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Doesn't add up: US export price versus Chinese end-user price
| Guest post by: Chris Wingo |
Article Overview: When selling in China, price is always an issue. This is why it is critical to analyze and understand the export price versus Chinese end-user price when planning to export sell to China. To the Chinese, "landed" price is what really counts. Landed price is total cost paid to import and obtain your product. So what's the difference between your export price and what the Chinese end-user pays for your product? This article details a simple yet revealing example.
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Free Download - A better way for American SME's to sell in China By Chris Wingo |
Doesn't add up: US export price versus Chinese end-user price
Any company selling in China knows that price is always an issue, even when it's not really an issue! That's just cultural and, hey, why not. Even the worst negotiation training courses in the west teach "always flinch at the seller's price". What we have to learn in school, the Chinese do very naturally. The main point is price is an issue in China yet many US exporters overlook the fact their export price and Chinese end-user price are two very different things in China.
This oversight is costing many of them valuable sales.
I'll not go into the psycho-cultural aspects of Chinese buying behaviors since that would, well, just be my own psycho-culutrual perspective. Instead, let's accept price is an issue and analyze the export price versus Chinese end-user price. To the Chinese, "landed" price is what really counts. That is total cost paid to import and use your product. So what's the difference between your export price and what the Chinese end-user pays for your product? A simple example reveals much:
Simple Example ...
Your California, USA company is selling its "commercial processing system" in North America through its North America distributor network. The price charged distributors is $10,000 USD per system; your distributors markup an average of 15% then charge end-users $11,500 USD per system, installed. Hence, the US end-user price is $11,500.
One day, you get a serious inquiry from China for a single system that "could lead to sales of 100 or more systems in first year alone". On your "Pro Forma" invoice (quotation), you offer the Chinese distributor your typical US distributor price plus a $500 negotiation margin for a total price of $10,500 ... yeah, you've studied up and know the Chinese are price sensitive. Receiving your quote, the Chinese distributor replies "impossible" and after several back-and-forths you offer a final price of $9,450 USD. Not bad you are thinking since the Chinese distributor should be happy with the 10% discount he "succeeded in negotiating". Feeling like a real international trader, you wait, and wait, and wait. Nothing happens.
Zoom to the Chinese distributor's side of the ocean. His customer, a Chinese end-user, is very price sensitive. They have seen and like your technology but need a good price. Local companies are making something similar, granted not as high quality or nearly as sophisticated but, for a local price equivalent to $7,450 USD. Out of the gate, your price is already selling for a $2,000 premium. If the $9,450 price were all the end-user had to pay, your sale would still be possible. Unfortunately, your quoted price is not even close to the end-user's final price.
Let's assume the the transaction terms are FOB (Free On Board), so you only need put your product on the ship in the US port and the Chinese distributor will cover everything else. Here's how the costs really stack up (all numbers are USD and on the low end):
- Your Quoted FOB Price ------$9,450*
- Shipping Costs -----------------$500
- Import Duties @ 8% ----------$756*
- Import VAT* @ 17% ----------$1,735 (value added tax based on "*")
- Misc Other Fees ---------------$300
- Distributor's Landed Cost ---$12,741
- Distributor Markup @ 15% --$1,911 (conservative - often ranges from 20 to 40%)
- End-user's Price ---------------$14,652 (versus US end-user price of $11,500)
What sells for an end-user price of $11,500 in the US is priced at $14,652 for Chinese end-users or a premium of $3,152 (27%). If you compare the Chinese end-user price for your product to a local Chinese product the premium becomes $7,202 USD (97% more). Ouch! Plus, Chinese are very price sensitive and your company isn't even located in China which equates to higher risk, slower response and maybe no service. The bottom line is that unless your product offers some very compelling performance advantages, you haven't a chance; to make matters worse, the Chinese generally do not accept "in-use cost savings" as an offset for higher price.
So what can your company do? Here are few ideas -
- Customize and custom price your product especially for China to reduce sales price and added "export sales" costs; don't sell extras they don't need and don't overvalue your "technology" since Chinese have just about everything they need these days.
- Find a partner company and have them add at least some value to your product in China to reduce the "import price" and associated costs like duty and VAT; ship key components from US then have simple machined parts and assemblies processed in China.
- Take the plunge, setup and manufacture in China to serve the local market - this is the only real long-term option; this is something you should begin thinking about once you're sure there's a market for your product in China.
