Offer must contain everything you want to find in the subsequent contract
The offer should already contain everything that you want to find in the subsequent contract. If the recipient accepts the offer without reservation, it must also be included in the contract.
The offer is, in a sense, the first "product" that the customer sees, which is why special attention must be paid to it in terms of form and presentation. It is the supplier's first declaration of intent, already aimed at concluding a contract and addressed to a specific person, a proposal to conclude a sales contract and thus the starting point of every export transaction.
The introduction of the offer
Reference to an inquiry or other occasion for quoting Example: "Thank you very much for your inquiry that you handed over to Mr. Murphy from our London office during his visit to your office office."
Presentation of your company: Example: "Since this is the first time we have had business contact with you, we would like to with you for the first time, we would like to briefly introduce our company and refer you to the enclosed brochure. to refer to the enclosed company brochure."
Invitation to plant tours: Example: "In order to give you the opportunity to convince yourself of the quality of our products, we take the liberty of inviting you to visit the following plants installed at customers near you!"
Components of the offer
In principle, every offer should be so precise and complete that the recipient can accept it with a simple "yes". "Yes" to accept it. At the very least, however, an offer that is more than a general introductory letter of introduction, after the introduction and the reference to the binding nature and period of validity, must contain the following components:
- Information about the goods
- Price indication
- Details of the price
- The special conditions of the distribution
- Packing costs
- Transportation costs
- Insurance costs
- Costs of contract processing
- Costs of payment processing
Information about the goods
The product is clearly described, possibly designated according to the nomenclature of the customs tariff and should be documented by enclosing brochures, descriptions, analysis sheets or samples. Within the product description, the advantages of the offered product are naturally highlighted. Such advantages may be: long service life, freedom from maintenance, high product quality and high standard of materials used, environmental friendliness, low energy consumption, outstanding design.
The scope of delivery is primarily defined by the description of the product and the indication of the quantity. Additional services such as packaging, transport, assembly or commissioning are indicated separately.
For the quantity specifications, there are often standards that precisely define the dimensions and measurements. A confusing metric tons and short tons can be very inconvenient. The delivery condition should also be be mentioned, e.g. "disassembled into components for easier transport", "primed and preserved", "light-protected packaging".
The customer would prefer to have delivery "free domicile", in his local currency, against an open target and at the best price. In practice, however, a compromise must be reached that both satisfies the buyer and provides the supplier with some risk protection and profit opportunity. This is achieved by carefully matching price and payment terms.
At the beginning, the exporter will have to follow the prices of the competition, i.e., it will have to pursue an adaptive pricing policy (price succession): In this case, the exporter refrains from pursuing its own active pricing policy and follows the prices of the competition. Of course, even in this case, a certain degree of cost coverage cannot be lost sight of. In the longer term, the price floor is where revenue covers costs. In the short term, it is sufficient for the revenue to cover at least the variable costs. These are the costs that can be directly allocated to the individual product, e.g. the cost of materials.
In principle, the currency of the offer should be based on the customer's wishes. If nothing is known in this regard, the offer is made in euros.
The costs for packaging, freight, insurance, customs, etc. should be shown separately, as they are not directly caused by the supplier and can therefore be influenced by him only to a limited extent.
Most European countries appreciate serious pricing that does not require much negotiation. "Bazaar" methods are out of the question here. Some countries in the Orient, on the other hand, regularly try to negotiate price reductions, even to a considerable extent; for them, "haggling" is virtually a national sport. The exporter must therefore be prepared for this and build in margins for his price negotiations from the outset.
When it comes to small trial orders, you have to be careful about the price. On the one hand, the price must not be so high that it deters the customer, but on the other hand, it must not be so tempting that it cannot be raised later. Popular in the USA is the "trial order gambit": The American asks for the lowest price for a small trial order. If an "introductory price" is actually given, then one gets into trouble with the following orders as soon as one wants to set the regular price again.
The special conditions of the distribution
The decisive difference between domestic and export costing lies in the special costs of distribution. They result from the delivery and payment conditions according to the offer or purchase contract and essentially comprise five main groups.
These five main groups are:
- Packaging costs
- Transport costs
- Insurance costs
- Costs of contract processing
- Costs of payment processing
According to the Incoterms, the seller must provide "customary packaging" unless it is customary to deliver the goods unpacked. Unpacked delivery practically only occurs with some bulk goods.
In export, the term "seaworthy packaging" is often used, although there is no generally applicable definition. A good is seaworthy if it is adequately protected against all stresses that may occur during overseas transport. This includes loading and unloading, storage and handling in port, stowage in the ocean-going vessel (space cargo, deck cargo or stowage in the tween deck) and stresses during the ocean voyage (tropical packaging due to humidity). The shipping route also includes pre- and on-carriage by other means of transport.
In addition to shipping packaging, consumer packaging also plays a role for many products. Here, the sometimes very extensive regulations regarding labeling and marking have an impact on costs.
