination control statement appears on the commercial invoice and on the air waybill or bill of lading to notify the carrier and all foreign parties that the item can be exported only to certain destinations.
  • A shipper’s export declaration (SED) is used to control exports and is a source document.
  • An export Code is a government customs number that authorizes the export of goods
  • An export packing list is considerably more detailed and informative than a standard domestic packing list. It itemizes the material in each package and indicates the type of package, such as a box, crate, drum, or carton. It also shows the individual net, tare, and gross weights and measurements for each package. Package markings should be shown along with references to identify the shipment. The shipper or forwarding agent uses the list to determine the total shipment weight and volume and whether the correct cargo is being shipped..
  • An insurance certificate is used to assure the consignee that insurance will cover the loss of or damage to the cargo during transit.

Documentation must be precise because slight discrepancies or omissions may prevent merchandise from being exported, may result in non-payment, or may even result in the seizure of the exporter’s goods by South African or foreign customs officials. Collection documents are subject to precise time limits and may not be honored by a bank if the time has expired. Most documentation is routine for freight forwarders and customs brokers, but as the exporter, you are ultimately responsible for the accuracy of the necessary documents.

The number and kinds of documents that the exporter must deal with vary according to the destination of the shipment. Because each country has different import regulations, the exporter must be careful to provide all proper documentation. The following sources also provide information pertaining to foreign import restrictions

SHIPPING

The handling of transportation is similar for domestic and export orders. Export marks are added to the standard information on a domestic bill of lading. These marks show the name of the exporting carrier and the latest allowed arrival date at the port of export. Instructions for the inland carrier to notify the international freight forwarder by telephone on arrival should also be included. You may find it useful to consult with a freight forwarder to determine the method of international shipping. Because carriers are often used for large and bulky shipments, you can reserve space on the carrier well before actual shipment date. This reservation is called the booking contract.

International shipments are increasingly made on a bill of lading under a multimodal contract. The multimodal transit operator (frequently one of the transporters) takes charge of and responsibility for the entire movement from factory to final destination.
The cost of the shipment, delivery schedule, and accessibility to the shipped product by the foreign buyer are all factors to consider when determining the method of international shipping. Although air carriers may be more expensive, their cost may be offset by lower domestic shipping costs (e.g., using a local airport instead of a coastal seaport) and quicker delivery times.

Before shipping, your firm should check with the foreign buyer about the destination of the goods. Buyers may want the goods to be shipped to a free trade zone or a free port, where they are exempt from import duties.

INSURANCE

Damaging weather conditions, rough handling by carriers, and other common hazards to cargo make insurance an important protection for South African exporters. If the terms of sale make you responsible for insurance, your company should either obtain its own policy or insure the cargo under a freight forwarder’s policy for a fee. If the terms of sale make the foreign buyer responsible, you should not assume (or even take the buyer’s word) that adequate insurance has been obtained. If the buyer neglects to obtain adequate coverage, damage to the cargo may cause a major financial loss to your company.

Shipments by sea are covered by marine cargo insurance. Air shipments may also be covered by marine cargo insurance, or insurance may be purchased from the air carrier. Export shipments are usually covered by cargo insurance against loss, damage, and delay in transit. International agreements often limit carrier liability. Additionally, the coverage is substantially different from domestic coverage. Arrangements for insurance may be made by either the buyer or the seller in accordance with the terms of sale. Exporters are advised to consult with international insurance carriers or freight forwarders for more information. Although sellers and buyers can agree to different components, coverage is usually placed at 110 percent of the CIF (cost, insurance, freight) or CIP (carriage and insurance paid to) value.

TARIFFS

Because tariffs, port handling fees, and taxes can be high, it is very important for you to consider their effects on your product’s final cost. Typically, the importer pays the tariffs. Nevertheless, these costs will influence how much the buyer is willing to pay for your product.

PRICING

PRICING CONSIDERATIONS


These considerations will help you determine the best price for your product overseas:
  • At what price should your firm sell its product in the foreign market?
  • What type of market positioning (that is, customer perception) does your company want to convey from its pricing structure?
  • Does the export price reflect your product’s quality?
  • Is the price competitive?
  • What type of discount (for example, trade, cash, quantity) and allowances (for example, advertising, trade-offs) should your firm offer its foreign customers?
  • Should prices differ by market segment?
  • What should your firm do about product-line pricing?
  • What pricing options are available if your firm’s costs increase or decrease? Is the demand in the foreign market elastic or inelastic?
  • Is the foreign government going to view your prices as reasonable or exploitative?
  • Do the foreign country’s anti-dumping laws pose a problem?

As in the domestic market, the price at which a product or service is sold directly determines your firm’s revenues. It is essential that your company’s market research include an evaluation of all the variables that may affect the price range for your product or service. If your firm’s price is too high, the product or service will not sell. If the price is too low, export activities may not be sufficiently profitable or may actually create a net loss.

The traditional components for determining proper pricing are costs, market demand, and competition. Each component must be compared with your company’s objective in entering the foreign market. An analysis of each component from an export perspective may result in export prices that are different from domestic prices.

It is also very important that you take into account additional costs that are typically borne by the importer. They include tariffs, customs fees, currency fluctuation, transaction costs, and value added taxes (VATs). These costs can add substantially to the final price paid by the importer, sometimes resulting in a total that is more than double the South African domestic price.

Foreign Market Objectives

An important aspect of your company’s pricing analysis is the determination of market objectives. For example, you may ask whether your company is attempting to penetrate a new market, seeking long-term market growth, or looking for an outlet for surplus production or outmoded products.
Costs

The computation of the actual cost of producing a product and bringing it to market is the core element in determining if exporting is financially viable. Many new exporters calculate their export price by the cost-plus method. In that calculation, the exporter starts with the domestic manufacturing cost and adds administration, research and development, overhead, freight forwarding, distributor margins, customs charges, and profit.

