Cost, obviously, is one of the most important considerations in export pricing. Export prices, like domestic prices are determined by the cost and supply conditions and the demand and competitive conditions. The cost and supply conditions dictate the minimum price the exporter must get while the demand and competitive conditions determine the maximum price he can charge.
Pricing for export market, however, is more complex and difficult than for the domestic market. Export pricing will have to accommodate into itself the trade practices and the regulation of the overseas market. Export process should take into account additional costs involved in respect of packaging, packing, labeling, marking etc. transportation and storage, covering export risks and so on. Export incentives, like duty drawbacks, may also influence the export process. Export pricing, thus, involves the careful consideration and incorporation of a variety of factors.
Types of Costs in Export Marketing:
There are broadly two types of costs in export marketing namely,
1. Production costs
2. Selling and delivery costs
1. Fixed costs
2. Variable costs
Fixed costs are costs which remain fixed irrespective of the level of production, like investment in land, building and plant and machinery. Besides these, there may be some other types of fixed costs. For example, even of there is no production, some people may have to be employed to look after the factory and premises and there may be some minimum fixed expenses like electricity costs etc.
Fixed cost is the cost which remains the same over a range of output. That is the total fixed cost remains whether there is no production at all or whether there is maximum possible level of production.
As the production increases, the average fixed cost per unit falls. For example, if the total fixed cost is Rs 10 lakh, the average fixed cost per unit will be Rs 10 lakh if the production is only one unit but will be Rs 5lakh if output is two units and is 1lakh if output is 10 units. If output is 100 units the average fixed cost per unit will be Rs 10,000 and it will be only Rs 1,000 if the production is 1,000 units.
Variable costs are costs that vary with the changes in the level of output and include costs of factors like labor, material etc. Although the average variable cost per unit may remain same for different levels of output, the total variable cost will vary with the level of production.
As fixed cost which is already incurred, it remains there even if there is no production. Hence, sometimes (for example when there is idle production capacity) the price may be decided taking into account only the variable costs. This is known as marginal cost pricing.
Selling and Delivery Costs:
Besides the production costs, there are several other costs which an exporter may incur and sometimes these are even more important than the production cost.
The selling and delivery costs include the cost of holding stocks, packing, transport, documentation, pre-shipment inspection, insurance and marketing costs like costs of advertising, personal selling etc.
Selling and delivery costs may also be divided into fixed and variables costs. For example, salesmanâ€™s salary is fixed cost, while his commission and traveling and incidental expenses are variable costs.
Variable costs are also known as direct costs (or primary costs) because they vary directly with the variations in the level of production.
Costs which cannot be directly apportioned to any product, like costs of plant maintenance, lighting etc. are called indirect costs.