Calculation of export prices is a critical decision which will determine the success and profitability of a business’s export activities. If prices are set too high, they may be uncompetitive, if too low they may be uneconomic.
Prices may be set in a number of ways:
Price is determined by adding the costs of exporting such as inland transportation, loading charges, freight costs and insurance plus profit margin to the basic cost of manufacturing. The resulting price may or may not be competitive in the market place.
This is the inverse of the cost plus method, whereby the starting point is the market price and export costs are deducted to arrive at the manufactured cost plus profit. Using this method, a business can identify by how much it will need to reduce costs to be competitive or what discount may be offered to customers to secure the export contract
This method treats exporting as a business which is incremental to domestic activities and therefore bears a reduced contribution to a businesses' fixed costs. A base price is established from direct production and sales costs, with fixed costs apportioned to volume. It may produce a more competitive price assuming that the domestic business produces stable revenues
Businesses should avoid setting export prices too low in order to gain initial contracts as it may prove exceedingly difficult to raise them at a later stage. Ultimately the pricing of exports will be determined by the balance between cost plus profit which will guarantee a reasonable return for the exporter and what the market is willing to pay for the product or service being offered.