How to Price Export Quotes: FOB, CIF, and Margin Math That Protects Your Profit

FOB vs CIF: What each price covers and how it changes your quote

Photo by Wolfgang Weiser

FOB (Free on Board) and CIF (Cost, Insurance, and Freight) are two of the most popular Incoterms (International Commercial Terms) used for ocean shipments under the latest Incoterms 2020 rules. They are foundational because they define precisely when the cost liability and, more importantly, the risk of loss or damage, transfers from the seller to the buyer.

FOB (Free on Board): The Port-Side Price

• Price Inclusion: Price includes all costs up until the goods are loaded on board the vessel at the named origin port (e.g., FOB Nhava Sheva).
• Risk Transfer: The risk passes from seller to buyer once the goods are physically **on board** the vessel. This is critical—any damage *after* loading is the buyer's responsibility.
• Seller's Responsibility: You, the seller (or exporter), handle product manufacture, export packing, pre-shipment inspection, export customs clearance, and local port handling fees (THC).
• Buyer's Responsibility: The buyer pays the main carriage ocean freight, cargo insurance, destination charges, import customs, duties, and final delivery.

CIF (Cost, Insurance, and Freight): The Convenience Price

• Price Inclusion: Price includes the FOB cost **plus** the main carriage ocean freight and mandatory minimum cargo insurance to the named destination port (e.g., CIF Rotterdam).
• Risk Transfer: Crucially, the **risk** still transfers to the buyer when the goods are loaded **on board** the vessel at the origin port, just like FOB. The seller is only paying for the *transport* and *insurance* on behalf of the buyer.
• Seller's Responsibility: All FOB responsibilities, plus contracting and paying for main carriage freight, and providing minimum insurance (Institute Cargo Clause C).
• Buyer's Responsibility: Pays destination terminal fees, import clearance, duties, VAT/GST, and final delivery.

CIF is not a door-to-door price. It ends at the destination port. Duties and import taxes are separate and depend on the **HS code** and the buyer’s market. For a comprehensive look at the shift in insurance requirements under the latest rules, refer to this Incoterms guide: Incoterms 2020 - Official ICC Rules.

When to Quote FOB vs CIF to Win the Deal

Choosing the right term depends on your buyer's experience and the current market volatility:

• Quote FOB when buyers have strong freight forwarders, want control over transit, or are facing high volatility in origin terminal handling charges (THC). This is often preferred by experienced, large-volume importers.
• Quote CIF when buyers want convenience, are new to shipping, or when you can secure better, more stable long-term freight rates than they can (crucial during periods like the Q2 2025 freight spikes caused by geopolitical rerouting). CIF makes your product look cheaper on the initial price sheet.

Origin Costs You Must Not Miss in FOB (The Hidden Profit Killers)

This is where many exporters, especially those new to large-scale operations, lose money. Every single fee, even if small, must be allocated to the Cost of Goods Sold (COGS) to ensure your FOB price is truly profitable. This is especially true for Indian exporters dealing with multiple documentation requirements.

• Manufacturing/Ex-Works Cost: Raw materials, labor, overhead, and initial factory margin.
• Export Packing: Inner boxes, master cartons, labels, strapping, and the cost of **export-grade pallets** (if applicable).
• Compliance/Regulatory Fees: **Export customs clearance** (broker fees), ISF filing (if shipping to the US), and necessary phytosanitary/fumigation certificates.
• Inland Logistics: Local trucking/haulage from your factory/warehouse to the **Container Freight Station (CFS)** or **Port/Airport Terminal**.
• Origin Terminal Handling (THC): Fees charged by the port/carrier for lifting and stacking the container before loading.
• Documentation & Certificates: Cost of **Certificate of Origin (COO)**, bill of lading (B/L) fees, and bank charges for payment processing (LC negotiation fees, wire fees).

Margin Math Made Simple: From Base Cost to Target Profit

You make money on the spread between cost and selling price. The key is to price using a target profit **margin**, not a random **markup**. Using the margin formula ensures that your profit is a locked percentage of the selling price, making performance tracking simple.

Cost of Goods Sold (COGS) vs. Total Export Cost

The COGS is often just the factory-gate price. The **Total Export Cost** is the sum of COGS and all the *variable* and *fixed* fees required to get the goods to the Incoterm point (e.g., loaded on the ship for FOB).

• Variable Costs (per unit): Product Cost, Packaging materials, Inland Freight, Commission (if applicable).
• Fixed Costs (per shipment, allocated to units): Export Documentation fees, THC (Terminal Handling Charge), Customs Brokerage. These must be divided by the total number of units in the shipment to get a "per unit" cost.

