3-6. How to Choose the Best Incoterms

Overview

Who can decide the incoterms?

Rookie

IINO san

Good question, what do you think?

Hmmm… is it the importer?

Rookie

IINO san

It is up to negotiation. I will give you tips for deciding the right incoterms.

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

Through a case study, we will check how Incoterms are negotiated.

International trade shows!
It’s where various businesses kick off!

Rookie

IINO san

Yes, exactly. Companies from various countries set up booths at trade shows to engage in discussions with attendees.

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

Incoterms are trade terms clearly defining which party bears transportation costs and from where they assume responsibility.

Yeah, that’s what we have learned in the previous curriculum.

Rookie

IINO san

You have to note international trade involves higher risks compared to the domestic transactions!

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.

Why is the DDP price expensive?

Rookie

IINO san

Because it includes transportation to the importer’s designated location, customs duties, and consumption taxes.

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

For leather bags, the price is based on the number of pieces, while for frozen mangoes, it is based on their weight.

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

For EXW or FOB prices, the cost can be provided immediately by the exporter. But for CIF or DDP, it may take time to confirm expenses.

Why?

Rookie

IINO san

Exporters need to confirm freight rates with forwarders! However, if they frequently send cargo to a country/region, they might be able to provide the price immediately.

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

Hmmm…CIF Tokyo seems pricey. I saw similar leather bags on Yahoo Auctions for $25 each. Can the price be reduced?

Rookie

IINO san

That’s a negotiation. For example, “if I commit to buying 1,000 bags annually, could I receive a lower price?”

What if I can’t afford it?

Rookie

IINO san

Another option is to use EXW or FOB and arrange your freight forwarders to reduce transportation costs.

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.

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

Stick to your guns! 

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

The act of “remembering” helps it sink in your memory.