It is technology that allows businesses to be global operators, and even the smallest business can now have clients in every time zone. Different countries and different cultures may have different preferences, however and what sells well in one place may never sell in another. While some global companies tailor different product offerings for different geographic locations, others pursue a global strategy, selling the same product worldwide. Coca-Cola and Apple use a global strategy; a Coke and an iPad are the same everywhere in the world – but not necessarily sold at the same price.
Your pricing strategy can either make or break your expansion efforts into new, global markets. One of the biggest obstacles for multinational firms to overcome is how to set fair and attainable prices across different countries and there are many different factors to consider before embarking on your targets abroad:
Drivers in International Pricing
The 4 C's
Major influences are labelled the 4 C’s:
1. Company (costs, company goals)
2. Customers (price sensitivity, segments, consumer preferences)
3. Competition (market structure and intensity of competition)
4. Channels (of distribution)
The 4 C’s can explain why both business and consumer products may vary in price depending on where they are sold. As an example, Listerine Mouthwash is priced at $4.72 in New York, $4.37 in Hong Kong, $3.60 in Seoul, $7.75 in Paris, $5.93 in London and $5.41 in Sydney.
The average price of a grande latte at Starbucks is about $2.80 in New Delhi. In Oslo, it is $9.83, according to the Starbucks Index, published by The Wall Street Journal several years ago. The Big Mac Index, published years earlier by The Economist, to compare the prices of McDonald's hamburgers worldwide, showed a similar diversity in price.
It's a fact that people in Oslo generally have more in their wallet than their counterparts in New Delhi. Of course, some experts have criticized these approaches to assessing purchasing power parity (PPP) in different locations, but the truth is, people pay widely divergent prices for the same products in different parts of the world. The reason goes beyond the fact that the costs of making and selling these products vary globally, depending on ingredients, wages, transport, shelf space etc.
Fairness and scalability
Smart entrepreneurs know that the price of a product should match the size of the customer's budget rather than the cost of the item's production. For you, there may be no difference in selling an online service in the UK versus selling the same service in Kenya - what matters is the vast differences between customers who are purchasing that same service across both countries.
This is not just a matter of fairness. It is also a question of scalability.
Do you want to trade only in the UK or European markets, when economic growth in Africa is projected to be higher, percentage-wise, in the next decade or so, than in North America? Clearly, you shouldn't ignore any emergng market where you can sell your products or services.
If you want to go global, you should consider diversified pricing. How is this done?
Research the Gross Domestic Product per country, per capita. This is not a perfect way to arrive at the right price but it is better than most. If you are selling globally, try dividing the world up into sectors with more or less equal GDP. For instance, if you are selling to or in the countries below, they can be divided up as follows
- Sector A: Hong Kong, Kuwait, Luxembourg, Norway and Switzerland
- Sector B: Australia, Germany, Sweden, United Kingdom and the United States
- Sector C: Chile, Italy, Spain Japan, Poland, Russia and South Korea
- Sector D: Bolivia, China, Egypt, Mexico, Nigeria and Thailand
- Sector E: Afghanistan, Cambodia, Ethiopia, Somalia and Yemen
and priced accordingly for each sector. It is important to note that often in a market where geographic location is close (see Europe), prices can still vary a great deal.
Most challenging International Pricing Issues
1. Export Price Escalation
There are higher risks involved in exporting goods. To make up for incremental costs, such as shipping, insurance and tariffs, foreign retail prices may often become much higher than prices in the country where production takes place. Ask yourself: will my customers pay an inflated price for our products/services? Will the price of our product allow us to compete successfully with other companies? If the answer to these questions are 'no' then consider the following two options: A) find a way to cut the export price, and B) position the product as an exclusive or premium brand (if appropriate).
Inflation rates in other countries can become a huge obstacle for multinational corporations. In places where inflation rates are rampant, setting prices and controlling costs are imperative. You could try modifying components or packaging materials, getting raw materials from low-cost suppliers, shortening credit terms, including escalator clauses in long-term contracts (used in many B2B situations), quoting prices in stable currencies and pursuing rapid inventory turnovers. If governments impose price controls, (which may accompany wage freezes), companies must also adopt other plans of action.
