3-6. How to Choose the Best Incoterms
Overview
![Rookie](https://trade-camp.com/wp-content/uploads/2023/03/shinjinkun1.jpg)
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
![Rookie](https://trade-camp.com/wp-content/uploads/2023/03/shinjinkun-2.jpg)
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
Learning Points
- How to choose Incoterms
- How to prorate transportation costs
- Tips on Choosing the Right Incoterms
Case Study (How to Choose Incoterms)
For example, let’s assume Rookie is importing a new product from overseas as a buyer. To find suppliers, he first attends trade shows.
The scenario is that he is trying to buy and import leather bags from Thailand to Japan.
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
It’s where various businesses kick off!
![Rookie](https://trade-camp.com/wp-content/uploads/2023/03/shinjinkun1.jpg)
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
Step 1) Quotation Requests
After verifying the quality, the next step is to confirm the pricing.
When requesting a quotation, you have to confirm the conditions. It helps you understand the extent to which costs and risks are considered in the quote.
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
![Rookie](https://trade-camp.com/wp-content/uploads/2023/03/shinjinkun-2.jpg)
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
2) Check the Incoterms and Price
The quoted prices vary based on the Incoterms, so it’s important to double-check. For example, the unit price of leather bags, according to Incoterms, is as follows.
- EXW: USD 20/piece
- FOB Bangkok: USD22/piece
- CIF Tokyo: USD 25/piece
- DDP: USD 30/piece
This is just for your reference, and the actual prices may vary depending on the quotes manufacturers and forwarders provide.
Price Breakdown
The transportation cost is prorated by the quantity and added to the unit price. The EXW price does not include any transportation expenses.
![Rookie](https://trade-camp.com/wp-content/uploads/2023/03/shinjinkun-2.jpg)
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
3) Check the Unit
When reviewing a quotation, always make sure to check the units.
If you are importing only one large shipment, such as machinery, there is no need to prorate transportation costs. However, overlooking the unit can lead to unforeseen losses.
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
In the case of EXW, the price of a product is quoted as follows:
- Term: EXW
- Unit price: USD 20/piece
4) Confirming the Total Price
Once you receive a quotation, you can grasp the costs based on the Incoterms condition.
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
![Rookie](https://trade-camp.com/wp-content/uploads/2023/03/shinjinkun1.jpg)
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
Tips on Choosing the Right Incoterms
You have to note prices vary depending on the Incoterms. Consider the costs you are responsible for and negotiate with the other party regarding the Incoterms.
As mentioned earlier, this results in differences reflected in the prices.
- EXW: USD 20/piece
- FOB Bangkok: USD22/piece
- CIF Tokyo: USD 25/piece
- DDP: USD 30/piece
![Rookie](https://trade-camp.com/wp-content/uploads/2023/03/shinjinkun-2.jpg)
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
![Rookie](https://trade-camp.com/wp-content/uploads/2023/03/shinjinkun-2.jpg)
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
Case Study (Prorate Transportation Costs)
Based on the previous case study, calculate the prorated transportation costs per bag.
The scenario is importing 500 leather bags from Thailand under CIF Tokyo terms. The transportation method is via sea, using a 20-feet container.
Conditions:
・Incoterms: CIF Tokyo
・Quantity: 500 pieces
・Container size: 20F
Transportation Cost: USD 2,500/Total
・Truck from the factory to Bangkok port: USD 400/20F
・Customs Clearance Fee: USD 50/20F
・Port Charges: USD 500/20F
・Ocean Freight: USD 1,500/20F
・Marine Insurance: USD 50/20F
Divide the Total Cost by the quantity
This time, you are transporting 500 leather bags in a container. So, you can obtain the transportation cost per bag by dividing the total transportation cost by the quantity.
Formula: USD 2,500 ÷ 500 piece = USD 5/ piece
Summary
In this article, we have explained how to choose Incoterms and how to consider transportation costs in pricing.
While Incoterms are often presented during the quoting process, exporters and importers must negotiate and select the most suitable terms for their needs.
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)
Enhanced Learning with Videos
Test Yourself
Reinforce your understanding of this topic by working through the exercises. Attempting the exercises without referring to the material as much as possible is advisable.
![IINO san](https://trade-camp.com/wp-content/uploads/2023/01/iino-san1.jpg)