The effect of this pricing approach may be that the export price escalates into a noncompetitive range. Clearly if an export product has the same ex-factory price as the domestic product has, its final consumer price is considerably higher once exporting costs are included.

Marginal cost pricing is a more competitive method of pricing a product for market entry. This method considers the direct out-of-pocket expenses of producing and selling products for export as a floor beneath which prices cannot be set without incurring a loss. For example, additional costs may occur because of product modification for the export market to accommodate different sizes, electrical systems, or labels. Costs may decrease, however, if the export products are stripped-down versions or made without increasing the fixed costs of domestic production. Thus, many costs that apply only to domestic production, such as domestic labeling, packaging, and advertising costs, are subtracted, as are costs such as research and development expenses if they would have been spent anyway for domestic production.

Other costs should be assessed for domestic and export products according to how much benefit each product receives from such expenditures. Additional costs often associated with export sales include the following:

  • Fees for market research and credit checks
  • Business travel expenses
  • International postage and telephone rates
  • Translation costs
  • Commissions, training charges, and other costs involving foreign representatives
  • Consultant and freight forwarder fees
  • Product modification and special packaging costs

After the actual cost of the export product has been calculated, you should formulate an approximate consumer price for the foreign market.

Competition

In the domestic market, few companies are free to set prices without carefully evaluating their competitors’ pricing policies. This situation is true in exporting and is further complicated by the need to evaluate the competition’s prices in each potential export market .

If there are many competitors within the foreign market, you may have little choice but to match the market price or even underprice the product or service in order to establish a market share. If the product or service is new to a particular foreign market, however, it may actually be possible to set a higher price than in the domestic market

Pricing Summary

In summary, here are the key points to remember when determining your product’s price:
  • Determine the objective in the foreign market.
  • Compute the actual cost of the export product.
  • Compute the final consumer price.
  • Evaluate market demand and competition.
  • Consider modifying the product to reduce the export price.
  • Include “non-market” costs, such as tariffs and customs fees.
  • Exclude cost elements that provide no benefit to the export function, such as domestic advertising.

TERMS OF SALE

In any sales agreement, it is important to have a common understanding of the delivery terms because confusion over their meaning may result in a lost sale or a loss on a sale. Terms of sale define the obligations, risks, and costs of the buyer and seller involving the delivery of goods that make up the export transaction. The terms in international business transactions often sound similar to those used in domestic business, but they frequently have very different meanings. For this reason, the exporter must know and understand the terms before preparing a quotation or a pro forma invoice.

The most commonly applied terms of sale in the global marketplace are the international commercial terms, or Incoterms. A complete list of these important terms and their definitions is provided in Incoterms 2010, a booklet issued by the International Chamber of Commerce (ICC). Following are a few of the more frequently used terms in international trade: There are also D terms like “ Delivery duty paid” DDP. But as an exporter, the advise is to stay away from these terms.

  • CIF stands for cost, insurance, and freight to a named overseas port. The seller quotes a price for the goods (including insurance), all transportation, and miscellaneous charges to the point of debarkation from the vessel. (The term is used only for ocean shipments.)
  • CFR applies to cost and freight to a named overseas port. The seller quotes a price for the goods that includes the cost of transportation to the named point of debarkation from the vessel. The buyer covers the cost of insurance. (The term applies only for ocean shipments.)
  • CPT (carriage paid to) and CIP (carriage and insurance paid to) apply to a named destination. These terms are used in place of CFR and CIF, respectively, for all modes of transportation, including intermodal.
  • EXW (ex works) means “from a named point of origin” (e.g., ex factory, ex mill, ex warehouse); the price quoted applies only at the point of origin (i.e., the seller’s premises). The seller agrees to place the goods at the buyer’s disposal at the specified place within a fixed time period. All other obligations, risks, and costs beyond the named point of origin are the buyer’s.
  • FAS, or free alongside ship, refers to the seller’s price quote for the goods, including the charge for delivery of the goods alongside a vessel at the named port of export. The seller handles the cost of wharfage, while the buyer is accountable for the costs of loading, ocean transportation, and insurance. It is the seller’s responsibility to clear the goods for export. FAS, as the term implies, is used only for waterborne shipments.
  • FCA, or free carrier, refers to a named place within the country of origin of the shipment. This term defines the seller’s responsibility for handing over the goods to a named carrier at the named shipping point. According to Incoterms 2000, the named shipping point may be the seller’s premises. In that case, it is the seller’s responsibility to clear the goods for export from the United States. The term may be used for any mode of transport.
  • FOB, or free on board, refers to a named port of export in the country of origin of the shipment. The seller quotes the buyer a price that covers all costs up to and including the loading of goods aboard a vessel. (FOB is used only for ocean shipments.) As with other “F” terms, it is the seller’s responsibility to clear the goods for export.

Some of the more common terms used in chartering a vessel are as follows:

  • Free in is a pricing term that indicates that the charterer of a vessel is responsible for the cost of loading goods onto the vessel.
  • Free in and out is a pricing term that indicates that the charterer of the vessel is responsible for the cost of loading and unloading goods from the vessel.
  • Free out is a pricing term that indicates that the charterer is responsible for the cost of unloading goods from the vessel.

It is important to understand and use sales terms correctly. A simple misunderstanding may prevent you from meeting contractual obligations or make you responsible for shipping costs that you sought to avoid.