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Global Marketing

Value Pricing: When ‘Cost Plus’ is Irrelevant

Setting a price tag to an intangible tech product is a challenge for most companies. While it is easy to set price levels for manufactured goods just by calculating raw material, manufacturing, and logistic costs; it is far more complex to come up with a price in SaaS business models. One needs to think long term and be strategic when doing that.

The most common framework these days is estimating the monetary value created for the customer first, and then using this as an input to come up with a price.

Most SaaS companies utilize the 10x rule. They aim to offer an ROI of 10, by pricing their service at 1/10 of the value they create for the customer. This mindset helps their salespeople too, no decision-maker can say ‘no’ to 10x ROI!

This also explains why SaaS companies offer different price levels to different customers groups; geographically, demographically or economically. If the perceived value of a certain product is not same for different groups of customers, then they shouldn’t be getting different prices as well. Tinder, the most popular dating app, for example uses this method. Thanks to the huge amount of historical like/dislike data and other personal information such as age and gender, tinder assigns a different ‘market value’ or ‘attractiveness score’ to each user. When they want to upgrade to the premium, those with higher attractiveness will receive a cheaper price, simply because they don’t need the app as much as other people(less attractive ones) on the app need.

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Global Marketing

An Introduction to Dumping

US Congress defines dumping as an unfair trade practice, where imports sold in the US market is priced with less than 8% profit margin over the production cost. While it is not illegal to dump prices on a global scale (WTO is not regulating the prices), it is often an unwanted scenario and countries put heavy anti-dumping laws and tariffs to protect their economies.

Where a company has a cost advantage and sees a market with high prices being paid for a specific product, they can start exporting to that country and sell at price levels way below the market price – even if they are not making profits initially. The goal here is to bring the market price below what local producers can make any profits. This action will force local competition out of business, and when all competition is eliminated, the dumping company will bring the prices up again. On the long run, this is very dangerous for the economy of the host country and a method of exploitation.

 

As of 2006, there were 64 countries with anti-dumping laws. Globally, China gets most of the dumping criticism and European Union countries are actively taking measures against China to protect their economies.

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Global Marketing

What is Differential Pricing?

It’s a well known fact that females get higher quotes on car repairs, compared to males. According to one study; women get almost 10% higher prices than men, when they are uninformed about the market price for a specific repair. This everyday price discrimination actually has a place in Marketing, and it’s called Differential Pricing in the corporate world.

From time to time, companies use different pricing strategies for different customer segments they have. Giving away discount codes, special deals, gift bundles are a way to introduce your brand to new customers. When targeted through a specific audience, discount codes can act as a way of Differential Pricing.

Some companies offer their products and services for cheaper prices in their customers in different countries. This is due to the perceived value of a product. For example, Spotify premium membership is $9.90 in the US, while it’s ₹150 ($2.30) in India.

Differential Pricing Strategy aims to maximize the units sold and market share, while decreases the profit margin. However, this trade off usually brings in more revenue to the company, especially when selling products with low marginal costs.

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Global Marketing

International Pricing Gone Wrong: The Grey Market Risk

According to investopedia, a Grey Market is a market where a product is bought and sold outside of the manufacturer’s authorized trading channels. For an International Grey Market to be established, it needs to be profitable for entrepreneurs to buy from another country for cheap and sell it in another country for more. Grey Markets exists globally, for alcoholic beverages, tobacco, gas, automobiles and luxury items.

The most crucial measure to prevent a grey market is the pricing strategy. If the price of an item is very high compared to the market price in other countries, entrepreneurs will start to buy from cheaper countries and sell in the market with high prices. This will not only impact the company’s profits, but also damage the economy of the country as a whole due to lack of regulations and loss in the sales tax/income tax.

Grey Market Differential = (A product’s price in Country 1) –  (A product’s price in Country 2 + Cost of transferring the product to Country 1)

When the Grey Market Differential is a positive number, a grey market is ready to form.

Grey Market Risk = (Grey Market Differential) x (Expected Volume of Demand)

While it’s impossible to completely eliminate the Grey Market Risk, there are several methods. First, every marketing team responsible from the pricing in different local markets should be aware of the foreign currency rate fluctuations and more importantly work in coordination to set floor and ceiling price levels. These price levels are called Collars. By setting minimum and maximum price levels for each local market, and coordinating it globally, risk of grey market can be minimized. A narrower collar means more control on the grey market, but also can mean less profit in some of the local markets. Marketing teams use advanced statistical models to forecast and determine the effects of different prices and make trade-offs between grey market risk and local profit.

 

 

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Global Marketing

Why Disney Tickets are so expensive?

Disney World is one of the greatest places to enjoy a family vacation. However, with high ticket prices, one of the happiest places in the world has become the most expensive place to visit. The reason why Disney hiked their prices is the introduction of new attractions and new parks. With the new addition, Disney will be busier. Raising ticket prices was a plan to regulate the number of visitors to the park. The company envisions that if the number of visitors goes down, there will be a decrease in wait time.

