This is the second article in our series on international pricing. For the first one, please go here: http://blog.stratinis.com/2015/06/article-series-on-managing.html
Companies selling internationally often have to deal with customers either buying from them in multiple countries or customers exploiting price differences between countries. Consumer goods manufacturers must deal with large retailers, chemical manufacturers with large manufacturers who buy in many geographical locations. Even stationary providers have international buying teams trying to find better deals on office supplies. A recent survey showed that companies invest 7 times more (in people, technology, training) in international procurement than those companies who invest in international sales teams.
The problem for the sellers is clear: they must face buyers who will compare prices for products or services across a number of geographical locations and exploit any differences. This puts pressure on profits as the supplier, if accepting the lower price, is no longer able to reap the profits from the high-priced markets, but only the low-priced markets.
So can’t they just harmonize prices and sell to international customers at one single, harmonized price? Yes and No. In cases with just a single buying and supply point, there can be a single price. However this is not really what this article is about, nor is it about the challenge in many industries. The problem occurs when customers buy in many local markets. Just like price differentiation makes sense in a single-country, national market, based on what customers are willing to pay, international price differentiation also makes sense. In some markets (local) customers are willing to pay more, and might demand premium products or services on top. In other markets, there is heavy competition or no customer loyalty, so prices will be lower. But a differentiated model overall does not always fit with a global customer’s demand for harmonized prices, especially if a harmonized global customer price creates gaps versus differentiated local prices.
It is in many cases possible to maintain differentiated pricing between markets, using a variety of techniques and arguments. While not all will be applicable in all situations or all organizations, here are some ideas:
- Use the price waterfall structure to harmonize some aspects of prices to global customers while using other building blocks to differentiate net net prices. E.g. have a uniform on-invoice price across markets for the given customer, but differentiate actual net net prices by offering different off-invoice rebates in local markets for customers performing local activities to “earn” those rebates
- Product differentiation or service-bundling: essentially make the product specific to the local market. In some industries that can work well, whereas in others it is ignored by sophisticated buyers comparing the Base product (i.e. the product without local differentiators)
- Value-added services: offer services locally that can only be delivered locally and thus only should be considered when pricing locally
- Arguing that cost bases are different in different markets and so should prices be (even if you are doing value-pricing)
- Argue that the customer’s resale prices (in e.g. retail or industrial input markets) also vary by country, and therefore it should be accepted/understood that your prices differ.
- Focus on value rather than costs and price, and build local market cases for how your customer can achieve better sales prices with their customers.
- Stall or delay harmonization, as time = money. The more you can delay a time where prices get harmonized the longer you can reap the profits of higher prices in some markets.
- Demand from the customer that you must increase prices in low-priced markets so both sides are equally well off in an harmonization scenario (often, they cannot convince their local people to accept a 20% price hike, even if they on the other hand could get a 20% price reduction in a high-price country)
- Allow negotiations to happen locally, maybe even removing the option for global negotiations: if there is nobody in the sales organization to negotiate a global price with (in reality or just what is said to the customer), then it is more difficult to force through global pricing.
Stratinis has substantial experience in helping all kinds of companies manage their local and international prices, with numerous projects both as strategic advisors and software implementers. Please get in touch to learn more about how we can help you.