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close this bookExport Marketing for a Small Handicraft Business (Oxfam, 1996, 192 p.)
close this folder3 Markets and their characteristics
View the document3.1 The perception of value
View the document3.2 Competition
View the document3.3 Market structures
View the document3.4 The costs of distribution
View the documentSummary

3.1 The perception of value

'There is ... no such thing as a "market". People talk about the Swiss market or the American market, but they do not exist ... so I suggest you forgo using the word "market" and think first in terms of customers and then the countries where they happen to be. This good advice might help to break down a little of the mental barrier which would-be exporters instinctively put up against overseas markets. Markets in every country have a great deal of diversity. In a typical handicraft producing country the range of different markets might be something like: the local village market place; the rural or small town shop; the smart large town or capital city shop; tourist stalls and shops; a fair or exhibition; museum or gallery shops; a trading organization; and an export company. All of these might be places where a production unit could sell its products. The price obtainable, or the requirements about quality or packaging, might be different for the same product, depending on which market it chose.

The situation in the countries which import most handicrafts is much the same. In Britain, Oxfam Trading has a chain of shops. Because these are located all over the country, it might be assumed that we sell to most of the country's markets. This is not the case. Markets are differentiated not so much by geography as by income levels and attitudes of the customers. Of course, these can have something to do with geographical location; an area in which most of the people are poor will not have shops selling very expensive products. However, in most areas in Britain, there are people of all income levels. So you cannot really talk about 'the market in London'. There is smart London, where rich people shop, and street-market London, where most of the customers are on low incomes. Marketing people often speak of 'going upmarket'-meaning targeting their products to well off customers-or 'downmarket'-to ones less well-off.

Markets are defined according to the type of customers who use them. For example, an alternative trading organization wants to export baskets made by a tribal group. These are of functional shape, commonly used by people in the domestic market as bowls for fruit or bread. What is distinctive about them is their form of decoration, employing natural dyes, and using symbols which have meaning in the culture of the community. The tribal group has an established price which is calculated loosely on its estimation of their production costs.

The ATO must choose how to offer the product, with the objective of making the maximum profit. It has to decide at what price to offer it, how to promote it, and where to place it in the market. What it wants to find out is how to give the baskets their highest possible market value.

The price which a customer is prepared to pay for a product has little to do with the cost of production. Think about the things you buy yourself: do you know how much they cost to produce? Not normally. What you do know is how much they are worth to you. Customers buy products which are offered in a way which corresponds to the value they are prepared to give them.

Value is the price at which a product can be sold. It will vary according to the way in which the ATO undertakes the marketing process. There are several ways in which it could increase the value of the baskets:

Quality of manufacture: customers might be prepared to pay more for items of high-quality production.

Promotion of decorative qualities: the ATO would seek to stress the beauty rather than the function of the baskets in its presentation, offering them as works of art rather than fruit bowls.

Providing information about the product: in this case, information about the cultural significance of the design might be produced on a highquality label.

Targeting the promotion at specialist outlets: there are high-class shops or galleries where customers are seeking distinctive original products of artistic merit.

In other words, the value of the baskets would depend on how they were presented to which market, and where the ATO was successful in placing them. The quality of production, promotion and presentation of the product, and the skill at placing it, will affect the price which the seller can obtain. Value derives from the total offer, not just the product itself.

It follows that changing one aspect of the offer will affect other aspects. Oxfam Trading sells through Oxfam's shops and through a mailorder catalogue. In the catalogue it is possible to achieve a higher quality of presentation, because products are professionally photographed, often in display settings. As a result, we can often obtain a higher price than would be possible in our shops, where space is limited for display. Conversely, we would probably be more successful selling a woollen rug in our shops, where customers could feel the quality. In a photograph it would look similar to a cotton or acrylic rug, and this might adversely affect its value. The presentation of products through packaging and display is called merchandising, and it clearly influences consumers in their buying decisions.

Value is a concept which varies according to the nature of the particular market into which a product is placed. For some, variation in a design may have value because the product is unique; for others it may imply imperfection compared to an industrial product. A specialist outlet requiring individual, culturally interesting products might accord value to an original musical instrument. For other markets its value may be low because people do not know how to play it.

