Resources > Articles

Another Day, Another Dollar (or Euro)

Post Author
dollar

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.

dollar
Photo By NeONBRAND on Unsplash

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:<

  1. Which currency should we sell in?
  2. 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.

Author

Author:

Other Resources in this Series

Most Recent

Article

What is Product Management?

Product management oversees a product's development and life cycle. The ultimate goal is to create and deliver a product that meets customers' needs and generates revenue for the company.
Product Principles for 2023 and an image of a hand holding a clock
Article

6 Principles for Successful Product Management in 2023

A principle is something that guides us in how we perceive things and the decisions that we make. These principles will reduce our decision time and our decision fatigue and help us navigate any uncertainties this year will bring.
People figures with two in different colors
Article

The Ultimate Guide to Positioning

Ask five people what positioning means, and you’ll likely get five different answers. Positioning is often used in place of value proposition and vice versa (sometimes both get confused with messaging) There is agreement on one
Four blue chairs, one is yellow with text "positioning strategy"
Article

A Look at Clarity in Positioning

Positioning is a process that focuses on conveying product value to buyers, resulting in a family of documents that drives all outbound communications. The best positioning clearly states how the product will solve specific customer problems.
Person working on laptop. On the screen is assessment, analysis, progress.
Article

How to Approach Asset Assessment

This article will help you get started with asset assessment, identify file naming conventions, and help you explore some potential tools to improve your processes.

OTHER ArticleS

Article

What is Product Management?

Product management oversees a product's development and life cycle. The ultimate goal is to create and deliver a product that meets customers' needs and generates revenue for the company.
Product Principles for 2023 and an image of a hand holding a clock
Article

6 Principles for Successful Product Management in 2023

A principle is something that guides us in how we perceive things and the decisions that we make. These principles will reduce our decision time and our decision fatigue and help us navigate any uncertainties this year will bring.

Sign up to stay up to date on the latest industry best practices.

Sign up to received invites to upcoming webinars, updates on our recent podcast episodes and the latest on industry best practices.

Training on Your Schedule

Fill out the form today and our sales team will help you schedule your private Pragmatic training today.

Subscribe

Subscribe

Training on Your Schedule

Fill out the form today and our sales team will help you schedule your private Pragmatic training today.