Random contract - Source: pexels.com
This includes primarily the cost of transportation, but also all ancillary expenses such as cartage, handling, storage and other forwarding costs and commissions.
If the delivery clause "ex works" was agreed in the contract, then the seller does not need to worry about the transport. His obligation is limited to making the goods available to the buyer. In export, however, this clause, which also relieves the seller of the worry about transport insurance, is rare.
More common is the clause "delivered duty paid (DDP)", which represents the maximum obligation of the seller. Here, he bears all costs and risks up to the place of destination, i.e. also the entire transport costs.
In overseas trade, contracts are preferably concluded on a CIF or FOB basis. In case of CIF, the seller bears the transport costs up to the port of destination, in case of FOB up to the port of shipment.
Large companies and government agencies overseas require both FOB and CIF prices, especially for public tenders, in order to have an overview of the transport route and transport costs.
The private importer, on the other hand, is mostly interested in CIF prices. This is because he can then compare the CIF prices of several suppliers, which all refer to his port of destination, much more easily than, for example, two FOB prices, one of which is "FOB Marseille", the other "FOB Yokohama".
The situation is different if the importer has a good forwarder on hand who grants him favorable transport conditions. Then he will be more interested in FOB delivery.
It is not easy for an inexperienced exporter to quote FOB or CIF prices in his offer when he does not even know the order quantity yet. In this case, the only option is to have his forwarder calculate the freight based on a minimum quantity.
In the case of the clauses "CIF" and "freight paid insured", the seller must take out transport insurance. In the case of CIF, only minimum conditions, the so-called FPA conditions (free particular average), need to be concluded. If the buyer wishes insurance cover beyond this, e.g. with particular average or all risks, a separate agreement is required. In the case of "free particular average" insurance, the insurance must be taken out on terms which "in the opinion of the seller are reasonable, having regard to commercial usage, the nature of the goods and other circumstances affecting the risk".
Reasonable is different for delivery of hard coal than for precision machinery. In case of disagreement as to what is customary, the seller's opinion shall prevail. In any case, he must inform his customer about the insurance he has taken out so that the customer can take out additional insurance if necessary. In addition to transport insurance, guarantees against political and economic risks, as offered by private insurance companies, also belong in this cost range. If applicable, the costs of exchange rate hedging must also be taken into account.
Costs of contract processing
This includes the costs of certification and inspection (e.g. for a phytosanitary certificate for grain), all costs of export formalities and - depending on the contract - also import formalities. All commissions, e.g. for the agent, are likewise costs of contract execution.
Payment processing costs
These costs arise from the payment terms, e.g. in the case of a letter of credit or documentary collection. However, the costs of granting credit are much more significant if, for example, the customer has to be granted credit over several years, as in the case of an investment transaction.
As a rule, it is the price that significantly influences the purchase decision. But willingness to pay a certain price varies greatly from country to country. After all, what is considered inexpensive in our country may be unaffordable in developing countries. A coffee cup that costs one euro here is a luxury product for someone who earns EUR 100 a month. Of course, this depends on the individual's purchasing power, but also on his or her attitudes, experiences and cultural background, which attaches greater or lesser importance to a product.
Terms of payment and delivery
Sealing the deal - Source: pexels.com
The most common payment terms ranked by ascending risk to the exporter are: Advance and down payment, letter of credit (preferably irrevocable, open-ended, confirmed and divisible), spot against documents, acceptance against documents, open-ended. In case of 100% advance payment, any risk for the exporter is eliminated, but such form of payment is hardly achievable in foreign trade. Besides advance payment and letter of credit, security is also provided by bank guarantees and bill of exchange guarantees.
Especially in developing countries, payment terms can be more important than price. As a rule, longer-term loans are required here, e.g. in the plant business up to ten years and longer.
The delivery time can sometimes be the deciding factor in whether or not you get an order. Therefore, delivery times should be specified in the offer: prompt, on call, within 14 days, two months after the opening of the letter of credit, etc. Delivery times should be specified individually for each delivery or quotation; it is necessary to be flexible in this respect in order to be competitive. General terms and conditions of sale and delivery, as are customary in domestic trade, do not prove expedient in export, since
- it is hardly possible to draw up generally applicable regulations for all export markets,
- they are not readily recognized by foreign courts in the event of disputes,
- they are unfavorable from the point of view of sales psychology, since they give the buyer the impression that he has to accept unilaterally fixed conditions.
The delivery clauses standardized by the International Chamber of Commerce (ICC) in the Incoterms (International Commercial Terms) are a great relief. They regulate the transfer of costs and risks from the seller to the buyer.
These clauses are internationally recognized, but require express inclusion in the purchase contract to be effective.
Other offer points
Further points of the offer may be: retention of title, warranty, applicable law and place of jurisdiction, possibly proposal of arbitration.
A special form of export offer exists in the case of an international tender. In this case, the tender is characterized by two requirements: Form constraint and deadline constraint.