Despite a massive trend towards automation, exporting services still requires a high-degree of human involvement in development and delivery. It still requires a human touch.
When exporting services, the same basic rules for trading goods apply, but there are key differences. These include how the services are marketed and which taxes and regulations are applicable. These differences affect costing.
The services being provided tend to be less tangible than goods, and there is more variability in quality.
International clients often demand a high-degree of customization of the service to fit their particular needs and context.
This can make the cost and pricing analysis for service exports challenging compared to an analysis for tangible goods.
To ensure a venture will be profitable, all these factors, as found in the FITTskills Feasibility of International Trade course, must be considered carefully during the costing and pricing analysis.
The service export sector is growing
Services are becoming a dominant driver of economic growth, both in developed and developing countries.
However, awareness of the services sector’s potential is still at a relatively low level. Developing countries are making the shift towards services much sooner than their developed counterparts.
Services can provide an alternative engine of economic growth, enabling late-comers to development to by-pass the traditional manufacturing route. Meanwhile, despite strong global growth, service exports continue to make up less than 25% of the world exports. This discrepancy between the size of the sector and its importance in exports points to a major untapped potential in the services trade.
The process of analyzing service export cost and pricing
The process of cost and pricing analysis for services involves the same three stages as for goods:
- Determine the cost of exporting services.
- Elaborate a pricing strategy.
- Assess the viability of the transaction.
The approach to exporting services is similar when exporting tangible goods, however, there are some important differences to be considered. Organizations may be exporting services linked to goods, for instance training related to exported software. An organization may be exporting pure services, such as management consulting, education, or health services. It is sometimes more challenging for an organization exporting only services simply because establishing an international profile without a tangible product can be difficult and requires serious resources.
Step 1. Determine the cost of exporting your service
Service exporters must fully account for all of the costs involved in delivering internationally. Once the delivery mode is determined, a costing sheet must be developed or customized to address all relevant factors. The export of services is a highly variable field, and the potential costs will differ depending upon the delivery mode, the type of service, the industry sector, and the target market. Organizations should consider potential after-sales costs that apply, such as providing ongoing client support.
Step 2. Elaborate a pricing strategy
Before setting a final price, exporters need to ensure they have considered the promotional costs of providing the service in-market.
Three reasons calculating a separate price for each export market is important are:
- Costs vary between markets
- Competitors’ pricing strategies will differ depending on the target market.
- The price end users are willing to pay will differ depending on the target market.
Some common pricing models for services include: cost plus pricing, competitive pricing, premium pricing, and penetration pricing.
Cost Plus Pricing
Cost plus pricing requires an accurate understanding of total costs for delivering the service into the target market as well as how to reflect a price compatible with the perceived market position. It is important to have an understanding of the average margin for the industry in the export market. A drawback to using cost plus pricing is that an organization may not be competitive in some markets (for instance, this may be by over or under pricing). Organizations may be able to discount or match a competitor’s price, if local resources are less expensive than domestic ones. Final pricing should reflect a balance between affordability for customers and the desired profit.
Competitive pricing involves setting the price of a service based on what the competition is charging. This is due to the assumption that the market has already reached a price equilibrium and competitors are setting their price to that. This can improve market access, especially if new services can be released shortly after market entry with demonstrable benefits and features. This is an acceptable strategy of service, if the service can be delivered at similar cost levels to other providers in the market; otherwise, it may not be feasible. Competitive pricing can make premium pricing difficult in the future, as it signals a ‘value of money’ or ‘affordable’ market position.
Premium pricing is a static strategy based on what the market will bear. It is a good export strategy as it is more profitable and provides a greater profit margin to cover cost increases. This strategy may allow an organization to maintain a price in foreign currency by absorbing negative impacts in exchange rates. As there is perceived value in innovative and uniquely packaged services, premium pricing can be an acceptable strategy. It also allows an organization to establish a premium brand in the market, offer discounted rates to loyal customers without reducing profit, and meet competitive threats over time.
As with the export of goods, service exporters can choose to price their service low so that they are perceived as excellent value for the money. This strategy can reduce the time to get market entry, while sacrificing early profit margins. This process must be tightly controlled. Representatives and partners must understand that market success will bring future price increases to cover lost margins and achieve rightful market positioning. This strategy must be used with caution and its implementation carefully monitored.
Step 3. Assess the viability of the transaction
Finally, as with the export and import of goods, organizations must conduct a final assessment to determine whether the transaction is viable.
Comparing a comprehensive listing of costs that will affect the final price will provide critical information regarding the potential profit. Service exporters can then decide whether or not to move forward with a particular venture.
What strategies did you use when you took your service international? Let us know in the comments down below.