However, while the importance of localizing prices is clear, it is not always done correctly or completely. What many companies don’t realize is that there are actually three different levels of price localization:
1. Localized Currency
2. Localized Pricing
3. Localized Presentation
In order to have a truly localized pricing strategy, it is necessary to optimize all three of these levels.
The most straightforward form of price localization is to convert your prices to the local currency.
Despite its simplicity, just taking this one step can have a significant positive impact on sales. In fact, according to a study by WorldPay, 13% of online shoppers will abandon a purchase if the price is shown in a foreign currency.
There are three reasons for this.
The first reason is trust.
Making an online purchase can seem like a less tangible experience than buying something at a physical store. Because of this, online customers tend to experience a much higher level of “purchase anxiety” and trust is critical to ensuring a completed order.
Seeing a price displayed in a foreign currency can easily disrupt that trust as customers perceive that lack of effort as an indication that you don’t care about their specific needs and makes them wonder about your returns policy, support and other critical variables in their decision-making process.
The second reason is psychological familiarity.
Your international customers are used to thinking in terms of the local currency, and have an intuitive grasp of its value. So, when the price is displayed in their local currency, it is possible for them to instinctively and intuitively understand and assess the product’s price in terms of value they believe the product holds for them. This, in turn, facilitates the purchase process by making it easier for customers to make and get comfortable with their purchase decision.
The third reason is predictability.
Exchange rates can experience large fluctuations over time, influencing the true cost of your product for international customers. Pricing in local currencies eliminates that problem for your customers and benefits your company directly by increasing the consistency of international sales.
This predictability is especially important for recurring purchases. Customers will be extremely reluctant to sign on to a recurring payment plan if they cannot predict how much they will be paying in 6 months’ time.
Once you have adjusted your pricing to depict your products in the local currency of your customers, the next step in localizing (and optimizing) your prices is to adjust them by geo.
Countries vary widely in terms of the purchasing power of their residents and their perception of your products’ value. This can be due to economic factors, consumer demand and the availability of competitive vendors. Given these major differences, it doesn’t make much sense to stick to the same price in every single market.
A Closer Look at Purchasing Power
Purchasing power refers to the quantity of goods that can be bought by a given unit of local currency – usually set at the equivalent of a single U.S. dollar. The most well-known way of tracking this is The Economist’s Big Mac Index, which compares the price of the iconic McDonald’s burger across the world. The idea is that a homogenous product like the Big Mac is a useful indicator for how far a dollar can go in each country.
As of July 2017, the price of a Big Mac in Switzerland is $6.74, while you can get the same burger in Ukraine for $1.70. Clearly, if you were selling in both countries, it is unlikely your Ukrainian customers will purchase at the same price as your Swiss customers. If you were interested in maximizing sales in both regions, you would adjust your prices to a level that local customers can realistically afford, and value.
A Closer Look at Perceived Value
Apart from these absolute differences in purchasing power, international customers can also differ in the relative perceived value they place on your products. A great case study can be found in the massive Indian video streaming market, where Netflix and Amazon are currently in a fight for dominance.
While Netflix has opted to go for the high end of the market, charging over $7.50 a month, Amazon Prime is targeting the mass consumer, at a cost of $1.25 per month. But more importantly, Amazon has aggressively invested in local content creation. According to Mumbai-based entertainment industry analyst Jehil Thakkar, this “is going to be the real differentiator” between the services. In December, Amazon announced 17 shows by local content creators, including eight that are already in production. Meanwhile, Netflix only has one (rumored) local show in the works.
By understanding the limits of local purchasing power and the high perceived value of local content, Amazon has leapfrogged Netflix in the race for the Indian market. According to Amit Aggarwal of Amazon India, Prime memberships grew more than 100% after the launch of Prime Video. And during the annual Diwali sale – India’s version of Black Friday – Prime membership was the most bought item in Amazon India’s entire history.
The third level of price localization involves adjusting how you present your prices along with all the added-costs to your different geos.
While this might sound like a minor point, the psychological impact on customers can be significant. Presenting your prices in an appealing way can often mean the differences between a successful sale and an abandoned cart.
The most common example of this is “charm pricing”, where prices are ended with a .99 or .97 instead of a round number. In his bestselling book Priceless, William Poundstone analyzed this phenomenon, and found that charm pricing boosted sales by up to 24%. A major advantage of differential global pricing is that it lets you use charm prices everywhere, so be sure to take advantage of that.
Add-on costs are another important aspect of global price presentation. In the Worldpay study referenced above, 56% of customers abandon purchases when the final price includes unexpected costs. These could include shipping, duties and payment processor fees.
In North America, ecommerce stores simply include these fees in the price on the product page. However, the issue is more complicated in international sales, since each country is likely to have a different mix of add-on costs.
In addition, customers in some markets might actually prefer a more detailed breakdown of costs, where specific fees are separated from the base product price. This is especially the case when different shipping and payment options have a large impact on the final price, since the added visibility can help customers save money.
Because of these important nuances, you should design price presentation differently for each one of your international markets.
When done well, price localization can turbo-charge your growth in international markets. Customers will be more likely to trust your company and follow through on their purchase. By considering all three levels of the price localization puzzle, you will position yourself far ahead of the competition.