A pricing strategy can either make or break your business. Even online sellers need to follow a system when setting the prices of their products and services because this determines profit and revenue. Can you tolerate being a lowballer and setting prices lower than the rest to stay competitive and get noticed? Or would you rather set your prices higher for better financial returns but risk losing customers?
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 lowest 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.
Price elasticity formula
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.
Different Pricing Strategies
1. Value-Based Pricing
The principle of value-based or premium-based pricing is that you have an estimate of the fair value of your product or service. Small business owners and online sellers always base their pricing on their clients’ willingness to purchase their products.
With value pricing, you have to focus on letting your customers know the value of your offering to ensure they understand the fairness and quality of your price tag. Your products may cost more because they are premium, naturally sourced, or eco-friendly. Companies usually opt for this if they have minimal to zero competition.
- This applies to all products and services because everything has its perceived value.
- Provides owners with a better understanding of their products’ worth.
- Allows the opportunity to introduce one product or service at a time.
- It is more of a trial-and-error pricing strategy until you get it right.
- The forecasted value of your goods and services may abruptly change.
2. Cost-Plus Pricing
With this strategy, you identify the selling price of your products by getting the unit cost and then adding a markup. Your objective when adopting this strategy is ensuring that the final price gives you some profit. At the same time, it will also cover all additional costs associated with the product, like shipping, taxes, and labor, to name a few.
Adding a percentage to the unit cost is one of the most commonly applied pricing strategies, especially for small businesses and online sellers, because it is straightforward and practical. Most of the time, entrepreneurs start with a minimum markup of 50%.
- This easy pricing strategy will cover your unit cost per sale.
- It is flexible, and you can lower the markup percentage once you have a steady demand for your products, as you can do bulk shipping or avail of wholesale prices.
- Inaccurate calculations can cause you to lose money, especially if you missed considering all expenses that went into your product.
- The flexibility is a double-edged sword because you have to continue increasing your selling price when there’s low demand and the cost of raw materials increases.
3. Price Skimming
Price skimming in pricing strategy is the practice of setting your price higher at the onset and then gradually lowering it as new players and products enter the marketplace.
Most tech companies adopt this strategy, where the product becomes obsolete so that the newer version of the same product becomes the competition. This causes the original one to decrease in value.
For instance, the price of the iPhone 13 Pro Max when it was released was ~$1,600, but less than two years later, its retail price is now ~$1,400 because there’s a newer model, the iPhone 14 Pro New.
Smaller businesses and online sellers would equate this to winter wear and holiday decorations going on sale or being sold at lower prices during off-seasons only to increase in value again by mid-November.
- Online sellers can use new products to generate hype and revenue.
- This is a win for bigger businesses that can still profit from newer products being released, not for small-scale firms or online sellers that need a quick investment return before getting a new batch of products.
- Products are sold for an extended period, so owners lower the original price, reducing the revenue.
4. Competitive Pricing
A common strategy that small businesses and online sellers employ is to base their prices on those of fellow sellers or entrepreneurs selling and offering the same goods and services.
You can price it the same as your competition or higher with an additional marketing strategy of freebies or coupons after a specific number of purchases from your business or even offer free shipping. Or you can lower your price without giving away your products and services for free.
- With your competitive pricing, you can quickly expand your client database and gain loyal consumers, and once you have that steady flow, you can get your prices at par with the competition.
- After several weeks or months of selling goods at a lower price, you can seamlessly go up the ladder, meaning selling the same merchandise at the same cost as your competition.
- Lowering your prices too much while being compared to other businesses offering the same products can cause questions about your products’ quality and authenticity.
- This can be a race to losses and a price war that doesn’t benefit competing businesses.
5. Penetration Pricing
Penetration pricing is another strategy that most small businesses and online sellers risk employing. This is when you set your prices low, making it affordable as you enter the marketplace.
This will help create noise for you and get people to notice your products and services. And once the recommendations and positive feedback come soaring in, you pick the most suitable time to raise your price, which is what it is actually supposed to be.
- You attract potential customers and buyers.
- The business becomes associated with the “more affordable” or cheaper option.
- Possible loss of clients after the price hike.
- Low return on investment during the penetration phase, with the uncertainty that you can recover when you set your price higher.
6. Dynamic Pricing
Flexibility is the critical element of dynamic pricing, meaning all your prices can change anytime. Often called surge pricing, companies use this strategy when something huge is about to happen. Small businesses and online sellers bank on these upcoming events to sell their goods and services.
For example, Coachella is happening next month, so festival goers plan their OOTDs as early as now. Small businesses that trade in body bags and pouches and online sellers of bling and accessories can bank on this and increase the price of their goods until the start of the festival.
- You can increase your price anytime to increase profit or lower it and balance profit.
- It can easily be implemented with another pricing strategy.
- It is a short-term retail success.
- Consumers who understand your pattern will wait until you decrease your prices.
- Too much price fluctuation can cause your clients to lose confidence in you.
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 clearly understand 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, setting a competitive and profitable price will be challenging.
- 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, which should be considered 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, there is a national minimum wage law in the UK, 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, which 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 the 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 the onus is on the customer to exchange the currency when purchasing the product, not the seller. The price increase from a currency devaluation will, therefore, be at the customer’s expense. This is a difficult way to do 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 seller’s account in the country of business is a great way to mitigate currency risk and get extremely competitive exchange rates with minimal fees for currency transfers. This way, you can consistently price your product in the overseas market without worrying about currency risk. If there is a negative currency fluctuation, you can 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 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 potential future currency risk. This way, customers will be more likely to pay instantly at a lower 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 when entering new markets, whether it is an internet acquaintance who lives in that area or 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 understand the target audience and their preferences, mentality, affluence, and any cultural 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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