Today marks the start of UK Export Week, five days of events organised by UK Trade & Investment (UKTI) to encourage British SMEs to tap into overseas opportunities. Only one in five small and medium UK businesses exports, according to the Confederation of British Industry (CBI), yet firms that do so are 11 per cent more likely to survive. And UKTI estimates the enterprises it works with earn an average £100,000 in additional sales in the first 18 months of their exporting efforts.
A major consideration for business owners when they’re thinking about exporting is how to price their goods and services in different territories. You need these figures settled before you even start to approach foreign contacts. So, how should businesses develop an international export pricing strategy that works in different countries?
Important exporting costs
The first question you need to answer is your likely total exporting costs. Aside from basic manufacturing expenses, there are many other elements to account for:
- Research into potential markets, including travel to different countries.
- The cost of international communications, and translation expenses.
- Modifications to products for certain geographies.
- Packaging fees.
- Product liability insurance.
- Credit checks.
- Compliance with foreign standards.
- Your all-important marketing budget.
A quick and useful exercise is to calculate your costs from the point of manufacture to the end customer, a cost plus approach. Then, apply the same process in reverse, costing from the ideal customer end price backwards to the ex-factory price, a top down calculation. The first approach could result in a price that’s too high, while the second could mean you lose money on each order. Applying both should reveal any such potential weaknesses, and give a clearer overall picture.
Getting things from A to B
The transport of goods is a major consideration, and will be a significant part of your overall calculations. The specific costs might involve:
- The value of any goods being exported.
- Expense of delivery from the place of manufacture or storage to the airport or port.
- Any fees involved in export customs formalities at the domestic end.
- Total cost of the transport whether by land, air, or seas. This often includes the Free or Freight on Board (FOB) price, which is the cost of movement of goods on board a plane or boat – typically borne by the seller when the agreement is on FOB means.
- Insurance costs, plus handling costs at the other end.
- Customs duties, and any import taxes.
- The cost of any import formalities.
- Price of the carriage of the goods from the point of arrival to the ultimate destination.
Review these numbers regularly, since transport costs can be another thing that changes quickly due to shifts in fuel prices and other factors. All of these elements will have an impact on how you price the product for sale. And, of course, knowing your business’ profit margins and break-even points – a topic we’ve covered before – is also a must.
Know your market – and local competition
The simple fact is you almost certainly won’t be able to charge the same for your offering in a foreign market as you do at home. Domestic pricing and export pricing can vary hugely, and if you’re operating in more than one country, you may have to devise a scale of prices for different areas.
You want your price to be competitive against local goods on offer, while allowing you to make a profit on sales. But you don’t want to price yourself out of a market, nor under-price goods either. Research here is essential. Look at what rivals are charging for equivalent items locally or, if you’re offering something unique, try to estimate likely demand. If it’s likely to be high, you can consider a higher price, if probable demand is weaker, a lower figure may be right. Assess local spending power, and what the native population appears to be prepared to pay for particular items. Is there established local competition to contend with? Can you exploit the Brand Britain aspect that we’ve discussed on this blog before? In some markets, a ‘Made in Britain’ label means you can charge a premium.
Beginners could get discounted help with tailored market research through UKTI’s Overseas Market Introduction Service (OMIS), which puts a business in touch with a trade advisor who will work with local experts in your planned target geography to assess business opportunities, market conditions, and possible competition. Costs start at £500, but the results are impressive – more than half of UKTI customers win extra sales worth £600,000 over two years when they use OMIS.
When you’re trading in another currency, your business is exposed to its fluctuations in value. Profit margins can be hard to predict when your sales are worth one sum one day, then something different the next. If margins are tight, this can put you in a precarious position.
For example, if the Euro strengthens against the Pound, European markets are going to find many British goods cheaper to buy. The cost of production would be the same for the UK company, but the effective market price in Europe would have dropped. The British firms have a choice – reduce their European prices and see a likely increase in demand, or maintain the original selling price, sell less, and have a higher profit margin. If currency moves shift in the other direction, producers may look to cut their costs, as their goods will begin to look more expensive to foreign buyers, and fewer units may be sold.
It’s an intricate balance to maintain, and one that exporters must constantly watch. Again, UKTI often holds free masterclasses in setting export pricing, and which strategy to adopt. Its experts also offer advice on getting the best currency rate, either through the bank or a specialist transfer provider, and the use of forward exchange contracts to lock in an exchange rate, and protect against future fluctuations.
Take expert advice
Small businesses getting started on the path to exporting can get help and advice from a number of sources, including the Government’s free Passport to Export export assessment service, the Institute of Chartered Accountants’ (ICAEW) business advice service, which offers an initial free consultation with an experienced ICAEW-certified accountant, plus its recent Competing in the Global Race report, and the official Business is Great website, with its tips and tools for would-be exporters.
And don’t underestimate exporting’s potential if you have growth in mind. UKTI research shows that 85 per cent of its clients said they’d achieved a level of growth that would otherwise have been impossible as a result of exporting. So, start looking further afield for expansion opportunities this Export Week, research potential markets, and get your export pricing formula right. It could be the best journey your business ever makes.