The same consumer will often make two different buying decisions in two different market places. A good example is the tourist market. When people travel to a new place, they generally like to buy some souvenirs, for themselves or as gifts. They tend to shop much less carefully than they would at home, and to accept lower quality. The fact that the product is made locally is the important factor. The same product on sale in their own country would usually have less appeal. It would be more expensive because of distribution costs, and the consumer would not normally be looking for a product from a particular country. Tourist markets are generally a poor guide to buying habits in the countries from which those tourists come.

If there are rational reasons why consumers accord value to products, there are also a number of less tangible ones, such as:

distinctiveness
emulation of others
pride in their personal appearance
pride in the appearance of their property
association with social achievement
expression of artistic taste
ambition
romantic interest
maintaining health
cleanliness
proper care of their children
satisfaction of appetite
pleasing the sense of taste
securing personal comfort
alleviating laborious tasks
security from danger
pleasure of recreation

While not all of these may be applicable to handicrafts, the list serves to emphasise that consumers have a very wide variety of motivations, and accord value to products for all sorts of reasons. Large companies invest significant sums of money on research into why people buy their products. They often advertise these products in ways which create attractive ideas and images rather than tell people much about the products themselves. This understanding of consumer behaviour was well captured by the head of Revlon Inc., a North American cosmetics manufacturer, who said, 'In the factory we make cosmetics. In the store we sell hope.

It is also worth noting that people often buy things simply because they enjoy shopping! Market research in Europe has indicated that up to 25 per cent of people go shopping as a leisure activity. They may well choose to buy a product because they are just relaxed and happy.

Two aspects of the offer which cannot usually be included in a list of consumer motivations are how and where the product was made. As consumers, we know that we are not often interested in whether a product is made by hand or machine, or in which country. The only occasion on which these factors have importance is where they give additional value to the product. If hand manufacture can achieve a quality which a machine cannot, then it will have more value; if the quality is the same, the value is the same. The place of origin of a product may have value for a customer with an interest in a particular country, but most will be only concerned about quality, design, price and presentation.

There is a further factor to which markets accord value. This is the quality of service. The best offer in the world is worthless if ultimately the contract is not fulfilled. Exporters must be very clear about the expectations of customers which they themselves have created. Like the other aspects of the total offer to the customer, service is a variable. An exporter may choose to offer certain special services-for example, free samples, documents sent by courier, best quality packing materials-and recover the cost by edging prices upwards. Alternatively, cheaper but less reliable forwarding agents might be selected in order to keep the price down. Service may be the single point of differentiation between exporters who are trying to sell the same product into the same market. For example, in Kerala, in southern India, coconut matting is exported in large quantities at fixed prices set by the state government. Given that the product quality is strictly controlled, it is only in the quality of service offered to the customer that one exporter may claim superiority over others.

The combination of the various aspects of the offer-the product, its price, promotion and placing on the marke-—and the service to the customer together comprise what is called the marketing mix. The marketing process can be seen as the attempt to convert a capacity to produce into a marketing mix of the highest possible value.

3.2 Competition

In this marketing process, an exporter's offer stands alongside offers by others, with which it is in competition. Successful marketing means creating a marketing mix which is better than one's competitors. Competition can apply to all aspects of the mix: a better-designed product, a cheaper price, more effective promotion, a more receptive market place. Many handicraft exporters already know that different aspects of competitiveness appeal to different markets. In general, if selling 'downmarket', it might be worth sacrificing quality in order to achieve a cheaper price than others. Conversely, in a market particularly appreciative of high quality, it might not matter that your price is higher than your competitor, if your product is superior in finish.

Inexperienced exporters tend to focus wrongly on price as the single factor in competitiveness. In fact, it is the best value which customers seek, and in determining value they take into consideration the whole marketing mix. If this were not the case, how would anybody sell basketware from anywhere but South-East Asia, which generally has the cheapest baskets? Other countries are able to compete, not on price, but on quality and distinctiveness of design, because many customers accord value to those factors. Producers find great difficulty in appreciating how distinctive their products may be in another country, and hence what value they might have.

Promotion is another vital aspect of the marketing process. Having competitive products is not enough if you cannot bring them effectively to the customer's attention. For many would-be handicraft exporters, this is a critical weakness. They would be wise to spend more on promotion, even at the expense of price increases to cover the costs of it. Price is, after all, the easiest aspect of the marketing mix for competitors to attack. Much less easy for them to beat is your quality of production or promotion. It is certainly true that many exporters succeed with not very competitive product ranges because they promote them very effectively. Competition is intense in the handicraft trade. It comes not only from similar products elsewhere-direct competition-but also from other products which may serve the same purpose-indirect competition.

