You may have products you’re proud of and a marketing strategy to match, but if you don’t enter a market at the right price, your ecommerce business could find itself in trouble—and fast.
Getting it right—and doing so across a world made up of unique markets—requires a carefully considered approach. In this guide to global pricing strategies for ecommerce, we cover how to go international and maximize profits while striking the right balance between economics, psychology, and an understanding of your target market.
The Keys to Setting an Ecommerce Pricing Strategy
Diving into the international ecommerce arena requires businesses to tailor their pricing strategies meticulously. While the right product or service is always essential, the way it’s priced can significantly impact its success across various global markets, each with its own particulars.
Setting that price is a complex undertaking that’s ultimately unique to each individual product, business, and market. However, as you look to build a successful global pricing strategy for a given offering, there will always be certain factors you must take into account. Dr. Chris D’Souza of CMA Australia has presented a simple and memorable overview of these factors, which he’s termed the “7 C’s of International Pricing:”
- Cost: Before setting a price, understand the total cost of producing, marketing, and delivering your product. This includes manufacturing costs, overheads, and marketing expenses.
- Competitors: Researching what competitors are charging and understanding the value they offer is crucial. Prices might need to be adjusted based on competitive dynamics in different markets.
- Customers: Understand the purchasing power and willingness to pay in various markets. Some regions might value your product more and be willing to pay a premium, while others may not.
- Cultural Differences: Different cultures perceive value differently. Selling your products globally, you need to account for this in your pricing. Some regions may value certain features or benefits more than others, affecting what they’re willing to pay.
- Channels of Distribution: Depending on whether you’re selling direct-to-consumer, through local retailers, or other channels, your pricing strategy will need to adapt.
- Currency Rates: Fluctuating exchange rates can greatly affect the profitability of products sold internationally. Regularly review and adjust pricing to account for these changes.
- Control by Government: Certain markets might have regulations, tariffs, or taxes that could influence pricing. Be aware of these and adjust your pricing strategy accordingly. These factors can also affect your shipping strategy, including whether to ship locally or cross-border, and influence your overall logistics approach.
Global Pricing Strategies for International Ecommerce
The factors covered in the framework above will play a role in any global pricing strategy. Yet each of them is dynamic and will factor differently within an organization’s given strategy.
Following is a deeper look into various pricing strategies and how they function in an international context.
This is one of the more straightforward pricing strategies, where the price is determined by adding a fixed margin or percentage to the total cost of producing and selling the product.
The total cost includes both variable costs, like materials and labor, and fixed costs, such as overhead and rent. By ensuring the selling price always covers the cost plus a predetermined profit margin, businesses can maintain consistent profitability. In an international ecommerce context, it’s vital to factor in additional costs that may arise due to international shipping, tariffs, and other region-specific expenses.
While cost-based pricing provides a safety net of built-in profitability, it doesn’t always account for customer willingness to pay or competitive dynamics, making it less flexible than some other strategies.
At its core, and in contrast to cost-based pricing strategies, value-based pricing is centered around the perceived value of the product in a specific market rather than its actual production cost. This approach is about understanding how much a consumer is willing to pay for the benefits, emotional connection, and solutions the product provides.
By tapping into the local value system and understanding the unique pain points or aspirations of the consumers, businesses can set a price that resonates with them. This approach, however, requires deep market research and a finger on the pulse of local consumer sentiment—something that can present an added challenge when entering a new international market.
This strategy involves initially setting a high price for a new product and then gradually lowering it over time. It’s especially effective for novel or innovative products where early adopters are willing to pay a premium to be the first to have it. The idea is to maximize profits from the segment willing to pay more before making the product more accessible to a broader audience.
While this strategy can be highly lucrative, it requires a strong brand presence and clear communication to ensure consumers understand the value proposition, especially in foreign markets where the product might be new.
Penetration pricing takes a virtually opposite approach to price skimming. Here, products are priced lower than the competition initially to quickly penetrate the market and gain a significant share. Once a foothold is established and brand loyalty is cultivated, prices can be increased.
In international markets, this strategy can be beneficial when trying to establish a brand name or when competing with well-established local brands. However, businesses need to ensure they can sustain the lower prices without incurring losses and have a clear plan for transitioning to regular prices.
Economy pricing is a volume-driven strategy where products are offered at the lowest possible price point. The profit margins are typically slim, but the high sales volume compensates for it.
When applied to international markets, it’s essential to understand the cost structures thoroughly, as factors like shipping, taxes, and import duties can affect profitability. Brands that can achieve economies of scale and operate efficiently can benefit immensely from this approach, especially in price-sensitive markets.
Premium pricing is reserved for products that can reasonably boast exclusivity, superior quality, or a unique value proposition. The high price serves as a testament to the product’s superior offering.
In international markets, this strategy can be employed by luxury brands or for niche products, but it’s crucial to ensure that the target market understands and appreciates the product’s unique value. Thorough market research, coupled with strong branding and marketing, is essential to justify the higher price point.
This dynamic approach seeks to adjust prices based on market demand. Prices might increase during high-demand periods or decrease during lulls.
With today’s technology, businesses can employ algorithms and real-time data analysis to adjust prices dynamically. However, when employing this technology in international markets, it’s vital to have an understanding of local demand cycles, holidays, peak shopping seasons, and even cultural events that might influence demand.
The Price Doesn’t Just Need to Be Right, It Needs to Be Local
Global doesn’t mean generic. Each market has its own nuances, and as we’ve covered, pricing should reflect that.
Price localization isn’t just about currency conversion, though. It’s about understanding local economic conditions, competitive landscapes, cultural values, and more.
Delivering a localized ecommerce experience—one that includes the properly converted currency—is critical to avoiding cart abandonment and driving ecommerce revenue. Because while customers may be increasingly open to international brands, 92% of them prefer to see prices in their own local currency.
To properly display pricing in local currency, inclusive of local tax, can require a lot of manual configuration and complexity. Tax rates change and currency exchange rates fluctuate. For those reasons, it’s wise for brands to partner with a cross-border solution provider that can automate local pricing and accurately calculate tax and duty for shoppers. After all, landing on an optimal pricing strategy is complex enough. Learn more today about how Digital River can help you simplify global growth and streamline entry into new markets.