Another Day, Another Dollar (or Euro)
You’ve done the hard work of creating a great product. You even analyzed your customers’ willingness to pay. After much research and debate, you’ve determined the best pricing strategy and have chosen a price. That’s hard enough to get right.
Now you need to price your product for international markets. That gets even more complex because of two characteristics of international business: currency fluctuations and a different willingness to pay in different regions.
Imagine that you’re able to find the optimal prices for your products in both U.S. dollars and euros. You’re cruising along happily when suddenly the exchange rate between dollars and euros changes. For example, in January 2002, a euro was worth $0.90. By the end of 2007, the value had increased 63 percent to $1.47.
Consider ACME corporation, a U.S.-based company that only makes one product and sells it for $100. They do their accounting in dollars. Their financial reports are in dollars. Actually, they think in dollars.
ACME wants to sell the same product at the same price in Europe, but now they have to think about currencies. They have two basic choices: Sell in dollars or in euros.
They could simply force all European customers to pay $100. This pushes the impact of all currency fluctuation effects onto the customers. A European would have to pay 111 euros to purchase ACME’s product in 2002 and only 68 euros in 2007 for the same item—all because of the currency fluctuation.
Beware though, ACME’s European competitors do business in euros, so their competitors’ customers are not affected by currency fluctuations. Hence, changes in relative currency valuation also change the competitive landscape.
If we truly believe in value-based pricing (which we do), then our pricing goal should be to charge what the customer is willing to pay. Willingness to pay doesn’t change just because currencies fluctuate relative to each other.
So to maximize profits, ACME would want to price its product in euros relative to the competitors there. How much more or less value does ACME’s product offer vs. competitors? That will help ACME calculate how much to charge relative to the competition.
It’s still not this simple though. ACME also has to worry about other international competitors. What if another U.S.-based company is the main competitor? Then, ACME will want to watch how that competitor does pricing and respond appropriately. If the competitor sells only in dollars, then ACME may be able to as well.
Practically speaking though, it is very challenging to manage prices in every possible currency. Many international companies choose three or four main currencies and create price lists for each of them.
The best practice is to use outside-in thinking. Put ourselves in the shoes of our customers, understand what decisions they are making and then set prices so we are more likely to win. This typically means pricing in local currency.
What Would They Pay?
One of the major headaches of international pricing is that different regions can have different willingness to pay. This can be caused by several factors, but one common reason is different competitors.
Customers in region one make a decision between you and competitor A, while those in region two choose between you and competitor B. If competitor B charges a high price, you can probably get away with a higher price in region two.
This makes sense, right up until a customer in region one buys at the low price and resells in region two. Or until customers in region two get upset when they see the prices available in region one. Or a global company has to buy at two different prices, depending on the location of the branch purchasing.
These are all challenging problems and there is no single best solution. Ideally, you charge different prices in different regions and are able to keep the offerings and even the knowledge of the offerings separated from other regions. Yet the ideal rarely works. This means you need to make a trade-off.
How much pain will leaked prices or price information cause you? If a ton, you will want to lean toward normalized pricing. If not very much, you probably want to offer differentiated pricing.
If you choose to attempt price consistency across regions, you have to put up with the aforementioned currency fluctuations. When currencies in two different regions fluctuate relative to the dollar at different rates, it will put stress on your price normalization.
If you choose to use different prices for different regions, then you need to decide who has the pricing authority within each region. Do you set all prices from a central location or do you allow the regional offices to set the prices? Usually, a hybrid structure works well with the central location having the authority and the regional group providing the local market knowledge.
One thing is certain, pricing internationally is much more complex than pricing domestically. The two biggest pricing decisions each international company needs to make are:
- Which currency should we sell in?
- Should we segment pricing based on geography?
Some of the answers to these questions are better than others. Do the research, so you can set your international prices and pricing strategies based on the landscape of where you do business.
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