Direct competition is the easier to confront because it is more easily understood. If you are an exporter of painted papier moxes from Kashmir, it is fairly clear that you are in competition with other exporters of the same items. But you are also in competition with exporters of painted boxes from other countries, such as Thailand and Haiti. These may be made from wood or bamboo, but the finished product is very similar. A great difficulty facing exporters is how to know what other products similar to theirs are available to the customers to whom they are trying to sell. This is a strong reason in favour of making a visit to a country to which you want to export.

Products are generally valued according to the purpose for which they are made. Purpose is not to be confused with function; the purpose may be to produce something purely decorative. Objects which are not particularly functional, but have special decorative qualities, might have a very high value. The purpose of a painted Rapier mox may be said to be both functional-to contain things, and decorativeto look attractive. Its value derives from both considerations. It is worth more than an undecorated box of a similar size or than a similar piece of painted papier mhich is not a box. Of the two purposes, it is possible to have a clearer idea about the value of its function than the value of its decoration. A box of a certain size may have an approximate value in a particular market; customers might be looking for the cheapest box which is available to perform that function. It is much more difficult to estimate how much decorative qualities are worth. Clearly, an exceptionally beautifully decorated box, perhaps painted with gold leaf, is worth more than a routinely decorated one. The value of decoration ultimately depends on the price particular customers in a market place are willing to pay for it, and it is much more difficult to assess what that might be without experience.

It follows that competition is always strongest where products are valued primarily according to their function. If you offer a simple undecorated box, there will almost certainly be many other similar boxes on the market. The competition to a decorated box is less strong because the box has been differentiated from others available in the market place and has gained an additional value directly related to its decorative qualities.

Competition with handicrafts comes not only from similar products from other countries, but also directly and indirectly from industry. Direct competition occurs when manual techniques are replaced by mechanical ones: hand-looms by power-looms for example. The production of a piece of cloth by machine at a lower cost reduces the value of the similar piece made by hand. Industry also competes indirectly with handicrafts by the production of items serving a similar purpose. Many traditional crafts all over the world are being displaced by the introduction of new products made by machine. The plastic bucket which performs the same function as the ceramic pot reduces the value of the pot to less than that of the bucket, which has the additionally valued quality of being light to carry. Cheap plastic and rubber sandals have put traditional cobblers out of business, because many customers in the markets in which the shoes are sold do not accord a higher value to hand-stitched leather sandals, which cost more to produce.

The only weapon available to handicraft producers to fight industrial competition is the enhancement of value through decoration. Oxfam Trading is able to sell, for example, lampshades and picture-frames made by hand. They are more expensive than ones sold in other shops, made by machine, but they sell because our customers accord value to their decoration. It is industry's capacity to respond to people's functional requirements by producing more cheaply which obliges handicraft production increasingly to emphasise decorative qualities. It is here that distinctiveness can be created, and additional value gained. The artisan who produces purely functional items with little or no decoration will be struggling to earn a living wage.

It is because the value of handicrafts lies to a considerable degree in their decorative qualities that market research is of limited usefulness. Research can most effectively survey competition to products where value is related almost exclusively to function. Exporters of leather bags would gain little help from a survey of the British market for bags. All it would reveal is that there are many types of bags-leather, fabric, plastic and others-at all prices.

Indirect competition hits much more widely than exporters usually assume, because everything is in competition for the money which a customer is disposed to spend. Sometimes customers are quite specific in their requirements. For example, if they want to buy a cushion cover, they will not spend the money on anything else. At other times, customers are much less definite in their requirements. They may be looking for an item of clothing, but not sure whether to buy a jacket, a jumper, or a pair of shoes. Or they might want something to decorate a wall. It could be a woven tapestry, a wooden carving, a painting, or even a large basket. So a tapestry might be in competition with a basket for the same amount of money.

