There are a number of challenges when it comes to pricing your products for international markets.
Companies making everything from air-fryers to software fail to consider how the quirks of the target international market will affect price – they just go with the same pricing strategy they use at home.
Many teams are also in the dark when it comes to the mechanics of building a product price for international markets, so they just take their domestic price and stick a margin on top.
And then there are those people who just go on guesswork – they pick a number out of the air and hope for the best.
If you approach pricing for international markets like this, there’s a real risk that you don’t make sales….or that you do make sales but don’t make money.
Thankfully, there is a better way and in this blog I want to give you three keys to success when it comes to pricing for overseas markets.
1. Understand your options
If you want to create a great pricing strategy for international markets, you need to know what your options are. Broadly speaking, there are three ways that you can price your products.Cost-plus pricing
Cost-plus pricing is the most basic form of pricing – it’s essentially selling something for what it costs to produce, plus a margin for profit.Competitor-based pricing
Another way to price is competitor-based pricing, you look at what competitors are charging and base your price on their price.Value-based pricing
A third option is value-based pricing, where you set your price according to how much value people in the target market are willing to pay.
2. Know how to build a price
The second key to success is understanding how to go about building your price for international markets. Here’s some colour on three of the pricing methods that I just mentioned, to help you understand how and where to use each one as you put together your international pricing structure.
Cost-plus pricing: how it works
I like to look at cost-plus pricing as the first step in the international pricing process, because you have to make sure that you cover your costs when you sell.
Add your fixed and variable costs to your direct export costs (packaging, transportation) and selling costs. Then add a profit margin on top to represent the value you are giving your customers.
You should be recovering all the direct costs of sale associated with selling your product overseas – transport, duties, marketing, sales reps, etc. It’s also important to understand what other indirect costs and fixed costs are involved in selling your product, so that you know what the true cost to sell is, and how much of that you need to recover each time you make an international sale.
Cost-plus pricing: pros and cons
- It’s simple. As long as you know how much your costs are, it’s easy to work out your price. No market research, no data analysis, no strategising. Just some addition and percentages.
- You will cover your costs. As this is cost-plus pricing, you know that you will be adding a certain margin on top of your costs as pure profit.
Taking those advantages at face value, cost-plus pricing seems like a great idea and certainly a good starting point, with little overhead and definite profits. But again, the approach has some drawbacks.
You won’t know all your costs. In international markets you won’t necessarily know all your costs, and therefore can’t know if you’re going to cover your costs.
For example, if you’re a Saas provider, your initial costs might include only hosting and some development, but as you grow you’ll have to factor in extra developers, sales, marketing, offices overseas, licensing, legal fees and a number of other previously unknown costs.
Also, costs fluctuate over time. Most businesses can’t constantly change the price of the product to maintain the same margin. That might work for a gas station, but it won’t work for a SaaS company. Profits will take a hit.
Customers don’t care about cost – they care about value. The big drawback of cost-plus pricing is that for many products, especially premium ones, customers don’t care about your costs, they care about value.
You have no idea how much it costs for Penfolds to make your Shiraz. You have no idea how much it costs for Audi to make your Q3. The price of these items is tied to the value they represent to you, not their internal cost. Sure, Penfolds and Audi are pricing their products over what it costs to make them, otherwise they’d be in trouble, but how much over is not determined by the cost of the grapes or the engine parts.
For many products, the unit cost of delivering one account or one item can be very low. It is the value that your customers will get out of using your product that really matters to them, not how much you paid to transport your jar of honey or what salary you gave your developers.
Cost plus pricing is a good start, but it’s not enough.
Competitor-based pricing: how it works
Competitor-based pricing: pros and cons
Competitor-based pricing definitely has its upsides.
It’s easy. By spending 30 minutes on competitors’ sites finding all their pricing information you can have a “pricing strategy.” It’s also unlikely to go wrong. By placing yourself in the middle of the pack, you’ll be anchoring yourself for any future customers and they won’t think your product is too cheap or too expensive.
It might be close. If you’re in a competitive market, pricing for the companies involved should be close to what the market can reasonably sustain.
However, there are downsides too.
Your competitor’s price reflects their cost base, not yours. Without knowing how similar the competitor’s cost base is to your own, you can’t know whether you can sell competitively using the same pricing.
You don’t have your pricing strategy, you have your competitor’s pricing strategy. Your company exists to offer customers something different to what is already on the market. You are offering more value and a better product, otherwise you shouldn’t be selling it in that market. So you need your own pricing strategy which reflects that value.
Customers don’t care about your competitors, they care about you. The big problem with using only competitor-based pricing is that it misses the point for your customers. Instead of focusing on what you can give them and how you can put together the right features and benefits for them at the right price, you are offering them something that they could literally get elsewhere.
Value-based pricing: how it works
Value-based pricing is basing a product or service’s price on how much the target consumers believes it is worth.
This could easily be called “Customer-based Pricing” because that is effectively what it is. Instead of looking inwardly at your own company, or laterally towards your competitors, with value-based pricing you look outward.
You look for pricing information from the people who are going to make a decision depending on your price: your customers.
Value-based pricing: pros and cons
There are some definite upsides to the value-based pricing.
Willingness to pay. You base the price on the value potential customers see in your product. You need to know what customers will actually pay for your product. Competitor-based pricing does this in a roundabout way. If customers are willing to pay $100 for your competitor’s product, then they must be willing to pay $100 for your product as well. But this misses the fundamental point that your product should be different to your competitors. It should offer more value, and therefore be priced differently.
Build the best product. Value-based pricing has the potential to help you build the best product. That’s because pricing isn’t just about the number on the page, it is about how you package and offer your selection of products and features, and to whom. This approach to pricing will help you understand what your customers truly want, and what features should be developed over time. Once you have developed your minimal viable product, your features and product updates should be driven by consumer demand.
You get to know your customers. By placing a premium on the opinions of your customers, you are focusing on the people who will be making the buying decisions. They are the ones that will eventually be deciding whether your pricing and packaging is correct. If not, they won’t be buying. And now, the downsides.
It takes some work. Without a doubt, value-based pricing takes more time and energy than the other pricing methods, because it’s more involved. To do value-based pricing effectively, you have to be dedicated to finding out about your customers and your product.
It’s also not 100% reliable. With price sensitivity measurements and feature analysis you are only going to get approximations of the right pricing, packaging, and positioning for your product. The good news is that this is still much closer to the truth than using just costs or competitors to set your price. It’s also based on your product and your value, so it gives a much more truthful representation of where your pricing should be set.
Each of the pricing strategies I’ve just talked has its place in business. You get the most clarity on how to price for international markets when you use a combination of all three.