The Crucial Difference: Margin vs. Markup

This distinction is the single most common error in export pricing. You must use the margin calculation to ensure you hit your profit targets. For more clarity on why margin protects your percentage better, check this external resource: Margin vs Markup Calculator & Guide.

• Markup Formula: $$\text{Markup} = \frac{\text{Selling Price} - \text{Cost}}{\text{Cost}}$$ (Example: Cost \$10, Markup 25%. Sell \$12.50. Profit \$2.50.)
• Margin Formula: $$\text{Margin} = \frac{\text{Selling Price} - \text{Cost}}{\text{Selling Price}}$$ (Example: Selling Price \$10, Margin 25%. Profit \$2.50.)

Key Pricing Formula: Lock in Your Selling Price

To ensure your quoted price delivers the target margin, use this formula:

Example: If your **Total Export Cost** is \$9.48, and your target margin is 25% (or 0.25):

FOB Price Worksheet: A Detailed Worked Example

Let's aggregate costs for a shipment of 5,000 units, focusing on per-unit allocation:

Cost Item	Total Fixed Cost (for 5000 units)	Variable Cost (Per Unit)	Allocated Unit Cost
Product Ex-Works (COGS)	N/A	8.50	8.50
Packing/Materials	N/A	0.35	0.35
Inland Haulage to Port	1,000.00	N/A	0.20
Export Clearance/Docs Fee	500.00	N/A	0.10
Terminal Handling Charge (THC)	900.00	N/A	0.18
Bank Fees/Other Admin	250.00	N/A	0.05
TOTAL EXPORT COST (FOB BASE)	2,650.00	8.85	9.38

Final FOB Calculation & Rounding

• Total Export Cost per unit: \$9.38
• Target Margin: 30% (0.30)
• Calculated Price: $$\text{FOB Price} = \frac{9.38}{1 - 0.30} = \frac{9.38}{0.70} = \$13.40$$
• Rounded Price: \$13.40 per unit.

Avoiding Costly Mistakes and Adding Smart Buffers

Profit protection requires foresight:

1. Currency Hedging: If you buy materials in INR but quote in USD, add a buffer (1-3%) for currency volatility between the quote date and the payment date.
2. Quality & Waste Allowance: For goods prone to damage (e.g., fragile electronics or perishable commodities), build a small "claim allowance" into your base cost (e.g., 0.5% of COGS).
3. Validity Period: In current volatile markets (like the Q2 2025 freight spikes we've seen), limit the quote validity to 7 days, especially for CIF quotes, and state this clearly: "Quote valid for 7 calendar days."

For professional assistance in structuring your cost sheet and navigating trade policies, check out our services: Perumala Overseas Services.

Convert FOB to CIF Without Guesswork: Freight, Insurance, and Risk

To move from FOB to CIF, you must add the main carriage costs. In a time of massive rate fluctuation and geopolitical risks (like the Red Sea rerouting increasing transit times and costs), accurate freight inclusion is essential.

Get a Freight Quote You Can Trust (The Surcharge Reality)

Your freight forwarder’s quote is not just a single number; it's a base rate plus a cocktail of variable surcharges. You must know these to protect your CIF quote:

• Base Ocean Freight (O/F): The core rate for moving the container.
• BAF (Bunker Adjustment Factor): A fuel surcharge, highly volatile based on global oil prices.
• CAF (Currency Adjustment Factor): Compensates the carrier for currency fluctuations.
• ISPS (International Ship and Port Facility Security): Security fee, often fixed.
• PSS (Peak Season Surcharge): Applied during peak shipping times (e.g., pre-Lunar New Year or Q3 retail build-up).
• Contingency Surcharges: Current factors like the **Red Sea Surcharge** can add significant, unexpected costs. Always confirm if these are included and their validity.

Ask your forwarder for a **"Freight All Kinds (FAK)"** rate that explicitly lists the base rate and all current surcharges, allowing you to quickly calculate the total freight cost per unit.

Add Insurance the Right Way (Incoterms 2020 Compliance)

CIF requires the seller to provide minimum insurance cover. Under **Incoterms 2020**, this default minimum is defined by the Institute Cargo Clauses (C), which covers only major hazards like stranding, sinking, or fire—not all risks.

The 110% Rule

The insured value must be at least 110 percent of the contract value (FOB + Freight). This extra 10% covers the buyer's anticipated costs, duties, and expected profit margin.

