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

2. Export Pricing - why Prices are depending on… Relative costs Demand
Competition
As demand and competition is different in each country a special export pricing is required

3. How to get the right price
Relative Costs
Export Costs*
Demand
Competition
Price
Relative Costs
Export Costs*
Demand
Competition
Price
Relative Costs
Export Costs*
Demand
Competition
Price
* 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 …

4. Some Pricing Strategies
Bottom Up – Pricing applying the traditional „Cost Plus“ approach to get the right price
Top Down – Pricing Target Pricing to become competitive at a given price level on a price sensitive market
Skimming Get what you can!

5. Bottom Up - Pricing
Export Price is calculated on base of domestic price
Cost for export is just added to domestic price
Pros & Contras ?
Simple to calculate, but may lead to a price that is not competitive on that target market.
Does not consider Demand and Competition
Does not skim the market, even when possible

6. Bottom Up - Pricing Variation: Marginal Costing
direct cost of procuction and sales
fixed costs apportiond to sales volume
Conditions for Marginal Cost-Pricing
Stable Volumes
Marginal price is aplicable to new market
Marginal Costing may allow to find a more
agressive price on a competitive market

7. Bottom 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)
=129
Transport contingency: damage, based on earlier experiences
Cost 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 contingency
CFR (Named Place)
=166

8. Bottom Up – Pricing (2/2) Carriage Paid To (CPT) % US$
CFR (Named Place) + Cost for off-loading at destination
166 +1
CPT (Named Place)
=167
Cost, Insurance Freight (CIF) %
US$
CPT (Named Place) + Cost Insurance premium / agio
167 +2
CIF (Named Place)
=169
Delivery Duty Paid (DDP) %
US$
CIF (Named Place) + Import duty, taxes (% on CIF price) + Customs clearance fees + To door delivery
DDP (Named Place)
=218

9. Top Down - Pricing
Calculate backward from a given market price to an EXW – price
Compare with your EXW - price
Take 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 share
Back out?

10. Top Down - Pricing Trading Stage Price Per unit (%) Calculation Tip
Glass of honey at Dutch retail store
117
Deducting VAT (here: 17%)* 17
117 – (117/1,17)
Retail price excluding VAT
100
117/1,17
Retailer Margin (52%)* 52
100 x 0,52
Retailer buys at / Importer sells at 48
100-52
Importer Margin (Profit and Cost: here37%)* 13
48-(48/1,37)
Importer buys at (including a 20% duty on CIF)* 35
48-13
Duty 6
35-(35/1,2)
CIF Price at Importer 29
35-6
Deduct your fright cost 4
Quotation
Deduct your insurance cost
FOB Price 21
29-4-4
Deduct FOB cost 2
EXW Price ** 19
21-2
*See local rates of target market ** Deduct Broker / Agent commission if applicable

11. Export Costs
Problem:
Export costs are not always calculable or known right from the beginning
However it is crucial for the outcome to determine them as exact as possible
Sometimes only export experience can help you out

12. Typical reasons for cost explosion
Wrong trading terms applied or terms not understood => fright / logistical costs
Packing (labeling requirements are not met
For any reason: Last minute product modifications / last minute product adaption => additional, not calculated costs
Wrong /incorrect / incomplete documentation
Unforeseen delays (check reason for delay: document / certificate / label?)

13. Also have a look at…
Fixed or variable costs are changing after accepting an order
Currency changes - cover foreign exchange risk
Rapid change of market prices – forecasting
Changing conditions: legal / state of the art / other requirements

14. Assignment Prepare a price analysis for your company
Use quotations & calculation tables as tools
Give recommendations on actual pricing
Prepare small presentation