This sort of customer behaviour is much more pronounced when buying gifts for other people. Very often, at Christmas time for example, shoppers set out with a certain sum of money, and a list of people, but no clear ideas as to what to buy for whom. The patterns of customer behaviour at consumer level are always mirrored in the trade by the professional buyers. When Oxfam Trading is putting its range of products together, we know that we want a certain quantity of specific products-some clothing, furnishings, rugs, etc. However, we are flexible about the precise quantity and type of each; and also about what other types of products we shall include. Our final selection depends on which products we think offer the best value. If we see four good jumpers, we might buy them. If we see only two, we might buy two more items of brassware or stone carvings as well.

Competition extends very widely. Perhaps the only comfort is that not even the most detailed and expensive research will reveal it all to you. Experience and understanding are the best guides: to know not only which of your products sell well, but why. The only practical advice can be to concentrate on what you are good at, and not to lose business to competitors by a shortfall in your own marketing mix which you could very well have overcome.

3.3 Market structures

Understanding the customer's psychology increases the chances of success in marketing, but first you have to find the customer. To do this, you have to look in the right place. All markets have structures which are defined by the functions they perform in the distribution of products. So, retailing is a market structure which distributes products to consumers; whereas the function of wholesaling is to distribute them to retailers. Exporters need to understand at what level in the structure the potential customers who might actually buy from them are to be found. Otherwise, they might waste money targeting their promotion at the wrong people.

Hence, it is not an adequate marketing strategy to say, for example, 'I am going to aim for the fashion market', or 'the tourist market'. You first need to know what the point of entry is into these markets for an exporter, according to their structures.

The structures are not the same in all markets, but follow a common pattern, which has evolved in order to distribute products profitably. The total distribution chain in handicrafts starts and finishes with a single person (or family)— the producer and the consumer. For the products to be moved from producers to consumers cost-effectively, they need to be handled in large quantities. In the case of export, they also need to be shipped to the country of destination in large quantities. A lorry or a container usually costs the same to hire, whether you fill them completely or only to half capacity. A typical distribution pattern for export is therefore something like this:


Fig. 6: Distribution structure in the handicraft trade

The functions of the distributors in the producing and the selling countries are exactly inverse. The local trader is bulking up for efficient export; the retailer is breaking down for selling to the individual consumer.

Because handling adds cost, it is in the interests of both producers and consumers that the distribution chain is kept short. In the producing countries it can be reduced if the producer sells directly to the exporter. The producer and exporter are both likely to earn more if the goods do not pass through other traders. Sometimes producers can join together to form their own export organization. This might add only a small markup to cover the cost of handling and shipping the goods, leaving a greater benefit for the producer. Oxfam Trading buys from several exporting organizations which belong to the actual producers - cooperatives, associations or unions.

However, the usual situation is that the producers are not able to export directly- for lack of production capacity, organization, knowledge about procedures, working capital and contact with overseas markets. They therefore sell to traders, though, of course, they may also sell directly to the public in their domestic markets. Nor is it always only one trader who stands between the producer and exporter. The goods may be bought and sold by two or more people before they finally reach the exporter. In such cases, the remuneration to the producer is usually very low. Through working together, producers can often shorten the distribution chain, and thereby improve their earnings.

In the country of sale, variations in the length of the chain also occur. Exceptionally, a wholesaler might stand between the importer and retailer. Wholesaling as a function has lost much of its former importance. This is because retail businesses have grown bigger, and are able to buy in larger quantities. Some are big enough to act as importers themselves, so that the goods pass directly from the importer to the consumer. Oxfam Trading is one example of this shortest possible distribution structure in the country of sale.

Retailing is to be thought of as a function- that of selling to the consumer - and not necessarily as a location, i.e. a shop. There are five main types of retailing organization:

· a single shop or boutique;
· a group, which has branches of the same shop in different towns;
· a trader who sells in a street market or from stalls;
· a mail-order catalogue;
· a business which sells through local representatives, who organise informal sales in people's houses or perhaps in church halls. (This is sometimes called 'party-plan selling'.) In Britain, Traidcraft is an example of an organization which imports handicrafts and achieves a significant percentage of its sales in this way.