1. CIF_no_ins: Calculate the base cost without insurance: $$\text{CIF}_{\text{no\_ins}} = \text{FOB Price} + \text{Total Freight Cost per Unit}$$
2. Insurance Value: Calculate the required insured value: $$\text{Insured Value} = 1.10 \times \text{CIF}_{\text{no\_ins}}$$
3. Insurance Premium: Calculate the premium based on your rate (typically 0.15% to 0.5%): $$\text{Insurance Premium} = \text{Insurance Rate} \times \text{Insured Value}$$
4. Final CIF Price: Add the premium to the base cost: $$\text{CIF Price} = \text{CIF}_{\text{no\_ins}} + \text{Insurance Premium}$$

Use HS Code to Guide Buyers on Landed Cost

The HS Code (Harmonized System Code) is a standardized 6-digit number used globally to classify products. This code is the foundation of global trade because it determines two things: the duty rate in the destination country, and whether the goods qualify for preferential duty rates under Free Trade Agreements (FTAs).

Why the HS Code is Your Best Sales Tool

By providing the 6-digit HS code (and confirming the destination country's 8- or 10-digit extension), you empower the buyer to calculate their total **Landed Cost** (CIF + Import Fees + Local Delivery). This transparency builds trust and speeds up the sale.

• Duty Calculation: The buyer's customs authority applies the tariff rate (e.g., 5% or 10%) to the CIF value to determine the duty payable.
• FTA Advantage: If India has a Free Trade Agreement (FTA) with the buyer's country, the HS code determines if your product qualifies for a zero or reduced duty rate, making your product significantly more competitive.
• Compliance Check: Incorrect HS codes lead to customs delays, fines, and reclassification, which can destroy the buyer's confidence. Always double-check your classification.

HS Code Resources for Indian Exporters

For domestic classification and trade compliance, Indian exporters should regularly consult the official CBIC (Central Board of Indirect Taxes & Customs) portal. For finding global tariffs, use the WCO’s structure as a base:

• Indian Customs (ICEGATE): Use the **Know Your Import Duty Enquiry System** on the ICEGATE portal to understand local duties and classification (This helps if you are also importing).
• Global Lookup: You can use free resources to look up the 6-digit HS code based on a description: GlobalPost HS Classification Tool.
• Trade Agreements: Consult the terms of FTAs (like India-ASEAN or India-Japan) relevant to your product's HS code to offer competitive duty advantages.

CIF Example with Current Market Numbers

Using our calculated FOB price of \$13.40 per unit (for a 5,000 unit shipment):

• Start with FOB price: \$13.40 per unit.
• Total Freight Quote (including BAF/PSS/Surcharges): \$6,000 for the container.
• Total Freight Cost per Unit: $$\frac{6000}{5000} = \$1.20 \text{ per unit.}$$
• Insurance Rate: 0.30 percent (Clause C cover).

1. Step 1 (CIF_no_ins): $$\$13.40 + \$1.20 = \$14.60$$
2. Step 2 (Insured Value): $$\$14.60 \times 1.10 = \$16.06$$
3. Step 3 (Insurance Premium): $$\$16.06 \times 0.003 = \$0.048 \text{ (approx } \$0.05 \text{)}$$
4. Step 4 (Final CIF Price): $$\$14.60 + \$0.05 = \$14.65 \text{ per unit.}$$

Final Quote Note: CIF Rotterdam \$14.65 per unit, Incoterms 2020. Freight and Insurance component valid for 7 days due to market volatility.

Conclusion: Lock In Your Profit, Today

Price with a steady method, not with a guess. The global trade environment is defined by complexity—from the changing Incoterms 2020 rules (like the DPU and CIF insurance mandates) to the rising geopolitical surcharges dominating ocean freight rates in late 2025.

For Perumala Overseas, or any ambitious exporter, defining FOB vs CIF clearly, building a full base cost (COGS plus all export fees), and applying the margin formula consistently is the only way to guarantee profitability. By converting FOB to CIF with transparent freight and insurance additions, and keeping the HS code front and center, you not only quote accurately but also establish yourself as a knowledgeable and trustworthy partner.

Your Immediate Action Checklist

• Create a Dynamic Cost Sheet: Migrate your pricing logic to a spreadsheet that dynamically calculates per-unit cost based on shipment volume (allocating fixed costs).
• Verify Target Margins: Ensure all pricing uses the **Margin Formula** to meet your 25% or 30% profit targets, avoiding the confusion of markup.
• Shorten Validity: Update your CIF quotes monthly, or even weekly, to reflect current BAF, PSS, and contingency surcharges.
• Leverage HS Code: Use your product's 6-digit HS code in every quote note to initiate conversations about the buyer’s duty savings (FTA benefits).

Ready to refine your export strategy and ensure every deal is profitable? Start your worksheet today. We are here to help you navigate the complexities of documentation and global trade compliance.