1. General principles for adjusting prices
After determining the basic price, the price should also be adjusted based on national and regional policies, the company’s purchase and sales intentions, changes in market conditions, competitors’ prices, and other transaction conditions in the contract. Many transaction conditions, such as trade terms, commodity quality, quantity, packaging, trademarks, transportation methods, delivery dates, shipping methods, and payment methods, have a direct impact on the price of commodities. Generally speaking, higher quality means higher prices, and when the transaction volume is large, the price can be discounted. When the payment method is favorable to the seller, the price can be reduced accordingly. When negotiating prices, if the price itself is difficult to adjust, the purpose of adjusting the price can also be achieved by changing other transaction conditions.
2. Commissions and discounts
Adjusting prices through commissions and discounts is a common method of adjusting prices.
(1) The meaning and difference between commissions and discounts
Commission is the remuneration obtained by middlemen for introducing or handling transactions between buyers and sellers. The price of goods that includes commission is called “commission-inclusive price”, such as “CIFC 3% Hong Kong” or “CIF Hong Kong 1000 pounds per ton including 3% commission”. The price without commission is called “net price”. If the percentage of commission is clearly stated in the contract, it is “explicit commission”; if the percentage of commission is not stated, or even the word “commission” is not marked, and the commission issue is negotiated by the two parties separately, this practice is called “implicit commission”.
Discount is a certain percentage of the original price given by the seller to the buyer. In international trade, price adjustments are sometimes achieved through discounts.
Commissions are different from discounts. The beneficiary of commissions is the middleman, while the beneficiary of discounts is the buyer. Commissions are generally paid to middlemen after the seller receives the payment, while discounts are usually deducted in advance by the buyer when paying.
(2) Expression of commissions and discounts
① Expression of commissions
As mentioned above, commissions can be divided into explicit commissions and implicit commissions. Implicit commission is a commission agreed upon by the buyer and seller but not stated in the contract. Explicit commission is a commission stated in the contract. Explicit commission is usually expressed by adding “C” and the commission rate after the trade term, such as “USD 1100.00 per M/T CIFC2% Houston” or “USD 1100.00 per M/T CIF Houston including 2% Commission.” According to national trade practices, the commission is usually calculated based on the invoice amount (i.e. the commission price), that is, the invoice amount multiplied by the commission rate. For example, USD 400 per metric ton CIFC2% London, the invoice amount is USD 400 per metric ton, and the commission is USD 8 per metric ton. In international trade, there is also FOB. If the commission is calculated based on the net price, in this case, other prices must be converted to FOB prices before calculating the commission payable. Theoretically, the basis for calculating the commission should not include freight and insurance.
Commission price = net price/(1-commission rate)
If the price quoted to the outside is the net price, and the customer asks to change the price to include commission, in order not to reduce their own profits, the previous price must be revised.
For example: The net price quoted by Chinese exporters is USD100 per dozen CIF New York. If the exporter proposes to charge a 5% commission, in order to maintain the original profit level, how much should the external quotation be revised?
The external quotation should be revised to include commission price = net price/(1-commission rate)
=USD100÷(1-5%)
=USD105.26
②Discount expression
The expression of discounts in international trade is shown in the following example:
USD35 per dozen CIF New York deducting 5% discount.
The net price after deducting 5% discount from the original price is: US$35 per dozen CIF New York. When discount is implemented, the net price is calculated as follows:
Net price = original price x (1-discount rate)