Join Doug Ladd for an in-depth discussion in this video Pricing considerations . . . the impact of currency fluctuations, part of Marketing Foundations: International Marketing.
- What is the real price a customer pays for your product or service? In reality it's more than just the price you place on the package, or the negotiated value the sales person reaches with the buyer. The real price the consumer pays is higher when you factor in the expense they bear to transport the product from the store to the home, the switching costs they incur to move to your product from that offer by another company, the transaction costs, and the taxes to buy your product. As you move into new geographies these costs, and thus the end price of your product may be dramatically different than they are in your home market.
When you begin your pricing strategy work, you will need to factor these issues into your thinking. Imagine you've designed and built a new rechargeable headset using wireless technology that's not only fashionable but durable, and you sell it for $90. If you're selling it online in the US today the customers outside of your home state are not paying any sales tax, but you do charge them a modest shipping fee of $10, so most of your customers are getting your product for $100. Some potential customers in Europe have come across your headset while surfing the web, and they want to buy it too.
They're currently buying something similar in retail stores, but you've learned that in order to sell your headset in Europe you must get a CE mark, and be registered to do business within the EU even if you're selling it via the web. As you're looking at your pricing strategy, you see there are some competitors in the EU at about €100, how are you going to determine the price you should offer for your headset in the EU? Well, let's go down the list. Shipping your product to Europe will cost a little more than shipping it to someone in the states, so your customer in Europe will pay $15 as opposed to $10.
In terms of switching costs the electrical outlets in Europe are different, and your customers there will need to buy an adapter. The one they may be using currently won't work, so that's another $5. Europe transaction costs can be the same, you accept credit cards, but in some countries people get paid a daily wage, and don't have access to credit. You'll need to consider this as you expand beyond Europe. Which brings us to the taxes, most countries within the EU have a value added tax or VAT, and the level for this category of products is 20 percent.
We add all this up and see that your end price into the market is going to be $105 + $15 + $21 for a total of $141, but the competitors are €100 how will you compete? Don't forget, the customer will have to pay that same 20 percent tax even if their shipping and switching costs are zero. They'll be at €120, and the euro and dollar are not equivalent. Due to the currency exchange rate a euro has more purchasing power than a dollar, so $141 is about the same as €115.
Your product will actually be less expensive to the customer in Europe than the product they are buying today. Determining your pricing strategy and end user price point as you expand internationally requires a little math, so factoring in the expenses other than just the product price is an important step to ensure your setting your price properly. Finally, paying attention to the exchange rate between currency and your home market in the new country is a critical step. Keep in mind you may want to use different pricing strategies when you enter new markets.
In some instances you may choose to take a lower net margin by going into a market at a lower price in order to gain market share. However, be cautious and pay attention to the differentials between the market price in your home market and the market entry prices in these new markets. There are many savvy middlemen out there who buy product in low price markets, and then ship them to higher price markets to make a few percentage points of profit. If you see your product being sold on the web in your home market by someone other than you, this is a good indicator someone is taking advantage of your pricing strategy in other parts of the world.
The course also investigates options for global expansion, such as exporting, licensing, joint ventures, and direct investment, and details how to put together a successful marketing mix using distribution, promotional methods, and translation. Plus, learn where to turn for more information about your specific target markets.
- The rise of the global consumer
- Learning about customers in global markets
- Accessing foreign markets
- Adapting products
- Balancing risks and rewards