Wednesday, May 25, 2016

Handling the Critical 5Ps of Export Business Success-Part-2(The Pricing)

Pricing is undoubtedly a very important part of any business. It determines the profitability of the transaction and consequently the continuity of the business concerns. It is a variable that is depended on three factors namely the cost, the demand and the competition. The first variable which is cost is mainly local factor while the second and the third variables are international factors which must the studied and well understood before an exporter set the the pricing for his product in the e port market. 

In order to be able to address the pricing issues in an export transaction, an exporter must be able to answer the following seven important questions namely: What are the cost elements to be incurred in a typical export transaction? Where do I get the amount involve in each of the cost elements? Who are the people to be paid in executing the export projects? When am I supposed to pay the freight forwarding agents? Why do we need to pay the bank and government? Which of the cost elements can be avoided? How does International commercial terms (Incoterms) contribute to the cost elements? I will try to address these questions in general in this article, however an exporter needs to do more research in order to know other likely costs that are peculiar to the selected product.

The first question states that, what the cost elements are? The cost elements in a typical export project include the following: Product Cost, Transport cost to the warehouse, Warehousing cost, Transport cost to the port, Freight forwarder fee, Shipping Line local charges, Freight Charges, NXP processing fees, Nigeria Export Supervision Scheme (NESS) Fee, Port Logistics fee. Other fees include SON or NAFDAC fee, Marine and good in transit insurance (GIT) Insurance fee, Quality and quantity Inspection fee, Certificate of origin fee, Fumigation certificate fee, Phytosanitary Certificate fee, Bank commission on Export Proceeds and Interest Rate.

The next question that needs to be address is, where can I get the amount involve in each of the of the cost elements? It is important for the exporter to know that some of these fees are fixed while others are the determined by the nature and the selling of the item being shipped. The amount involve in each of these fees can be obtained from banks, shipping line, haulage firms, government agencies, freight forwarder and inspection agent. For example NXP processing fee is N5,000 irrespective of the value of the product stated on the form. On the other hand, some fees are fixed as a percentage of the selling price, for example the NESS fee is 0.5% of the FOB value ( products cost plus profit), while marine and GIT ranges from 0.3-0.5% of the product cost. Some other charges are paid per container and this include the freight forwarder's fee, shipping line local charge, the freight charge and the inspection fee. The other fees like Certificate of origin fee, Fumigation certificate fee, Phytosanitary Certificate fee, SON or NAFDAC fee are charged based on a number of other variables like quantity, amount etc.

The third question to be answered by the exporter is, who are the people to be paid in the export project? The Product Cost is paid to the supplier, Transport cost to the warehouse and Transport cost to the port will go to the haulage firm, Warehousing cost will go to the warehousing company, the Freight forwarder and Port Logistics fees will go to the freight forwarder, Shipping Line local charges and Freight Charges go to the shipping line, NXP processing fees, Commission on Export Proceeds and Interest Rate (if any) go to the bank. The other fees like Quality and quantity Inspection fee goes to the inspection agent, the Marine and GIT Insurance fee go to the insurance company and lastly, the Nigeria Export Supervision Scheme (NESS) Fee, SON or NAFDAC fee, Certificate of origin fee, Fumigation certificate fee and Phytosanitary Certificate feeble to the respective government agencies. 

The fourth question that needs to be answered by the exporter in the planning stage is, when am I supposed to pay the freight forwarding agent's fee? First of all, we need to define the job of the freight forwarder. This is a custom licensed agent that arrange the shipment of goods to international destination. He is engaged to cleared the goods for export and process the post export documentations. His job could also include other things like processing pre export documentations, payment of NESS fees etc depending on the agreement with the exporter. We recommend that you pay the agent an advance that covers all his costs (about 70%) at the point of engagement and pay the 30% balance which is mainly his profit after he must have delivered the Bill of lading and other agreed post export documentations to you.

The next question is, why do we need to pay the bank and government? All the documents required for pre export documentations processed through bank. The bank is a private and profit oriented organisation and therefore will charge for its service. These include the NXP processing fee and commission on the export proceeds for documents handling. Other other hand, a number of costs are charged by government through all its agencies probably to generate revenue for the various government agencies. However, it will be important to say that fees being charged by government agencies are very minimal. It may also interest you to note that no export duty is paid on items exported out of Nigeria and not VAT is charged on the export proceeds received from abroad.

The second to the last question involves cost reduction and it reads, which of the cost elements can be avoided? The avoidance of the cost elements is dependent on the nature of the item being exported, the procurement strategy and the Incoterms agreed with the buyer. For example, if you are exporting solid minerals and finished products, goods can be transported straight to the shipping line terminal and the quality inspection can be done there. This helps the the exporter to avoid the cost of warehousing and transport to the port. Other cost element reduction comes with building relationships, experience in the business and the volume of shipment being done.

The last question that also needs to be answered by the exporter as he tries to determine the pricing of the shipment is, how does Incoterms contribute to the cost elements? Incoterms is international commercial terms that determines where the risks and costs of an exporter ends and where that of the importer begins in an exporter transaction. There are 11 of them in the most recent revision tagged Incoterms 2010. If the Incoterms is Free on Board FOB for example, that means the cost of the exporter ends while the goods are on board the vessel at the port of loading. The exporter incurs minimal cost here unlike Cost and Freight (CFR) where the exporter where the exporter incurs the freight charge (transport cost from the port of loading to the port of discharge) which is an additional cost to destination. An exporter needs to read more about these trade terms of his export transaction in order to know his costs and risks before signing the contract.

On a final note, pricing of an export transaction determines the viability, an exporter should therefore research into getting more detailed answer to these questions in order to make his export Business a success.  

1 comment:

  1. Knowing the basic of international freight forwarding and how it can be used to succeed a business makes your article very helpful. Very informative article. Thanks.