USD 4.20 Target Price: Cutting Profit to Zero Is Not a Strategy
A Delhi home-textile exporter receives an enquiry from a German buyer for 2,000 quilted cushion covers, 45 × 45 cm, with an embroidered front panel and a concealed zip. The buyer's target is USD 4.20 per piece FOB Nhava Sheva. The costing assistant submits: cotton duck 240 gsm at ₹180 per metre, 44 inches wide, 1.15 m per piece including wastage; lining at ₹60 per metre, 0.90 m per piece; zip ₹12; embroidery ₹25; CMT ₹55; packing ₹8. Overheads are charged at 12% of direct cost, a rejection provision at 3% of direct cost, profit at 10% of works cost, and the buyer's agent commission at 4% of FOB. The exchange rate is ₹83 = USD 1 and freight and documentation are quoted separately. The merchandiser says a competitor has already quoted USD 4.25 and asks whether the firm should cut profit to zero to win the order. The buyer wants an answer within 48 hours.
1. Build the FOB cost sheet per piece and compare it with the target price.
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Direct cost per piece
| Element | Calculation | ₹ |
|---|---|---|
| Shell fabric | 1.15 m × 180 | 207.00 |
| Lining | 0.90 m × 60 | 54.00 |
| Zip | - | 12.00 |
| Embroidery | - | 25.00 |
| CMT | - | 55.00 |
| Packing | - | 8.00 |
| Direct total | 361.00 | |
| Rejection provision | 3% of 361 | 10.83 |
| Direct incl. rejection | 371.83 |
Build-up
- Overheads: 12% of 371.83 = 44.62
- Works cost: 371.83 + 44.62 = 416.45
- Profit: 10% of works cost = 41.65
- Ex-works / ex-factory: 458.10
- Agent commission 4% of FOB, so FOB = 458.10 ÷ 0.96 = ₹477.19
- In dollars: 477.19 ÷ 83 = USD 5.75
Comparison: target USD 4.20 = ₹348.60. The gap is USD 1.55 per piece, about 27%. The order as costed is not competitive at the buyer's price. Fabric alone is 207 ÷ 361 = 57% of direct cost, so no serious answer exists that does not touch fabric.
2. Work out what would have to be true for the firm to reach USD 4.20, and evaluate the merchandiser's 'zero profit' proposal.
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What USD 4.20 requires
- FOB target ₹348.60. Strip the 4% commission: ex-works allowed = 348.60 ÷ 1.04... more precisely 348.60 × 0.96 = ₹334.66.
- If profit is zero, works cost must fall from 416.45 to ₹334.66 - a cut of ₹81.79 (about 20%).
- Overheads must still be covered: direct cost allowed = 334.66 ÷ 1.12 = ₹298.80, against ₹371.83 today - a 20% cut in direct cost.
Where ₹73 could realistically come from
- Shell fabric 180 → 165 per metre: saves ₹17.25 (needs a volume commitment to the mill).
- Better marker: 1.15 → 1.02 m per piece: saves ₹23.40.
- Lining 60 → 45 per metre: saves ₹13.50.
- Embroidery brought in-house or simplified: ₹25 → 18: saves ₹7.00.
- Total about ₹61 - still ₹12–20 short, before any risk.
Verdict on zero profit Zero profit on this order is not a discount; it is a transfer of the firm's working capital to the buyer. It leaves nothing to absorb a rejection chargeback, a 2% rupee movement (₹1 on ₹83 is about 1.2% of price), a delay claim or a fabric price rise between quotation and shipment. It also sets a precedent: the next enquiry from the same buyer will open at USD 4.20 or lower. The competitor's USD 4.25 is not proof that the price is achievable - it may equally be a firm that has mis-costed its rejection or its overhead recovery.
3. Give the commercial recommendation you would send within 48 hours, including the price to quote and the risks you would disclose internally.
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Recommendation: counter-offer, do not capitulate.
- Quote USD 5.20–5.40 per piece FOB, at or just under the natural cost, with a clear note that the price is built on a transparent cost sheet and is valid for 30 days against a fixed rupee rate.
- Offer a value-engineered version at about USD 4.60 - laser-cut or simplified embroidery, a lighter lining, and a revised marker - so the buyer has a route down that does not destroy the margin.
- Tie price to volume and terms: USD 4.20 is only defensible at 5,000+ pieces as a repeat order with a 50% advance, a firm fabric price and the buyer accepting a defined rejection allowance. Per-piece overheads fall sharply on a larger run.
- Fix the exchange rate or add a currency clause; on thin margins the rupee is a bigger risk than the sewing floor.
- Disclose internally what the quote does not cover: rejection above 3%, embroidery delays, LC charges and any late-delivery penalty. Put those numbers in front of management so nobody later calls them a surprise.
Why this and not USD 4.20 The order is worth about USD 8,400 at target. Winning it at zero profit risks losing more than it earns on one chargeback, and it consumes capacity that a better-priced order could use. A professional buyer respects a costed 'no' more than a price that collapses on the second enquiry.