Mail-order is an increasingly popular way of selling handicrafts. In Europe it has about 15 per cent of the retail market, so it is still much less important than shops. The business produces a catalogue containing photographs of its product range, with descriptions, dimensions and prices. It mails the catalogue to its existing customers and other potential buyers. The customer sends an order together with the money, and the company sends the products, usually by post. Unlike the other retailing methods, there is no opportunity for the customer to see the actual product before purchasing. This consideration, and the payment in advance, seem strange to many exporters: why do consumers like to purchase by mail-order? The reasons have to do with lifestyles, and alternatives. The advantages of buying through a mail-order catalogue in Britain, for example, might be:

· Most shops close at the same time as people come out of offices, and are also closed on Sundays. Saturday is a popular shopping day, but many people work then, or are engaged in sporting or other activities.
· Women are increasingly working similar hours to men, and so also have little time to shop.
· Parking cars is difficult and expensive in town centres, where most shops are found.
· With the growth of retail groups, there are fewer small individual shops, so the consumer has less choice. Mail-order catalogues may have unusual products.
· There is very little choice available in shops to people who live some distance from towns. Oxfam Trading's catalogue, for example, is very successful in rural areas.
· People who have little mobility, perhaps because they are old or disabled, or have childcare responsibilities, find it convenient to shop from home.
· Mail-order businesses offer money-back guarantees, and accept credit cards, so that the consumer risks nothing and can defer payment.

The exporter's potential customer might be a retail group, a mail-order company, or an importer who does not sell direct to consumers. It is the capacity to import which matters to the exporter.

Knowing where to look for your customer means also going into the right trade segment. Markets define products by their purpose, not by their method of manufacture. Hence 'handicrafts' is not a marketing term. There are few importers who buy the whole range of products which are commonly offered by exporters of handicrafts, because there is such a great diversity of products. Oxfam Trading classifies its handicraft product range according to the following product types:

Product group description

Products within group



Furniture and storage

Linen baskets


Wastepaper baskets


Picnic baskets and hampers


Cabinets


Bookcases and shelves




Tables


Chairs and stools


Magazine racks


Mirrors


Trays

Household

Baskets


Bowls and dishes


Kitchen equipment


Tea towels


Aprons


Tea cosies and oven gloves


Crockery and cutlery


Dusters, brushes and brooms


Tablemats

Candles and incense

Candles


Incense


Holders

Furnishing textiles

Wallhangings


Hanging tidies


Cushion covers


Bedcovers


Floorcoverings


Table linen

Decor and ornamental

Hanging baskets


Mobiles


Boxes and containers


Figurines and carvings


Pictures


Photograph frames


Lamps

Clothing

Skirts and dresses


Trousers


Jumpers and cardigans


Blouses and shirts


Jackets


Dressing gowns


Scarves


Gloves


Hats


Belts

Accessories

Wallets and purses


Bags and luggage


Footwear


Sandals


Slippers



Jewellery

Bangles and bracelets


Necklaces and pendants


Earrings


Brooches


Rings

Toys and hobbies

Puzzles


Games


Toys


Dolls


Musical instruments

Garden

Garden clothing


Planters and vases


Garden utensils


Hammocks


Garden furniture

Stationery

Writing paper and notelets


Wrapping paper


Stationery racks


Pen trays

Greetings cards

Handmade cards


Christmas sundries


Christmas decorations


Calendars

Markets in the countries which import most handicrafts are specialized. The importer who buys basketry will probably not buy jewellery. This is because consumers want to see a good selection of the particular product which they intend to buy. People going shopping for a carpet generally go to a specialist carpet shop which will offer a large range from which to choose. The person responsible for buying for the carpet shop will need to know the carpet trade well in order to stock the shop properly. It is easier to be successful by specializing, because you can become expert at what you do, and make your selection more attractive to consumers. General importers who try to cover a very diverse product range, as Oxfam Trading does, find it extremely difficult to be knowledgeable and successful in all of it. We do it because we have a particular interest in supporting as many types of handicraft producers as possible.

Exporters of handicrafts need to identify into which trade segment their particular products fall, and then approach this at the correct distribution level. The product will be categorized by the market according to its purpose. The importers may often also trade in products within their segment which are made by machine. This would almost certainly be the case with carpets, for example.

This very practical issue of how a market place is actually organised, and hence who the potential customers are, is difficult for new exporters to research adequately. Each country will be a little different. The chances of understanding will be greater if you limit the number of countries in which you try to sell, so that you can visit each country and gradually get to know its markets better.

3.4 The costs of distribution

As products pass through the distribution chain from producer to consumer they bear costs. Consider a purchase by Oxfam Trading of alpaca sweaters from Peru. We buy from a Peruvian ATO which works with women's groups in the countryside. Between the producer and the consumer (our customer) the following costs will be added to the product:

PRODUCER'S

=PRODUCTION COST PLUS

SELLING PRICE

PROFIT



Labels and bags

Each jumper must have a sewn-in


cloth label and be sold in a plastic


bag.

