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.
How to calculate
This may mean some markets aren’t worth exploring, but that isn’t the only point of this. It is also a way to figure out what markets you can raise your prices, whilst still retaining sales. Price elasticity means how responsive are sales to a change in the price of a good. The formula 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
An elastic product means the fall in demand will be greater than the rise in price. In other worse, the sales revenue will decrease if you increase the price in this market.
Selling overseas often means that the currency used by the buyer will be different to your own domestic currency that is at the core of the business. Such a 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 still looms for the UK, with hardline Brexiteer Boris Johnson as the new prime minister. Such a scenario like a no deal could see the Pound Sterling crash. This means that seller’s from other countries will take a hit on their profit margin on their sales to UK customers. If you sell a $100 computer chair to a UK customer, it will cost them about £78 today. A crash in the Pound though would mean that the chair priced at £78 now converts back to only $90. This is a 10% reduction in revenue, and likely over 50% reduction in the profit margin.
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 the 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 skeptical when it comes to ultra-low aggressive pricing.