The upper limit is set by what the market can bear. The characteristics, requirements, competitive conditions and the paying capacity of the various markets differ from each other. It would always be useful to look at the market to determine the prices to be charged. An attempt should be made to find out what the market can afford to pay.
Having found out what the market can afford to pay, the firm has to determine whether it can sell at that price by working back from the market price. The margins of various middlemen, internal taxes, import duty, transport and insurance costs when subtracted from the market price, would give an idea of the possible f.o.b realization for the exporter. The following chart gives the nature of analysis for market oriented pricing:
Analysis for market oriented Export Pricing:
Less – Retail Margin on selling price
Cost to the retailer
Less – Wholesaler’s mark up on his cost
Cost of the Wholesaler
Less – Importer’s mark up on his cost
Cost of the importer
Less – Import duty
Less – Freight and insurance charges
f.o.b realization of the exporter
Having determined the upper and the lower limits of what a firm can charge, it has to exercise discretion and judgment on the actual price. As the firm gathers experience, it would be able to set prices to provide higher and higher profitability. Much would depend upon the relative bargaining position of the buyer and the seller. Before quoting a price, the seller should try to determine the real interest of the buyer. He should also try to get as much information about the market as possible. The more that is known about the target market and the buyers for the product concerned the better placed the exporter is to conduct negotiations and match the offer to the buyer’s needs.
While negotiating with the buyer the exporter would find it useful to emphasize the total package of the offer. He should start with the strengths of his product first and follow it up with the firm’s strength, production capacity, quality control and reliability as a supplier. The actual price quoted should come at the end. The buyers are willing to pay a higher to quality conscious and reliable suppliers
However, in any case, the prevailing international price may be very low. In such cases, the exporter can compare his f.o.b realization with the direct costs or full costs. He can then determine whether it would be profitable for him to export or not. He can take a decision to export even when there is a loss if he feels that market prospects are right in the future.
Impact of Contract Conditions on Exports Price Quotation:
Contract conditions relating to any export transaction may substantially effect the pricing calculations of a manufacturer-exporter. Implications of contract conditions tend to be stronger when the merchandise in question are capital goods involving installation, performance guarantees etc. There are, however, certain clauses which are universal in their effect.
Base of Export Price Quotation:
Export price quotations can be made with reference to different points of delivery, e.g. Ex-Works to France Delivered. However, the common bases of export price quotations are f.o.b., c&f and c.i.f. Since many importers insist on c&f, and c.i.f quotations, exporters will have to prepare their price quotations on such basis. The implication of such export quotations are two fold: (1) the exporter will have to arrange for the shipping space and (2) he will have to bear al costs till the goods are off loaded at the port of destination. Before, the risk of any change in the transportation costs subsequent to the date of contract will have to be borne by the exporter. Since transport costs account for a fairly substantial proportion of total c&f / c.i.f costs, any increase in freight can substantially affect the profitability of export transactions. One possible way to avoid this problem will be to stipulate at the time of making the quotation itself that the c&f/c.i.f quotations are based on the present freight rate and any subsequent change will have to be on the importer’s account.