Disney has continually reviewed their ticket prices over the years. Though this is good for the company, to the loyal customers, it is not a good thing. According to the Business Insider, Disney World’s annual collections have gone up considerably. Visiting Disney World in summer days is a huge convenience. However, it is very costly: the hotel prices are high, and the charges for the park are also high. It is cost friendly to visit the park on a less popular day. Disney raised the prices on Disney World tickets as a strategic plan: it wants people to spend more time in their parks. By increasing the cost of a 1-day ticket, purchasing multiple tickets seems to be a better arrangement; a guest who spends more days at the park will spend less money on foods, hotel and more.

The turnout at Disney World has always been high. As highlighted by the Business Insider, Disney World attendance has continued to rise more than before; hence, the company is generating more revenue. In 2018, the park attendance grew by 7%. However, if Disney continues to increase the price of the tickets as has been the case, the cost will be too expensive for an ordinary family, and it will lock out several people.

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Global Marketing

Louis Vuitton Pricing Strategy

Well, you may be contemplating on buying Louis Vuitton products but you are not sure about the price being charged in your locality. On this note, it is important noting that Louis Vuitton brands are charged differently in different countries. The price charges are largely dependent on several factors ranging from costs of production, expenses incurred, and profit and among other factors. Additionally, a country factors such as tax among other things will come into play when determining the price charges for Louis Vuitton products. Nonetheless, it is essential understanding that Louis Vuitton unique brand, originality and identity play a major role in the price charges. This is what makes Louis Vuitton brands a bit expensive as compared to other brands available in the market.

Moreover, the durability, quality and market demand contribute to the price being charged. For example, in Japan, a canvas goes for 139, 320 yen and China 9,050 yen. This is affected by the cost of production in these countries and the overall demand for the canvas in the market. China, for example, has low production costs resulting from low labor costs, which make the products being sold cheaper. On the other hand, Japan cost of production is high, due to a number of factors such as access to raw materials and labor costs, which make the products expensive.

The above information is a clear manifestation that Louis Vuitton brands do not have fixed prices. The price charged in any given country will depend on factors in play in that country such as ease of doing business, cost of production, labor costs among others. The pricing strategy of Louis Vuitton, therefore, is aligned to country factors in terms of cost production and is market specific in nature.

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Global Marketing

Why Gas Prices Fluctuate from City to City?

Have you ever wondered why gas prices vary from city to city, day to day? Gas prices are reliant on the price of oil and there are diverse factors that make the prices vary from one city to another such that a buyer in a specific city buys the gas at completely different prices at the same day and time in another city. Such factors include wholesale cost, transport costs, taxes and price on the street.

First are the supply and demand. An oversupply happens when the quantity of oil is higher than the people purchasing it. As the quantity supplied is high, the prices of all the petroleum products including gas fall, reducing the prices. The next factor is the value of the dollar. The global benchmark prices for all the petroleum products such as LPG, diesel, and petrol among others are priced in US dollars, therefore, the strength of the local currency in is likely to influence the price in the different cities across the world.

Petrol price cycles are the next factor that causes variation in gas across the cities. The sequence of pricing in diverse cities across the world sees prices fall gradually followed by a sharp rise. This occurs due to deliberate pricing policies and regulation of petrol retailers and is not directly linked to alterations in costs. The petroleum regulating agencies monitor these cycles and recommend the cheapest and most pricey days to purchase fuel in the cities. The next factor is the competition of the local market. Lower prices of gas and other petroleum products are generally observed in cities with many independent retailers since the competition between retailers is high. For this reason, cities with fewer retailers the gas prices is higher with some cents as compared to cities with many autonomous retailers. Last but not least is the regional factors.

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Global Marketing

The Big Mac index

The purchasing power parity is a theory that has been used greatly used to determine the purchasing power of people living in a particular country as compared to another. Here, theorists suggest that when currencies exchange rate is in equilibrium the purchasing power between the countries is equal. However, this concept is considered more formal and to make it more understandable, The Economist developed The Big Mac index. This concept tries to find out if currencies of different countries correctly determine the purchasing power of the countries residents. Here, the economist’s uses Big Mac prices of different countries to determine which currency is overvalued and which one is undervalued. In their concept,the economists argue that countries that have the same purchasing power have equal prices of Big Mac. However, if there exists a variance between the prices of Big Mac in two countries, it is a manifestation of purchasing power disparity between the countries.

Although initially the Big Mac pricing index was used to determine the price of burgers across countries, it has become a widely accepted index for informal determination of currency exchange rates and pricing strategies. The big mac index goeshand in hand with the adjusted index, which addressesthe assumption that poor countries have cheaper burgers due to reduced production costs. Here, the economists find that PPP has a deficiency since it only talks about the long run effect, but shy off addressing on the current equilibrium rate. According to the article, the current fair value of the currencywould be best be determined by examining the relationship between GDP and prices. The currency over and undervaluationis then determined using the line of best fit, which is derived from an adjustedindex of GDP and prices of the selected countries.