It’s better to make a small margin on a huge order, than to try to make larger margin on an order that never happens.
You may be used to selling to retailers at wholesale prices. Selling internationally is different.
After the a product leaves your warehouse or factory, the following expenses will be incurred (not by you):
- Ocean freight
- Inland transportation
- Margin for importer
- Margin for wholesaler
None of these expenses is incurred when you sell at wholesale to your retail accounts.
That is why export prices have to be lower than wholesale pricing.
The challenge is to not price your product so high that your product becomes too expensive foreign markets. In Japan, for example, you have to figure that if your export price is $10, the retail price will be between $42.00 and $45.00. This is an average, and includes international shipping, duty, taxes, distribution, marketing, and, of course, the same keystone markup for the retailers. This does not mean that someone is making a killing and you should therefore raise your price.
If you lower your margins at higher volumes, you stand a much better chance of succeeding internationally. Remember, it’s better to make a small margin on a huge order, than to try to make larger margin on an order that never happens.
When you sell internationally, you no longer have to factor in costs such as the following in your cost accounting:
- Gen. & Admin.
- Trade Shows
- POP/POS Materials
I recommend taking a look at your COGS and calculate an acceptable contribution margin. Figure your incremental COGS and tack on a percentage—5% or 10% or whatever. That won’t cover all your fixed expenses, but you will still have an incremental margin, or contribution margin, that will be money in your pocket to help cover fixed expenses.
Again, the main challenge is to not price yourself out of the international market.
There’s a temptation to say, “But if I sell all my product at this price, I’d go out of business since I’m not covering all my expenses.” This slippery slope argument is fallacious. That’s where the concept of contribution margin can be tricky. Presumably, you’re covering your variable and fixed costs with your margins from your domestic sales. Often when dealing with international orders, you have two choices:
- Price your product to cover incremental variable costs (COGS) and add on a small margin. This increases your gross profit, and puts money in the bank.
- Price yourself out of market and lose the deal. This puts no money in the bank
Clearly, #1 is the more profitable choice.