Setting prices in various countries that also make sense globally is a difficult tasks. The same product–be it a soft drink or a consulting project–sold in the United States and in South Africa should not carry the same price. How should companies determine the price difference?
You can test different price scenarios using the Canback Global Price Calculator. Many factors influence the ultimate pricing decisions (such as competitive intensity, commodity prices), but the calculator should be the starting point for any pricing decision. We in fact use the calculator to set our own fees country by country.
How to use:
1. Enter the country you currently have the product in
2. Enter the price in local currency
3. Enter the country you want the price for
4. Enter if you want the price mix to skew globally or locally. 0 if totally global; 1 if totally local; a factor in-between such as 0.5 if you want a blend
5. The resulting local currency price in your target country is calculated
As the price mix factor increases, the recommended price is weighted more toward the local purchasing power parity (PPP) of the target country. PPP is defined as “the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as a U.S. dollar would buy in the United States.”
Suppose that a company would like to sell chewing gum to consumers in Malaysia. In its local market, the United States, the product sells for USD 0.99. What should the Malaysian price be? If it is set at the current exchange rate (mix factor = 0), then the price is MYR 4.01 However, this seems too high given the lower standard of living in Malaysia, which in turn leads to lost volume. If it is set at the local level, then the price is MYR 1.43, but this is probably margin eroding for the company. Given that the chewing gum has international credentials, it may be reasonable to set the mix factor to 0.5, resulting in a price of MYR 2.40.*
Some products are essentially global. An example would be luxury handbags. Without global pricing there would be arbitrage between countries since the product has high value compared to the transport cost.
Other products are local. An example is men’s hair cuts. It is unlikely that a man would travel to another country to cut his hair to save on price.
Most products fall in-between these extremes.
This is not a share of wallet analysis. Even with fully local prices, the share of wallet to buy the chewing gum in Malaysia is 2.6 times higher than in the United States.
* The analysis was updated on May 18, 2016. Exchange rates change continuously so it is impossible to replicate our example exactly.
Note: The derivation of the equation below is found here.
Source: xe.xom; ISO; World Bank’s International Comparison Progam; Canback Global Income Distribution Database (C-GIDD); Canback analysis