International Pricing Strategies for Small Businesses & Online Sellers
There are a lot of factors to consider with pricing, but the effectiveness of a given pricing strategy may vary in its effectiveness when selling overseas. Different markets respond differently to price, and there are even more factors to take into consideration, like exchange rates.
Price elasticity for different geographical markets
Some countries, for example, may have a preference for premium products and are not deterred by overpaying for such prestigious quality. On the other hand, some countries – usually less prosperous economies – will seek out the minimum they can pay for a product that can still “get the job done”. For example, take selling men’s wallets.
The men’s wallet market in The Netherlands may be more inclined (on average) to pay extra if they know the materials have been locally sourced and hand-stitched. In other markets, for example, China, it may be that if the wallet looks similar and imitates an expensive wallet, then this is good enough – it is now down to who can do this for the cheapest price. Furthermore, certain markets might be more concerned about its baseline functionality of “will it store all my cards,” as opposed to “what are the ethics behind the animals used in its production”, which also highlights how value differences in cultures will affect your pricing strategy.
Different Pricing Strategies
Penetration pricing is a strategy where a lower price is offered to attract new customers. The aim is to penetrate a competitive market, and this tactic is often used by new products or services. For instance, when a new coffee chain entered the market, it offered a 50% discount on its coffee for the first month to attract new customers.
Economy pricing is a volume-based strategy where a low price is set to increase revenue through high volume sales. A popular clothing retailer that sells budget-friendly clothing uses this tactic to drive sales.
Premium pricing is about charging a high price to give the impression of higher quality. A luxury car manufacturer is a classic example of this strategy. They charge premium prices for their cars and the perception is that they are of high quality.
Price skimming is a strategy where a high price is initially set and then gradually reduced over time as competitors enter the market. A popular video game developer uses this tactic when launching a new video game. They initially set a high price and then gradually decrease it as new games are launched by competitors.
Promotional pricing is a strategy where a limited-time price reduction is offered to boost sales. A popular electronics retailer uses this tactic to promote their products, such as offering discounts during special events like holiday sales.
Psychological pricing is a sales tactic that aims to create a psychological impact on consumers. A popular online marketplace uses tactics like “limited time offer” and “odd pricing” to influence customer behavior.
Versioning involves offering different versions of a product or service at different prices. A popular software company uses this tactic by offering basic, premium, and enterprise versions of their software.
Sandwich pricing involves offering three options for a product, a more expensive version with more benefits, a cheaper version with less features, and a mid-priced option. A popular furniture store uses this tactic to drive sales towards their mid-priced furniture.
Competitive pricing involves setting prices based on competitor prices. A popular sports brand uses this tactic to remain competitive in the market, as their prices remain similar to those of their competitors.
Value pricing involves setting prices based on customer value, ignoring competitor prices and costs. A popular home services company uses this strategy, as they price their services based on customer needs and preferences.
The formula for price elasticity is:
% change in the quantity demanded (divided by) % change in the price
A PED of more than 1 means it is elastic
A PED of less than 1 means it is inelastic
The elasticity of a product helps determine which pricing strategy to apply by considering how sensitive the demand for the product is to changes in price. If the demand for a product is elastic, meaning that a small change in price results in a significant change in the quantity demanded, a lower price might be appropriate (e.g. penetration pricing, economy pricing). If the demand for a product is inelastic, meaning that a change in price has little effect on the quantity demanded, a higher price might be appropriate (e.g. premium pricing, price skimming). In addition, the target market and their preferences, the presence of competitors, and the overall market conditions are also factors to consider when choosing a pricing strategy.
International Pricing for Your Product
These are the seven points to consider prior to setting up your product’s international pricing:
- Costs It is crucial to have a clear understanding of all costs related to your product or service offering, including development, manufacturing, packaging, distribution, storage, marketing, freight, taxes, and custom duties. This will help ensure that you can accurately calculate the cost of your product and set a realistic and profitable price.