Internal transport

To the exporter's warehouse in the


capital city.

Export packing

Strong quality cartons.

Export formalities

Transport to port or airport,


preparation of documents and


clearance through customs by a


forwarding agent.

Exporters charges

For services to organization of


production, quality control, packing


and undertaking export, plus profit.

Overseas transport

To country of destination.

Customs clearance

In country of destination by a


clearing agent.

Internal transport

To importer's warehouse.

Insurance

Throughout the journey.

Storage and distribution

In warehouse and to shops or


mail-order customers.

Tax

Jumpers bear 17.5% Value Added


Tax in Britain.

OXFAM TRADING'S

=PRODUCER'S SELLING PRICE

SELLING PRICE

PLUS DISTRIBUTION COSTS


PLUS PROFIT.

There could be variations in this list of distribution costs. Some countries levy taxes on exports. This would be one more cost. Most handicrafts enter Britain without being subject to duty. Some clothing items bear duty, although not usually hand-knitted jumpers. There are a considerable number of costs, and these will be applied even in the shortest distribution chain. When additional traders enter the picture, there are further handling costs and profits for the products to bear.

Who is going to bear these costs, the exporter or the importer? It is an important question, because misunderstanding often occurs in an export contract, causing an argument about whose responsibility it is to pay certain costs. The answer is that it depends on the terms of the contract. It must be made absolutely clear between exporter and importer when making a contract precisely which costs are included in the price quoted.

The distribution chart can be simplified by amalgamating certain costs, as shown in Figure 7.


Fig. 7: Export distribution

The price which an exporter quotes could be based on assuming responsibility for costs in Box 1, or 1 + 2, or 1 + 2 + 3. It would never include those in Box 4. There are terms to describe these three different ways of quoting export prices:

Product including labels, packaging and packing

=EX WORKS

Above plus internal transport and export formalities

=FREE ON BOARD (FOB)

Above plus international shippingand insurance

=COST INSURANCE FREIGHT (CIF)

(There are other possibilities, but they are not commonly used.) In the handicraft trade, the majority of prices are quoted on the basis of either ex works or FOB. This means that the importer has the responsibility to pay for the costs of international shipping and insurance.

FOB is the basis for pricing which most suits the importer. This is because the importer knows how much the product is actually costing when it leaves the country of origin. With an ex works basis of pricing, the importer can have some nasty surprises. Oxfam Trading frequently does. For example, we imported some palm leaf picnic baskets from southern India. They had to travel from the production centre inland to the port. Because they were very bulky, several lorries were required, and we collected a bill for several hundred pounds. We had not realised transport would cost so much when calculating our own selling prices, and consequently we lost money. Moreover, how could we know if the exporter negotiated the best possible rate? It is a very trusting importer who agrees to pay charges over which no control can be exercised, nor the amount be known before shipment. Few importers will therefore feel happy about ex works prices.

However, for inexperienced exporters, ex works is the most favourable basis of pricing. They know how much it costs to produce the product, but have little knowledge about the costs of local transport or export formalities. If the importer insists that they quote an FOB price, they are worried that if they underestimate the costs, the contract will be loss-making; whereas if they overestimate them, their prices may become uncompetitive.

It is advisable for exporters to move towards an FOB basis of export pricing as soon as they can. Most exporters calculate from their experience the average of the costs in Box 2 as a percentage of their sales. They then add this percentage to the ex works price. It might be that on some consignments the actual costs are higher or lower than the amount allowed, but over a period it should average out about right. If not, they need to review the percentage added in the light of the latest bills.

Many of Oxfam Trading's difficulties with exporters occur when there is misunderstanding of what the terms mean. This is why the details should always be spelt out in a new trading relationship. Many exporters have quoted us prices on an FOB basis and then sent us an invoice which adds some charges incurred in the country of origin, or the cost of sending documents by courier. FOB should mean that the importer incurs no costs until the consignment leaves the country of origin.