If you are unable to sell in China, toss out all your "sell value" ideas and look at the reality on-the-ground. Make sure you understand the actual price the Chinese end-user will have to pay to acquire your product and use it. Don't overestimate your products' value to Chinese customers or their desire to own it. To help sort it all out, you might want to seek a bit of professional advice along the way.
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Article Tags: China, Chinese, Chinese buyers, Chinese enduser, distributor, duties, export price, export to China, landed price, price analysis, price comparison, US export pricing, US exporters, VAT
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About the Author: Chris Wingo RSS for Chris's articles - Visit Chris's website My Mini-Bio
I started my career as an aerospace engineer with Ford Aerospace in California back in 1985. From there with MBA in hand, I ventured into technical sales for W. L. Gore & Associates before landing in China in early 1997 to manage Gore's Asia-Pacific business. In 2003, I setup and am now running China Sage Consultants based in Shanghai, China. Tops in China Sales Support since 2003!
China Sage Consultants offers full sales and business development outsourcing for US B2B engineered product companies seeking to enter China and sell in China. Our China Sales Incubator program provides everything needed to sell, market and establish a long-term China presence - program provides same as own Rep Office in China. China Sales Incubator is minimal-cost, high-results and virtually no-risk. Select recruiting and other consulting support available.
China Sage Consultants - Your best first step to sales in China. Visit www.ChinaSageConsultants.com for more information. See my China Sales Dog Blog for insights on selling, business and other bigger things "China". Visit my Linked-In profile for more. Click here to visit Chris's website   Ten Tips for Selling B2B in China Tied Up and Gagged by Chinas New Labor Law Is it Time for You to Start Selling in China My Friend on the Street in Shanghai LowPrice Buyers Drive Poor Chinese Product Quality |
Related Forum Posts
Re: Matching competitors prices - beware
- While I agree that getting into a price war should be avoided if possible... on rare occasions, it's not a bad idea to match someone's price (or even beat it) if you're doing it "one time" to land a new customer.
For instance, I was recently looking for the best price on a [u:2rhwa2wg]specific[/u:2rhwa2wg] flight to NY and a customer service rep from Flight Centre ended up taking zero commission to help me book my flight. In fact, she even beat the price by $5 in the hopes of creating brand loyalty for the future.
Re: need pricing help please
- I think you could be selling yourself short.
Plus you may be focused on the wrong things when it comes to pricing your products.
What will your buyers be able to do or get as a result of your product?
How much would that be worth to them?
Buyers will gladly pay over $100 for a one page report because it tells them exactly what to do to overcome a specific difficult to solve problem. Even when that information can be found free elsewhere.
I know it's hard not to compare your eBook to a physical book. Yet, that may not be a fair comparison.
Another thing to consider is the perceived value when a product that sounds great comes with a very low price. Some potential buyers will doubt the value of your product because the price seems way too low for the result it promises.
There's a quick and easy way for you to discover the right price though. Open a Google Adwords account ($5) and then set-up a multi-variant test for different price points. If you have a decent amount of traffic you'll quickly discover the best price.
Can consumers reduce the price of gas?
- Hi Everyone,
I just wanted to get your opinion on someone's suggestion that we as consumers can actually reduce the price of gas if we were to simply stop supporting the two biggest companies, Esso and Shell. The logic behind this "price war" theory is that if no one buys Esso and Shell gas, then they'll be forced to lower their prices and then the other smaller companies will follow suit as well.
Is this a myth or is there actually any truth to this gas price reducing strategy?
Re: E-Commerce Spending Down?
- Spending might be down, but there's still plenty of spending being done. Only a 2% decrease is hardly anything to worry about.
As Kevin pointed out, I've noticed eBay sellers offering free shipping, but increasing the starting cost or Buy It Now price. So, in reality you're still paying for the shipping.
I'm one who likes to buy online, mainly because it's a lot easier and I don't have to deal with the mad rush at malls and shopping centers. I'll shop around for the best price online, mainly looking at eBay or Amazon.
However, if I happen to get into a crunch, then I'll just suck it up and go to the store and pay full price. Sometimes you just have to, but I try to avoid that situation.
As Kevin also mentioned about shipping prices on eBay, I, too, have noticed that some sellers really inflate the price, even for US shipping. I avoid those sellers unless I can still get it cheaper through them than someone else, but most of the time you won't. It doesn't make any sense, and I would hate being out of the country and getting completely ripped off.
eBay Shipping Rates
- Unfortunately a lot of sellers on eBay are selling low cost products but making up the low price with extraordinary shipping prices. You just have to be aware of how much you're paying for shipping and whether the total price is still a good value.
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