In these circumstances, try altering your product lines to minimise negative affects from price controls, change defined market segments, launch new products, negotiate with the government, and try to better predict when pricing controls may occur. It might be that you will choose to exit particular foreign markets when inflation or pricing controls become too costly. If, however, you can weather these challenges, you will gain a long-term competitive advantage by creating higher barriers to entry for potential new competitors.
3. Currency Movements
Exchange rates represent how much one form of currency is worth in terms of another. Political and economic conditions cause exchange rates to constantly fluctuate. When these rates are unstable, setting a price strategy that can combat these changes can be difficult. Make sure you know how much of the exchange rate gain or loss should be transferred to customers (the pass-through issue), and make clear, informed decisions on the most beneficial currency for you to use when quoting for goods or services.
4. Transfer Pricing
Another challenge facing organisations operating globally is how they handle sales transactions between related parts of the same company. Transfer pricing describes the prices charged for transactions involving the trade of raw materials, components, finished goods, or services. Transfer pricing decisions involve the need to balance the interests of a variety of stakeholders including the parent company, local country managers, host governments, domestic governments, and joint-venture partners.
Some of the factors that influence transfer pricing decisions are the following: tax regimes, local market conditions, market imperfections, joint venture partners and the morale of local country managers.
It is vital for any multinational company that their IT infrastructure supports complete transfer pricing transparency. Finance IT professionals need to involve tax department colleagues to understand any additional necessary reporting data capture as your business evolves, enters new markets, or encounters tax law changes such as country-by-country reporting.
Business planning and profitability applications now offer integrated solutions that can address complex tax and transfer pricing reporting requirements, and they provide your organisation with the confidence that it is engaging in international trade in a compliant and fair manner. IT professionals must work together within their companies to guide the implementation of integrated ERP and EPM systems.
5. Anti-dumping Laws
Dumping occurs when imports are sold at an unfair price. Recently the removal of trade barriers such as tariffs and quotas has caused countries to switch to anti-dumping regulations in order to protect their local industries. It is important for multinational corporations to take into account anti-dumping laws when they determine their global pricing policy. If firms price too aggressively, this may cause anti-dumping measures that will hurt their competitive position. Keep a close eye too on how anti-dumping laws affect competitors in your industry.
6. Price Coordination
Price coordination is the relationship that exists between prices charged in different countries. Although the laws of economics indicate that prices should vary across regions so that overall profits are maximised, the reality is not that simple. In the majority of instances, markets cannot be separated perfectly, and too much price differentiation creates grey markets - the collective system of unauthorised sales channels for products. Grey market products may be less expensive than those bought through official distribution channels but are sometimes inferior.
So, when deciding on how to coordinate your pricing strategy, consider these factors:
- The nature of your customers
- The amount of product differentiation
- Nature of your distribution channels
- Nature of you competition
- Market Integration
- Characteristics if your internal organisation
- Government regulations
Countertrade describes many unconventional trade-financing transactions that involve some form of non-cash compensation. It has become more popular recently and the most common forms of countertrade are barters, clearing arrangements, switch trading, buyback, counterpurchases and offsets.
A pricing manager can use countertrade to gain rewards when conducting business globally. Today, the biggest indirect way of exporting is by countertrade.
Using countertrade you may be able to expand your operations by trading in a market where there is less competition or where currency exchange is not possible. Countertrade can be used to stimulate home industries or where there is a shortage of raw materials. The main disadvantage of countertrade is that there is a strong possibility of handling goods that you are not familiar with – and you could potentially run into all sorts of legal difficulties and hassle.
The major downside to pursuing a global strategy is that a one-size-fits-all approach does not work in all markets - some markets have particular tastes or are more price sensitive. Moreover, a company's products invariably are more popular in one country than another country; deciding in which country a product will be popular is an issue – and not least, how to price that product to make it an affordable and lasting success.
Detailed research into your target market will ensure that you are fully conversant with the average purchasing power within your target country and are up-to-date with inflation and currency exchange rates. It's essential that you have a pricing software solution that will 'deliver' for you both nationally and internationally. You cannot afford to estimate a price incorrectly, the mistake could cost you a fortune.