Chapter # 5 : Selecting the right export distribution
Chapter # 6 : Export Pricing
Q: Which kind of distribution channels should I select for a foreign market?
A: How much control do you want and what will you be allowed to do in the country. For full control, you need to establish your own subsidiary. However, some countries do not allow majority foreign ownership and you would need to find a local partner.
If you select a local representative or distributor, you will delegate much of the responsibility to them. It is important to select the right ones and activate them. The advantage of selecting a local representative is that they already know the market and have the client networks that will enable you to start up quickly.
Your choice of solution depends on the country, your resources, and how fast you want to be up and running. If you are not familiar with a country and the ways of doing business, ask someone with experience there for advice.
Q: What are the pros and cons of having your own foreign operation?
|Under your control||High startup costs|
|Easier communications with HQ||Could be difficult to find good local people|
|Profit stays within the company||Could be costly and risky.|
|Will increase prestige in domestic and international markets||If not successful can have a long-term negative impact|
|More freedom for implementing ideas||Can demand a larger administrative organisation than if using a local distributor|
|An independent legal entity separate from HQ||May have too narrow a range of products to be profitable|
|Better feedback from the market||Foreign investment can be influenced by risks (Economical and Political)|
|For larger contracts, a definite advantage to own the operation|
Q: How to select the right foreign distributor?
A: First contact the end-user (customers etc.) and ask them to suggest companies they want to buy from. If you are a small company it is easier to work with a small distributor. Note, however, that larger multinationals such as car manufacturers have lists of preferred suppliers. If you want to sell to them, you have to a pre-approved supplier.
In our book “Export & Import – Winning in the Global Marketplace” ISBN 978-0-9681148-1-0 these topics are covered in depth
Q: How do I set my export price for a specific market?
A: The market price is always the basis for the export price and not your manufacturing cost. Find out the net selling price. Then calculate backwards, taking into consideration the different distribution margins, freight, customs duty, etc., to end up with an export price. If that export price does not give you enough profit find other solutions of distribution such as shortening the number of distribution levels between you and your end-user.
Q: How do I proceed with inter-company pricing if we own the foreign operation?
A: You should treat your own company as you would any distributor. They have to make money and you do too. Some companies want to sell to their overseas operations at a lower price to prevent high duties in the foreign market. Some want to keep the profit at home, so they charge a higher export price. Local Customs authorities also influence pricing in a market, so you have to use market pricing. If you sell at too low a cost to your own company, the local authorities can charge extra duties or accuse you of dumping. Charges of dumping can have severe consequences. Ask for advice if you are not sure.
Q: How do I set the value of a down payment and royalty for a license?
A: When you sell a license, you sell the right to produce and market your products. What you charge the licensee for a down payment and royalty is part of profit sharing. First, find out what the product will sell for and the local manufacturing cost. Calculate the gross margin the licensee will receive. Then, decide what is reasonable as your share. That will guide the amount of the down payment and the percentage or $ value of the royalty.
Remember that in most countries you cannot just bring home the royalty. There is normally a local withholding tax. If there are tax treaties between the countries you can deduct that tax at home.
Leif Holmvall, President
Export Pro Inc.
In our book “Export & Import – Winning in the Global Marketplace”
ISBN 978-0-9681148-1-0 those topics are covered in depth. You can also buy our book for less than $10 as an e-book visit e.g. https://www.amazon.com/dp/0968114814, where you can read part of the book.
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