Exporting—Financing and Pricing

PRICING FOR THE FOREIGN MARKET

Pricing for the foreign market—as for the domestic—is a circular process which involves market research to determine current pricing structures in the targeted market, estimating the cost of production to see if prevailing prices can support the production, projecting a tentative price, testing it in the market if possible, and then making changes in production, packaging, distribution, and marketing until the "right" price emerges. The difference lies in such factors as currency conversion, difficulties in getting information, additional costs associated with foreign trade which may impose higher costs (fees, licenses, etc.), translation costs, special packaging requirements, and higher costs of money (if payments are slow or must be discounted to factoring companies). It is obvious from this brief sketch above that the business with good market contacts and well-developed sources of information will be more successful in setting the right price yielding the maximum profit than a business largely groping in the dark or pricing entirely by analogy to the domestic market.

SBA's principal Guide (Breaking into the Trade Game: A Small Business Guide) recommends that the business develop its cost picture based on the marginal-cost method, assuming that export sales are "additional" sales. Under this method, all costs are classified as fixed or variable. If the business is profitable now and the owner does not need to add buildings or machinery to produce for export, these "fixed" costs are excluded from the costing and only "variable" costs of raw materials, purchased parts, energy, and labor are measured. To these costs are added export costs unique to that business along with prorated overhead costs. Thus if the export sale represents 8 percent of total sales, 8 percent of overhead costs would be added. The anticipated profit would then be added to determine a tentative initial price from the business's own point of view.

With price initially set, the business needs some data about pricing in the target market. According to the SBA, "pricing information can be obtained in several ways: a) from overseas distributors and agents of similar products of equivalent quality; b) whenever feasible, traveling to the country where your products will be sold to gather information; and c) through the U.S. Commercial Service which can assist in determining appropriate prices through its Customized Sales Survey. For more information, go to www.export.gov/tic."

Prices obtained must be translated to U.S. dollars before comparisons to the business's own "tentative price" can be made. If the business has a genuinely innovative product, comparisons will not be exact because products now sold may not offer the company's superior features. But the "market prices" will be an indicator both of the venture's feasibility and likely degree of success. If pricing in the market is generally lower but the company's product has desirable features, a green light may flash immediately if those features are obvious. If not, marketing expenses may have to be raised—and the process of pricing iterated. Sometimes the "feature" of the company's product may be precisely that it is inexpensive yet in all other ways equivalent. In that case, too, additional costs may be indicated to get the message of quality and durability across or, if the price differential is high in favor of the seller, perhaps the price needs to be hiked.

Currency values fluctuate, in some markets more than others. For this reason the SBA recommends that small businesses new to exporting arrange transactions in U.S. dollars; that is, they should both price their goods and request payment for them in U.S. dollars. If a buyer balks at conducting the transaction in U.S. dollars, an exporter can still protect him or herself through factoring or hedging. Hedging guarantees a set exchange rate through the use of option and forward contracts, but these types of transactions involve the small business in activities likely to be far removed from its core business.

The small business pursuing export business with some care and tenacity will, needless to say, develop a fairly extensive circle of advisors and participants so that neither its financing nor its pricing activities will be taking place in a vacuum. Aside from having something of real value to sell, the most important factor for success will be information—about the market, about methods of financing, channels of distribution, and (not least) about the customer. The more extensive the business's contacts and the more intensive its relationships, the better will be its information and the more refined will be its pricing.

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