Chapter 5 Price Clause

Pricing is one of the most important and complex tasks in business, and even more of a problem when linked with exporting. An exporter should sell its products at a price acceptable to the customers and, at the same time, generate enough revenue to cover all its costs. Appropriate pricing is not easy and must be treated seriously and carefully.

5.1 Points to Be Considered in Pricing

When we come to the issue of pricing, the following points are the factors to be considered in arriving at a potential price:

（1）Have a good knowledge of the international market level, and establish all relevant market data on competitive prices for similar products and evaluate then.

（2）While referring to the international market situation, consider the policies and regulations that apply to a particular market area.

（3）On the basis of international market level, adjust prices according to the exporter's specific purposes or the importer's requirements.

（4）As the world market may fluctuate with the change of supply and demand pattern, it is important to watch the change of supply and demand relationship and the trend of rising or failing of the market prices.

（5）Your price must include adequate profit margin over your actual production and distribution costs, etc.

（6）The quality and quantity of the products contracted, transportation costs, place and terms of delivery will also influence the determination of export prices.

（7）Method of payment of the goods and the possible fluctuation of foreign exchange rates are other factors that should be considered when pricing.

5.2 Conversion of Major Trade Terms

In this section, we discuss the conversion of some major trade terms, i.e., FOB, CFR, CIF, FCA, CPT and CIP, since they are most commonly used in the international trade.

5.2.1 Conversion of FOB, CFR and CIF

If FOB price is given, then we may get CFR and CIF price. Here is the formula:

CFR price = FOB price + Overseas freight

CIF price =（FOB price + Overseas freight）÷

（1- Insurance percentage of addition × premium rate）

If CIF price is given, then FOB and CFR price can be figured out as per the following formula:

FOB price=CIF price×（1- Insurance percentage of addition×

Premium rate）- Overseas freight

CFR price =CIF price×（1 - Insurance percentage of addition × premium rate）

If CFR price is given, then, FOB and CIF price can also be calculated as per the formula as below:

FOB price=CIF price - Overseas freight

CIF price =CFR price÷（1 - Insurance percentage of addition × premium rate）

5.2.2 Conversion of FCA, CPT and CIP

If FCA price is given, then we may get CPT and CIP price. Here is the formula:

CPT Price = FCA price + Overseas freight

CIP Price =（FCA price + Overseas freight）÷

（1 - Insurance percentage of addition × premium rate）

If CIP price is given, then FCA and CPT Price can be figured out as per the following formula:

FCA price=CIP price×（1 - Insurance percentage of addition×

Premium rate）-Overseas freight

CPT price =CIP price×（1 - Insurance percentage of addition × premium rate）

If CPT Price is given, then, FCA and CIP price can also be calculated as per the formula as below:

FCA price=CIP price-Overseas freight

CIP price =CPT price÷（1-Insurance percentage of addition × premium rate）

5.3 Choice of Currency for Accounting and Payment

Currency for accounting is the currency used for price calculation while currency for payment is the currency for settlement. They are usually the same currency if not otherwise stipulated in the contract. Currency for accounting and payment can be the home currency of the exporter, the importer's currency or a third currency if only these currencies are convertible. When choosing the currency, the exporter and importer should take foreign exchange rates into consideration, as the fluctuation of exchange rates may influence their interests.

Theoretically, the use of hard currency that is reliable, stable and more in demand as payment currency is more favorable to the exporter, while the importer prefers to pay in soft currency whose value may depreciate rapidly or that is difficult to convert into other currencies. Which currency is to be used depends on the consultation between the exporter and the importer. Any party who has to adopt an unfavorable currency as payment currency may take one of the following measures to offset foreign exchange exposures.

5.3.1 Try to Reduce the Import Price or Raise the Export Price

When entering a contract, we should take the tendency of foreign exchange into consideration. For example, you are an importer, while the currency used is likely to float upward （Note: this is your forecast）, you should try to press the exporter to reduce the price. If you are an exporter, while the currency is likely to float downward, you should try to raise the price. Usually such measure is used within a short period, because it is rather difficult to forecast the tendency of foreign exchange for a long period.

5.3.2 Stipulate Exchange Proviso Clause

In the case that the currencies for accounting and payment are the same soft currency, i.e. the change of the exchange rate between the present date and the settlement date might be for the worse to the seller, to protect itself from suffering loss, the seller should define in the contract the equivalent contractual amount in another strong currency according to the rate between this soft currency and another strong currency on the day of concluding the contract. On the date of payment, the amount in hard currency shall be converted into soft currency at the rate of that date accordingly. This converted amount of soft currency is what the buyer should pay to the seller. The following is an illustration:

The exchange proviso clause in the contract stipulates“The amount in Japanese Yen under this contract is equivalent to Swiss Francs 124,000 as calculated according to the ratio between the buying rate of Japanese Yen（JPY）and that of Swiss Francs（CHF）published by the Bank of China on the day of concluding this contract. On the date of payment, the amount in Swiss Francs shall be converted into Japanese Yen for full payment according to the ratio be tween the buying rates of Japanese Yen and that of Swiss Francs published by the Bank of China on that day”.

