Export pricing calls for a high degree of certainty and a clear understanding of the terms and conditions on which the transaction is based.
To get to this level of certainty, an exporter must be aware of:
- What transporting costs are to be paid by each party, and the Incoterm that matches this to the commercial contract.
- The timing and method of payment, and the currency used.
- Additional on-costs incurred by the exporter that need to be factored into the sales price.
1. The Incoterm used will determine a) who pays for items involved in the movement of the exports such as freight, marine insurance, wharf charges, inland cartage and potentially duties and taxes, and b) where the responsibility starts and ends between exporter and importer.
Accordingly it is vitally important to use the correct Incoterm, to ensure a named place or location for the transfer of responsibilities between the parties, and to ensure it matches the commercial agreement underpinning the sale.
If the exporter is required to cover freight and insurance for instance, the costs of these per pallet or container, or the insurance cost to a particular destination will need to be known for inclusion in the price quoted. An important rule is to ensure your profit margin is included in the cost of the goods and not in these on-costs, as it is easy for a buyer to check. This could lead to lack of trust and the loss of future sales.
2. From an exporters viewpoint it is preferable to receive payment up-front and in Australian dollars. Realistically this puts all the risk on the buyer, so it may not be achievable. The three key elements are:
a) The timing of payment. When will the funds flow to the exporter. This is important from both a cash flow and a risk perspective. Receiving payment after the buyer is in possession of the goods increases the risk of non-payment or a quality dispute. An option is structuring partial payments at different stages of the export process which decreases the risk, certainly on open account sales.
b) The method of payment is important in providing a level of comfort for an exporter. Direct payment up front is ideal, followed by the protection of a Documentary Letter of Credit, where the buyer is ‘guaranteed’ by his bank, as long as confirming documents are presented. ‘At Sight” documentary collections can also ensure that the buyer does not get control of the goods until payment is made.
c) The currency. If the settlement is not in Australian dollars, the exporter may want to take out a forward exchange contract, an option contract, or use a foreign currency account to mitigate the exchange risk. It is important to talk with your Bank about the ways that you can protect your payment (and profit margin) from exchange rate changes.
Each of these payment methods include costs, which need to be included in the cost of the goods for sale.
3 Apart from the cost of producing the goods, what additional charges then should the exporter consider. Freight, insurance and any duties and inland handling will be covered under the Incoterm, so are there others?
- The cost of export packaging, which may be more costly than for domestic transport.
- Cartage to the wharf or airport, and loading costs at the wharf (again depending on which party is paying)
- Any customs /AQIS inspection charges.
- The cost of producing and notarizing any documents (eg certificates of origin)
- The cost of the freight forwarder, and any additional clearance charges, duties, taxes etc at the buyers end if the agreement is to deliver to his country. Inland freight also if delivery is to his warehouse.
- The interest cost of financing the export until final payment is made, plus the Bank charges for Letter of Credit negotiation, or Credit Insurance premium.
- If any of the inputs for the exported product have been imported, there may be the opportunity for duty drawback under the Tradex scheme.
The costs for each export will depend on the method and complexity of transport, the risk factors while in transit, and costs at the destination country. Either the buyer or seller will need to pay all of the costs, so a good understanding by an exporter will assist when negotiating the sales price, even if the buyer will purchase from your factory door.
For a more detailed appreciation of export pricing we would recommend the Australian Export Handbook, or attendance at one of the Institute’s practical Export Procedures courses: www.export.org.au
Peter Mace, General Manager, Australian Institute of Export