Set your export prices for profit with our international pricing guide
For any business looking to export, a clear pricing strategy is critical to success.
More often than not, pricing for goods and services sold overseas may need to be adjusted to cover the new costs involved with the export process. Things like marketing, freight, licensing and import taxes all need to be accounted for in order to reach profitability in a new country. One of the keys to success is to thoroughly research your target market, make a pricing plan, and stick to it.
There may be little room to move once you’ve begun to sell overseas, as frequent and reactive price changes could only damage your brand reputation. Use this guide to help you figure out what long-term pricing strategy works best for your business.
The golden rules for pricing
Before you set your export prices, remember these two rules:
1. The market sets the price
This means you need to consider researching the competing offerings in the local market, along with consumers’ capacity to pay, the level of supply and how closely your offering meets buyer needs (and has a point of difference). You may also have export costs to factor in. That’s why successful exporters are more likely to sell on quality and features rather than price alone - it helps build customer loyalty and could also result in better profits.
2. In the long run, the price should cover all costs
There is simply no point in exporting your goods unless the result is profitable. Remember to factor in the cost of materials, labour, overheads, promotion, distribution and mark-ups into your pricing before you export – and be prepared to accept you may need to make changes to your existing model to make it work.
Which pricing strategy is best for your international business?
There are three pricing strategies most commonly used for export. Each has different potential advantages and disadvantages, but depending on your business they can be combined to tailor the perfect strategy for your product and target market.
Cost-plus pricing involves taking the total cost of everything, including raw material, labour and the extra costs involved in getting to know the overseas customer – with an added profit margin.
- It is generally easy to implement - provided that all the relevant costs and a fair distribution of overheads are included.
- It’s generally simple - just add up all the cost, and decide how much profit you’d like to make.
- You’re in control of your revenue – so if your product cost $100 to make, and you wanted a profit margin of 10%, you would charge $110.
- You may overestimate or underestimate what the market is willing to pay – which could negatively impact either sales or profits.
- It doesn’t always take future demand into account.
- It doesn’t generally acknowledge the actions of competitors – your product is at risk of failure if your price is uncompetitive.
This strategy is where the demand for a product or service determines the price. A good example of a company who successfully use demand-based pricing is Uber, which introduced the concept of surge pricing to its ride-sharing service. This method of pricing starts with the customers’ perception, and involves determining what your product is worth by researching competing products in the target market. The perceived value sets the price, not the cost of production.
- Customers are likely to appreciate your product’s value because you’ve matched your price to their needs. This may also build brand loyalty.
- You could develop a great understanding of local competition because the key to demand-based pricing is market research.
- It is generally easy to implement – just follow the competition, and tweak when necessary.
- Matching market prices can also mean matching the competition on other services issues, such as discounts, advertising and give-aways.
- It can be difficult to estimate the right price - to accurately strike the perfect balance of supply and demand requires extensive and ongoing research.
- Pre-negotiated rates are often required for long-term agreements
- You may overestimate the competition – it is hard to know if your competitors are successful with their approach.
Also known as direct costing, this technique involves only charging the variable or direct cost for the product unit produced. This means all operating costs are differentiated into categories of fixed and variable, with the fixed treated as a period cost and the variable charged to the product.
- It’s generally simple to implement and understand – differentiating the variable and fixed costs shows the relationship between cost, price and volume.
- It's also easy to see the potential impact of sales and production decisions.
- Losses can potentially be kept to a minimum – the marginal cost is covered, and any excess can contribute to the fixed cost.
- It can result in a loss of margins – monitor your margins closely, as your overall business profit could drop if your export revenue proportion is higher than forecast.
- It can be difficult to raise prices to protect the margin – it is always easier to reduce them.
- It may be overly simple – fixed costs to products are often ignored, and stock valuation may be incorrect.
- It can be inefficient in the long run, because fixed costs can become variable but the model doesn’t allow for the total cost to be considered.
The perfect pricing strategy can be tough to lock down, especially in unfamiliar locations, but once the work is done, the results are usually worthwhile. If you’re looking for help accessing overseas markets, Australia Post can help you find customers and manage your online sales as well as provide a range of support and services for shipping logistics, customs and documentation.