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3

parts

3. The art of negotiating

the lowest price

1.Definition and example

2. Compare price

and othercontract

terms

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The exporter must perceive and preservethe interdependence of every aspect of anexport negotiation.

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Every problem that the two sides normallynegotiate has a bearing on price.

Raise the price or the lowering price?

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The relationship between price and other contractterms:

1. order size2. specifications

3. packaging4. Incoterms5. terms of payment6. date of delivery7. warranty period

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The product: small domestic electric fans ofVerbena Electric

The size of the order: 3,000 items

The specification of the fans is identical color:1,000 will be delivered in gold, 1,000 in black,1,000 in red.

No additional packaging or safety warnings arerequired beyond what is normal in Verbena.

Delivery is FOB (Port Verbena) Payment is by irrevocable, confirmed, at-sight

letter of credit Delivery: three weeks from the date that

Royalstone receives advice that the letter of credit

has been opened. The warranty period: three months from the date

of delivery.

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Order size:When the buyer agree or disagree with thesize of the goods, the seller can make

points:- increase the transport costs on a smallerorder.

- the unit price will increase on a smaller order.

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2.2. Specifications:

- What are the technical specifications of theproduct? what size, colors, design, etc are

preferred by the buyers?- What if the technology is changing fast?How can we maintain product superiority?

If the goods do not require high technology,the price is reduced( depending on thequality of the

goods)

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2.3. Packaging:What are the branding, packaging and

labeling requirements to sell the productaboard? how would the present branding,packaging and labeling be changed forexporting?

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2.4. Incoterms:

Two parties agree method of delivery, anexport price that is CIF,FOB, or FOR called

Incoterms known as special international

trade terms.

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2.5. Terms of payment cash in advance.

Letter of Credits.

Open account

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2.6. Date of Delivery

What does Date of Delivery mean? The final date by which the underlying

commodity for a future contract must bedelivered in order for the terms of thecontract to be fulfilled

The maturity date of a currency forward

contract

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2.7. Warranty Period

The time period in which a purchased productmay be returned or exchanged; may beextended through extended warrantyplanspurchased from Seller. So if you ask for muchtime warranty, the price is more costly.

http://www.businessdictionary.com/definition/product.htmlhttp://www.businessdictionary.com/definition/extended-warranty.htmlhttp://www.businessdictionary.com/definition/plan.htmlhttp://www.businessdictionary.com/definition/plan.htmlhttp://www.businessdictionary.com/definition/extended-warranty.htmlhttp://www.businessdictionary.com/definition/product.html

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Step 1: Mode of Payment

Step 2: TimingStep 3: Place of payment

Step 4: Delay - what delay in payment isexcusable?

Step 5: Results of delay

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1. Payment on open account with no

security: risky to the exporter2. Payment on open account secured by

export credit insurance: the exporterpays money to an insurance company

to buy an export credit insurance

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The Use Of A Third Party

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3. Payment on open account secured by

a payment guarantee: the buyer paysmoney to a bank to receive a bankguarantee.

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A letter of creditis issued by a bank at therequest of an importer and states the bank

will pay a specified sum of money to abeneficiary, normally the exporter, onpresentation of particular, specifieddocuments

Main advantage is that both parties arelikely to trust a reputable bank even if theydo not trust each other

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This step determines the date of payment. Theimporter often wants to delay the time of payment butthe exporter suffers from delay because late paymentis subject to payment of interest so most sellers offer

discount for early payment. This helps the buyer saveon the invoice price and the seller quickly collects hismoney.

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Step 2: Timing

The date of payment may be regulated date or achain of dates.

It is also calendar dates or interval times.

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Step 3: Place of payment

This step determines where the money must bebefore payment is to be completed

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P79:

Payment shall be deemed to have been madeonly when the contract sum is paid into theSellers bank account and is at the Sellers full

disposal.

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Step 4: Delay what delay in payment is excusable?

