Presentation on theme: "“Bottom up” and “Top Down” Models (Cost Plus and Target Pricing)"— Presentation transcript:
1“Bottom up” and “Top Down” Models (Cost Plus and Target Pricing) Export Pricing“Bottom up” and “Top Down” Models(Cost Plus and Target Pricing)by Günter Schranz
2Export Pricing - why Prices are depending on… Relative costs Demand CompetitionAs demand and competition is different in each country a special export pricing is required
3How to get the right price Relative CostsExport Costs*DemandCompetitionPriceRelative CostsExport Costs*DemandCompetitionPriceRelative CostsExport Costs*DemandCompetitionPrice* export literature, translation, freight forwarding, logistics, export packing, product modifications, packaging, labeling, compliance with foreign standards, insurance, credit checking, export documentation, export financing, charges and of an overseas staff training …
4Some Pricing Strategies Bottom Up – Pricing applying the traditional „Cost Plus“ approach to get the right priceTop Down – Pricing Target Pricing to become competitive at a given price level on a price sensitive marketSkimming Get what you can!
5Bottom Up - PricingExport Price is calculated on base of domestic priceCost for export is just added to domestic pricePros & Contras ?Simple to calculate, but may lead to a price that is not competitive on that target market.Does not consider Demand and CompetitionDoes not skim the market, even when possible
6Bottom Up - Pricing Variation: Marginal Costing direct cost of procuction and salesfixed costs apportiond to sales volumeConditions for Marginal Cost-PricingStable VolumesMarginal price is aplicable to new marketMarginal Costing may allow to find a moreagressive price on a competitive market
7Bottom Up - Pricing (1/2) Ex Works (EXW) % US$ Wholesale Price 100 EXW (Named Place)Free On Board (FOB)%US$Wholesale Price (EXW Named Place) + Transport to carrier (airport, wharf) + Customs clearance + Additional packing/labor for transport + Agent’s commission (Based on FOB price)FOB (Named Place)=129Transport contingency: damage, based on earlier experiencesCost and Freight (CFR)%US$FOB Price (FOB Named Place) + Sea/air freight charges to wharf/airport+ Sea/air document fees (Airway Bill, B/L) + BAF (Bunker Adjustment Factor) + Transport contingencyCFR (Named Place)=166
8Bottom Up – Pricing (2/2) Carriage Paid To (CPT) % US$ CFR (Named Place) + Cost for off-loading at destination166 +1CPT (Named Place)=167Cost, Insurance Freight (CIF)%US$CPT (Named Place) + Cost Insurance premium / agio167 +2CIF (Named Place)=169Delivery Duty Paid (DDP)%US$CIF (Named Place) + Import duty, taxes (% on CIF price) + Customs clearance fees + To door deliveryDDP (Named Place)=218
9Top Down - PricingCalculate backward from a given market price to an EXW – priceCompare with your EXW - priceTake Actions:Change / Develop your EXW price using such tools as supply management, re-engineering, lean production, outsourcing …Go for other strategies, i.e. maximizing volumes, profit, market shareBack out?
10Top Down - Pricing Trading Stage Price Per unit (%) Calculation Tip Glass of honey at Dutch retail store117Deducting VAT (here: 17%)*17117 – (117/1,17)Retail price excluding VAT100117/1,17Retailer Margin (52%)*52100 x 0,52Retailer buys at / Importer sells at48100-52Importer Margin (Profit and Cost: here37%)*1348-(48/1,37)Importer buys at (including a 20% duty on CIF)*3548-13Duty635-(35/1,2)CIF Price at Importer2935-6Deduct your fright cost4QuotationDeduct your insurance costFOB Price2129-4-4Deduct FOB cost2EXW Price **1921-2*See local rates of target market ** Deduct Broker / Agent commission if applicable
11Export CostsProblem:Export costs are not always calculable or known right from the beginningHowever it is crucial for the outcome to determine them as exact as possibleSometimes only export experience can help you out
12Typical reasons for cost explosion Wrong trading terms applied or terms not understood => fright / logistical costsPacking (labeling requirements are not metFor any reason: Last minute product modifications / last minute product adaption => additional, not calculated costsWrong /incorrect / incomplete documentationUnforeseen delays (check reason for delay: document / certificate / label?)
13Also have a look at…Fixed or variable costs are changing after accepting an orderCurrency changes - cover foreign exchange riskRapid change of market prices – forecastingChanging conditions: legal / state of the art / other requirements
14Assignment Prepare a price analysis for your company Use quotations & calculation tables as toolsGive recommendations on actual pricingPrepare small presentation