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“Bottom up” and “Top Down” Models (Cost Plus and Target Pricing)

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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

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