- Competitors Knowing your competition is a key element in determining your pricing strategy. Understanding the competitive landscape and your brand’s positioning in relation to your competitors can help you make informed decisions about pricing. For example, if your brand is positioned as a premium product, your prices will likely be higher than those of economy brands.
- Customers Before setting your pricing strategy, it is essential to have a firm understanding of your target customers and what they are willing to pay for your product or service. This information can be gathered through market research and customer surveys. Without this knowledge, it will be challenging to set a price that is both competitive and profitable.
- Cultural differences The local culture and your target customers’ perceptions of your brand versus your competitors should also be considered when setting your pricing strategy. For example, Starbucks has deployed significant price variations due to market positioning, with higher prices in Russia, where it is positioned as a luxury coffee house, and lower prices in the US, where its target market is more cost-conscious.
- Channels of distribution The number of organizations involved in your global supply chain, such as agents, importers, wholesalers, and retailers, will impact the overall cost of your product. The more organizations involved, the higher your costs will be, and this should be taken into account when setting your pricing strategy.
- Currency rates Handling multiple currencies can be challenging, as exchange rate fluctuations can significantly impact your pricing strategy. To mitigate this risk, businesses should factor in currency rates when setting their pricing strategy.
- Government control Finally, government regulations should also be taken into consideration when setting your global pricing strategy. For example, in the UK, there is a national minimum wage law, which means that all businesses must factor in this cost when setting prices for UK workers.
Focus: Currency risk
Selling overseas often means that the currency used by the buyer will be different from your own domestic currency that is at the core of the business. Such dependence on other currencies poses a serious risk to your margins. Your pricing may need to be adjusted, or other measures need to be in place in order to hedge against a static pricing strategy.
For example, Brexit has had a massive impact on the currency rates in UK, and transferring money internationally has become a lot more expensive for UK vendors. FX risk management is necessary in such cases.
How to deal with currency risk
Price the product in the company’s domestic currency. This means that the onus is on the customer to exchange the currency when purchasing the product, and not the seller. The price increase from a currency devaluation will therefore at the expense of the customer. This is a difficult way to business, mind, as it usually requires selling the product on your own platform as opposed to Amazon or eBay. Additionally, you will not receive the benefits of currency fluctuations when it is the other way around (when your domestic currency devalues).
Opening an online sellers account in the country of business is a great way to mitigate currency risk, as well as get extremely competitive exchange rates with minimal fees for currency transfers. This way you can price your product in the overseas market at a consistent rate without the worry of currency risk. If there is a negative fluctuation in currency, you can merely keep hold of the money in the overseas account until the price amends back into your favour (if it does). Additionally, many new currency transfer firms allow you to transfer the money the same day, at a fair rate, and with no fees.
If some currencies fluctuate more than others, you can price your product higher in that market to mitigate any risks and cover potential losses.
If you allow buy-now-pay-later, then you can price this more expensively to cover to potential future currency risk. This way, customers will be more likely to pay instantly at a cheaper price. This is a great way to limit the amount of time that you spend exposed to the currency market.
Have a contact in that market
Looking to others for advice is also crucial here when entering new markets, whether it is an internet acquaintance who lives in that area, or perhaps someone you know who has previously sold in that market. This can help because they will already have a feel for the market. They may already have an understanding of the target audience and their preferences, mentality, affluency, as well as any culture differences.
For example, how much interest you charge on purchases on credit may not be Shariah-compliant, which could be very important in many middle eastern markets, for example. A trusted contact may also be able to advise on domestic companies that can be trusted.
For example, if you want to open a current account in the country you are selling to in order to benefit from currency exchange, then the contact may have some valuable advice that can save you a lot of time in research and save you from getting scammed. Additionally, they may understand how responsive and accepting the market is to premium prices, or if they are sceptical when it comes to ultra-low aggressive pricing.
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