We once had a difficulty with an exporter in Kenya who quoted us FOB prices and subsequently sent us an invoice for local transport costs, and additional packing. When we queried it, the explanation came back that the basis of FOB was to send the goods by air freight from the capital city, Nairobi, which is inland. As we had requested sea freight, additional transport was needed to send the consignment to the port, Mombasa, and extra packing for better protection. This was reasonable enough, but we explained that the price list should then state clearly FOB Nairobi, packed for air freight, so that the customer would be prepared for the additional cost if sea freight was used.

We have had similar misunderstandings with exporters over the meaning of ex works. It is usually taken to mean that the product is labelled, packaged and packed for export, and that only the costs of internal transport and export formalities are omitted. Nevertheless, we have received bills for printing labels and even for plastic bags and packing.

In Figures 8 and 9, typical price movements are shown in the total export distribution process. It is difficult to generalise about costs of transport for handicrafts. There are very large variations according to which type of products are being exported from which country to which. Oxfam Trading's average import costs are not 23 per cent, but less than 20 per cent. Transport, however, is not the largest distribution cost; that is incurred in the country of sale. In the example given, a product landing in an importer's warehouse in Britain at £1.60 would be sold to a consumer at over £5.00, five times more than the producer received for making it, and about four times more than its FOB price. This is not untypical. As a rule of thumb, importers think in terms of FOB x 4 as the final selling price when deciding whether or not to take an interest in a product. When we make our buying decisions in Oxfam Trading, we estimate costs rather more precisely according to the actual type and origin of the product. However, if we are selecting samples while visiting an exporter, FOB x 4 is our guide. If we think the product could not sell in Britain at four times its export price, it is unlikely that we would select the sample.

The explanation for the large increase in price within the country of sale is the high cost of living there. The major costs are: rent of warehouse, rent of retail premises or publication of catalogue, fixtures and fittings, staff wages, heating and lighting, packing materials, transport, interest and promotional materials. Employers also incur costs for staff benefits, such as medical schemes and pensions. Additionally, there will be a profit for the wholesaler and retailer, and a sales tax. The costs of retailing are higher than wholesaling because distribution is in smaller quantities, so that more space and staff are required to sell the products. Where the wholesaler and retailer are the same, then the overall costs can be reduced, but not by very much. Most of the same functions still have to be performed, except wholesale selling.

In order to recover these costs, we need to add the sort of mark-up to the products we buy which is shown in Figure 9. For expensive products we may add a smaller percentage. Most handicrafts are of relatively low value, and many are of large volume. To import, store and distribute laundry baskets, for example, not only incurs high costs of transport, but also takes up a considerable amount of expensively rented warehouse space. Even on products which we can import and store cheaply, it is extremely unusual for us to sell at less than three times the FOB price.

The procedures and costs of international distribution are poorly understood by many handicraft exporters, and especially small, inexperienced businesses. But it is very important to understand them. How can you be effectively engaged in the export business, and give good service to the customer, if you do not know the procedures for making the consignment arrive safely and cost-effectively in your customer's country?

The export-import procedure, as described in Boxes 2, 3 and 4 of Figure 7 comprises:

· export formalities: the procedure by which the exporting country regulates all exports;
· international freight;
· import formalities: the procedure by which the importing country regulates all imports.

The costs of the export and import formalities are only partly related to the size and value of the consignment. There are minimum charges whatever the size. Hence the cost of these as a percentage of the consignment's value is larger for smaller consignments, and smaller for larger consignments.


Fig. 8: Composition of FOB price


Fig. 9: Price movement in international distribution

Summary

I Customers are not interested in what a product costs, but in what its value is. Value depends on the way a product is presented to a particular market. There are many different types of markets, and many different motivations for a customer to buy a product. The marketing process can be seen as realising the highest possible value out of a capacity to produce.

2 Product design, quality of production and presentation, the price of the product, its method of promotion, distribution, and the level of service to the customer are all variable factors in the marketing process. It is the way in which they are combined which defines what is called the marketing mix. All markets are competitive. Successful marketing means creating a marketing mix which is better than your competitors'.

3 Markets are structured according to the function played in the distribution chain, and the type of product being sold. An exporter must identify the correct point of entry, in order to reach a potential customer. Making a visit to the target country will greatly assist identification of who the customers might be.

4 Distribution adds cost. When countries import handicrafts, they sell them at around four times the export price, in order to recover their costs, such as shipping, rent of premises, and staff. There are standard methods of pricing for export contracts, determined by whether the exporter or importer is responsible for certain of the distribution costs.