For example: The contractual amount was JPY11,000,000. And the exchange rate on the date of concluding the contract was JPY/CHF0.012,4. Thus, the total contractual amount in Swiss Francs was CHF124,000. On the date of payment, the exchange rate was JPY/CHF0.011, then in light of the exchange proviso clause in the contract, the contractual amount in Swiss Francs（CHF124,000）should be converted into JPY11,272,727 at the new rate. The payment for the price should then be JPY11,272,727 instead of the original JPY11,000,000.

5.4 Commission and Discount

In the price clause, sometimes commission or discount is involved.

5.4.1 Commission

5.4.1.1 The Meaning of Commission

Commission is a fee charged by a broker or agent for its service in facilitating a transac tion. It may be indicated in the price, for example, US$2,000 per M/T FOB Chongqing including 3% commission, or US$ 2,000 per M/T FOBC3% Chongqing, or US$ 2,000 per M/T FOBC3 Chongqing. The commission included in the price is known as a plain commission. Commission which is not included in the price is called secret commission.

5.4.1.2 The Calculation of C-inclusive Price

Contractual price with commission is called commission-inclusive price（abbreviated as C-inclusive price）. Commission is the product of the C-inclusive price and the commission rate. The following formula shows how to calculate commission, net price and the relationship between C-inclusive price and net price.

Commission = C-inclusive price × Commission rate

Net price = C-inclusive price- Commission

= C-inclusive price-C-inclusive × Commission rate

C-inclusive price=Net price÷（1- Commission rate）

For example: The original price quoted by the exporter is US$100 per set CFRC3% Sin gapore, now the exporter is requested by the importer to make a new quotation on CFRC5%. By how much will the exporter's net income is reduced if the new quotation remains the same as the original one? And how much should the exporter quote if its original income is the same as before?

Answer: The original net income = CFRC3% - C

= CFRC3% - CFRC3%×3%

= 100-100×3%

= US$97

Then, the new net income = CFRC5% - C= CFRC5% - CFRC5%×5%

= 100-100×5%

= US$95

Thus, the exporter's net income will be reduced by US$2（US$97-US$95）per piece.

New quotation: CFRC5% =Net price÷（1- Commission rate）

= 97÷（1-5%）= US$102

5.4.2 Discount

5.4.2.1 The Meaning of Discount

Discount is a certain percentage of price reduction and a special favor given by the exporter to the importer. It is usually used as a means of promotion and expanding sales. There are different types of discount such as“quantity discount”, “cash discount”, and“special discount”for some special purpose. Discount can also be specified in the price clause, such as

“US$160 per metric ton FOB Shanghai less than 2% discount”.

5.4.2.2 The Calculation of Discount

Discount can be calculated on the basis of invoice value. The payment method of discount can be offered directly during issuing; or sellers remove the discount from the invoice value. Formula:

Discount = Original Price × Discount Rate

Net Seller's Revenue = Original Price ×（1 - Discount Rate）

For example: The original export price is US$100/ PC CIF HK, Discount rate is 2%.

Please calculate the discount offered by the seller to buyer and the net income of exporter.Answer: Discount =US$100×2%=US$2

Net income of exporter=US$100×（1 - 2%）=US$98

5.5 Cost Accounting in Export

There are two major economic benefit indices used in Cost Accounting in Export by China's foreign enterprises.

5.5.1 Cost of Earning Foreign Exchange in Export

5.5.1.1 The Meaning of Cost of Earning Foreign Exchange in Export

This index means the cost in RMB for earning one dollar in export.

5.5.1.2 The Calculation of Cost of Earning Foreign Exchange in Export

It is the ratio of total export cost in RMB to net foreign exchange income in US dollars in export and can be expressed as follows:

Cost of earning foreign exchange in export =

total export cost（RMB）÷ Net foreign exchange income（USD）

Where total export cost covers purchasing cost or production cost domestic charges（storage, management, taxes, circulation cost, processing fees, packing fees, domestic transportation cost—from warehouse to harbor, documents fees, freight fees, banking charges, postal fees, and so on）. Net foreign exchange income（USD）refers to FOB price.

The following is an example:

Suppose the total cost for per unit of commodity is as follows: purchasing cost RMB8,000, processing charges RMB1,000, circulation charges RMB500, other costs RMB50, and the export price is US$1,500 per unit CIF Singapore, in which US$100 of freight and US$50 of in surance premium are include, thus:

Total export cost（RMB）= 8,000+1,000+500+50=RMB9,550

Net foreign exchange income（USD）= 1,500-100-50= US$1,350

Cost of earning foreign exchange in export = RMB9,550÷US$1,350

= RMB7.07/ US$

5.5.2 Profit or Loss Ratio in Export

5.5.2.1 The Meaning of Profit or Loss Ratio in Export

This index is the ratio of profit or loss（which is net export income in RMB minus total export cost）to total export cost. Net export income in RMB is the net foreign exchange income in US$multiplied by the buying rate of US$to RMB. Positive result and negative result stand for profit ratio in export and loss ratio in export respectively.

5.5.2.2 The Calculation of Profit or Loss Ratio in Export

Profit or loss ratio in export can be expressed as follows:

Profit or loss ratio in export =

（Net foreign exchange ×buying rate - total export cost）÷ total export cost×100%

Taking the previous example, suppose the buying rate is RMB7.01/US$, then

Net income of export sales =1,350×7.01 = RMB9,463.5

Total cost = RMB9,550

Profit or loss ratio in export =（9,463.5-9,550）÷9,550×100% = -0.91%

Thus, the loss ratio in this transaction is 0.91%