Delay in payment may be excused during a graceperiod (not common) or a force majeure event (more

common). But most exporters do not want to excusethese delays and any payment made after the agreeddate of payment is in delay.

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Step 5: Results of delay

When delay in payment happens the exporter isusually compensated for losses due to late payment.

The exporter may ask for a payment guaranteewhich makes sure payment is made on time.

The best solution to get rid of delay is to create apayment article in the sale contract which makes

late payment impossible.

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Step 5: Results of delay

Page 80

If payment of any sum payable is delayed, the Buyershall be entitled to receive interest on the amountunpaid during the period of delay. The interest shallbe at an annual rate three percentage points abovethe discount rateof the central Bank in the Sellers

country.

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In the international trade, the exporter may face alot of risks and one of the significant ones is non-payment. There are two main ways that the exporter

can use to reduce this risk. One is export creditinsurance and the other is bank guarantee.

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1 Export credit insurance

Export credit insurance allows exporter to recoverthe major part of the contract price if the buyer fails

to pay after six months. To buy such insurance, theexporter must explain the detail of the business toan insurance company and receive a quotation.

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Export credit insurance

If the insurer refuses to pay, it may mean that thereare some problems in the exporter or importer. The

exporter has to pay an export insurance premiumwhich depends on many factors, such as: the type ofgoods exported, the creditworthiness of the buyer,the political stability of the importer country.

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Export credit insurance

Although this way is attractive, it has somelimitations: the exporter has to wait for a long time

to be compensated and the compensation is unlikelyto cover 100% of the invoice price.

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Payment guarantee

In this method, the buyer may ask for a bankguarantee which means that the bank will pay the

contract price if the buyer fails to do so.Guarantees are commonly used in four businesssituations, as the following:

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2 Payment guarantee

In this method, the buyer may ask for a bankguarantee which means that the bank will pay the

contract price if the buyer fails to do so.Guarantees are commonly used in four businesssituations, as the following:

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2 Payment guarantee

Risk 1: Non-payment =>Payment guarantee

A payment guarantee makes sure that the exporter

will receive payment. It commits the bank to pay ifthe buyer defaults. The payment guarantee isusually for 100% of the contract price.

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2 Payment guarantee

Risk 2: Revocation => Tender guarantee

This type of guarantee is used in case that the

exporter who bids on a contract to supply goods ormaterials to a government department or agency iswithdrawn. A normal figure for tender guarantee isusually from 1.5% to 5% of the contract price.

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2 Payment guarantee

Risk 3: Non-performance=>Performance guarantee

Performance guarantee makes sure that if the

exporter works badly or not at all, the guarantor willpay, within stated limits, the costs of the exportersfailure to perform. A figure for performanceguarantee is from 5% to 10% of the contract price.

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2 Payment guarantee

Risk 4: Losing Prepayment=>Prepayment guarantee

This guarantee promises the buyer that the bank will

return advance payments if the exporter fails todeliver. The guarantee is often for 100% of theprepayment.

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Letters of credit are issued in manyforms for many purposes. Some letters

of credit offer first class security for theexporters, some are little better than apersonal checkThe most ideal type of letter of credit

from the exporters point of view isirrevocable, confirmed, at sight letter ofcredit.

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The Uniform Customs and Practice forDocumentary Credits (UCP) by the

International Chamber of Commerce is themost universal set of practices ruling overpayment by letter of credit. Besides, partiesto a contract can also use the rules of the

United States.

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Page 87

The Buyer, on receipt of the Confirmation ofOrder from the Seller, shall at least 20 daysprior to the date of delivery open a confirmed,irrevocable letter of credit. This credit shall besubject to Uniform Customs and Practice forDocumentary Credits, 1993 Revision, ICC

publication No.500.

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Page 87

20% of the credit shall be available against theSellers draft accompanied by invoice, theremaining 80% shall be available against theSeller graft accompanied by the shippingdocuments.

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Page 87

20% of the credit shall be available against theSellers draft accompanied by invoice, theremaining 80% shall be available against theSeller graft accompanied by the shippingdocuments.