- Forget Bitcoin. It is time for Ripple now! - December 31, 2017
- Completing a successful transaction: Part 3 International Trade - April 11, 2017
- Negotiating And Planning To Win: Part 2 International Trade - April 5, 2017
- Launching A Profitable Transaction: Part 1 International Trade - March 28, 2017
In this article, we will discuss about the profit aspects of international trade, beginning with initial quotations, terms of sales, the market channel, and pricing.
Initial quotes begin either with a Request For Quotation (RFQ) sent by the importer to the exporter or with an unsolicited offer from the exporter. A simple letter or e-mail can be a request for a quotation.
The pro forma invoice, a normal invoice document visibly marked “pro forma” is the method most often used to initiate negotiations. This provisional invoice is forwarded by the seller of goods prior to a contemplated shipment. Its purpose is to describe in advance certain items and details, and it contains the major elements of a contract, which will be used later in shipping and collections documents such as letters of credit (L/C).
Keep in mind that everything in a pro forma invoice is negotiable, so carefully think through any terms entered on this document. Figure 1 is an example of a pro forma invoice which shows the key elements of the contract which are:
- Product description and specifications
- Material costs
- Shipping costs
- Delivery terms
Terms of Sale
In international business, suppliers use pricing terms, called terms of sale. Terms of sale quite simply define the geographical point where the risks and costs of the exporter and importer begin and end.
The International Chamber of Commerce (ICC) has, over time, developed a set of international rules for the interpretation of the most commonly used trade terms called INCOTERMS. If, when drawing up the contract, both buyer and seller specifically refer to INCOTERMS, they can be sure of clearly defining their respective responsibilities. I will list down 4 terms below that are most commonly used.
1.) FOB – Free On Board (named port of shipment)
Under FOB terms the seller bears all costs and risks up to the point the goods are loaded on board the vessel. The seller must also arrange for export clearance. The buyer pays cost of marine freight transportation, bill of lading fees, insurance, unloading and transportation cost from the arrival port to destination.
2.) CIF – Cost, Insurance & Freight (named port of destination)
This term is broadly similar to the above CFR term, with the exception that the seller is required to obtain insurance for the goods while in transit to the named port of destination.
3.) FAS – Free Alongside Ship (named port of shipment)
The seller delivers when the goods are placed alongside the buyer’s vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment.
4.) DAT – Delivered At Terminal (named terminal at port or place of destination)
This Incoterm requires that the seller delivers the goods, unloaded, at the named terminal. The seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until arrival at the destination port or terminal.
The Market Channel
A market channel is the path by which all goods and services must travel to arrive at the intended consumer. Market channels can be short or long, and depend on the amount of intermediaries required to deliver a product or service.
However, goods and services are sometimes passed to consumers through multiple channels, a combination of short and long. The longer the market channel, the less profit a manufacturer might get from a sale due to the fact each intermediary charges for its service.
In general, the international market channel includes:
- The manufacturer
- The foreign import/export agent
- The buyers
Pricing for Profit
Each step along the market channel has a cost. If a product is entirely new to the market or has unique features, you may be able to command higher prices. On the other hand, to gain a foothold in a very competitive market, you can use marginal cost pricing. Marginal cost pricing is the technique of setting the market entry price at or just above the threshold at which the firm would incur a loss.
It is also important that you understand not only the element that make up your price, but also those of your overseas trading associate. Remember that are no free lunches; everything has a cost.
Figure 2 shows how the selling price in one country becomes the buying price in the other. Typical commission percentages are between 7 and 20% percent for an export middleman and between 5 and 20% for an import middleman. The key issue are the price of the product and the number of units that you can sell.
For the next article in the series, we will touch on the planning and negotiating sides to secure a transaction.