In today’s business world, selling globally is easier than ever; but surviving in a fiercely competitive environment requires to focus more on your customers and target markets.
Generally, when I have an idea for starting a new business, or for entering a new market, I focus 100 percent of my efforts into understanding my customers. I can tell you from experience: if you want your customers to notice you, you should do something unusual and unique. You should also be willing to provide your customers with detailed information, and a clear road map to your products and/or services.
My goal in this article is to help you understand the term “Landed Cost” and the significant impact it can have on your export pricing strategy, and to guide you in your understanding of your customers and their market dynamics. I can imagine that many of you may say that the concept of landed cost is not related to exporting… On the contrary, it is one of the key secret weapons for exporters. Let me explain how it is can be used as your weapon.
1. It helps you capture hidden costs at the destination country
The calculation of landed cost cannot be ignored within a supply chain because it helps you capture all the costs associated with producing and delivering products to the country of your destination.
The factors to calculate landed cost can vary depending on the type of industry you are in. Factors such as freight, insurance, inland transportation, unit selling price, duties & taxes, tariff and storage are among the main supply chain costs that must be taken into consideration. But honestly, these variables are not enough to calculate or find the true cost of a product.
There are also many hidden costs that can impact landed cost calculations. Understanding these hidden variables do not only help importers find the true costs of products, but will also improve their decision-making involving the export sales prices and cost-efficient ways of getting products to the end users.
If you think that you will learn each hidden variable by reading this article, you will be disappointed. The hidden cost may vary based on countervailing duties, anti-dumping duties, country of import, trade agreements, seasonality and regulations of import country. It is your job to investigate these costs.
Here is an example! Based on a regulation in Turkey, importing feed additives into the Turkish market requires microbiological and nutritional analysis before the import clearance process can begin. This regulation not only creates an extra analysis cost, but also adds storage cost at the destination port, and perhaps even a demurrage cost if the analysis takes longer than the free time that was provided by the shipping agency. As a result, you could potentially fail if you don’t identify and take into consideration such hidden costs at the destination customs.
As illustrated by the example above, every market may have different kinds of import regulations and applications that can create hidden costs. For that reason, it is crucial for exporters to understand these kinds of hidden cost from their potential or current customers in their respective target markets in order to determine better competitive prices. In addition to that, having a clear idea of the exact landed cost, the decision-making process for your export journey will be easier.
2. It helps you determine the best price for your product
Many enterprises lose money in international transactions. This often happens because companies are not able to set the product price for the global marketplace. For instance, many companies mainly use the export cost pricing method to determine export sales prices. Although this method is important when estimating the feasibility of transactions, using this method alone is not sufficient for determining the real export sales price. This method neglects the impact of other costs (like landed costs) and will cause you to fail in the price quotations.
Furthermore, the traditional method of export pricing does not allow you to understand the target market and its competitive dynamics, because it only focuses on cost and profit. If you have a better understanding of the landed cost than your customer, you will have a chance to understand the market and its competitive forces at an earlier stage. Thereby, you’ll able to adjust your strategy and plan accordingly.
In this matter, having an idea about the landed cost that importers pay to take possession of the product in the country of destination helps you understand how importers set the product prices in a domestic market. In the end, it can help you estimate the margins and pricing strategies in the market. In other words:
When you know the true value of the landed cost, it is easier to estimate the margins of all intermediaries in a target market.
Consequently, landed cost plays a vital role in determining the sales price in your customer market. For that reason, you should get information about each of thefactors in landed cost before offering your quotation. For further information about pricing and pricing strategy, you can visit my article “How to price a product for the global marketplace”.
Written by Kemal Sucu
A pragmatic, smart, and strategic International business strategist and new market researcher, Kemal has good insights into international trade and is full of great marketing ideas. Kemal possesses the real life experience, academic capability and the necessary personal skills to help SMEs build up import-export strategies, enter new markets and expand their business activities in more foreign markets.