Make Your Prices Fair and Scalable, Globally Consider that the average customer in Oslo can afford a higher-priced Starbucks latte than someone in New Delhi.
By Jurgen Appelo Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
The prices of many products and services around the world are unfairly high. Nor do they scale well, either. But I have found a way to fix that, easily, and now you can too, as a means of eventually going global,
Related: Forget Rising Beef Prices: Why Arby's Is Placing All Bets on Meat
First, though, a little background, Have you noticed that many fees for products and services are the same worldwide? Trello Business Class has a fixed price of $8.33 per user per month, no matter where the user lives. Bi-annual membership in the ScrumAlliance costs $100 for everyone from New Zealand to New Caledonia. And it was recently suggested to me, as a public speaker, that I could charge the same fee, regardless of whether my keynote was taking place in Iceland or Italy.
I disagree with this uniform approach. And here I'll lay out why.
Purchasing power
The average price of a grande latte at Starbucks is around $2.80 in New Delhi. In Oslo, it is $9.83, according to the Starbucks Index, published by The Wall Street Journal several years ago. The Big Mac Index, published years earlier by The Economist, to compare the prices of McDonald's hamburgers worldwide, showed a similar diversity in price.
Some experts have criticized these approaches to assessing purchasing power parity (PPP) in different places, but the fact is, people pay widelly divergent prices for the same products in different parts of the world.
The reason goes beyond the fact that the costs of making and selling these products vary globally (depending on ingredients, wages, transport, shelf space and so on). It has to do with the fact that people in Oslo can afford to pay more than those in New Delhi.
So, that is the reason those experts refer to such indices as measures of purchasing power. (Note that I've never seen them discuss a selling power parity index.)
Fairness and scalability
Smart entrepreneurs know that the price of a product should match the size of the customer's wallet, rather than the cost of the item's production. For you, there may be no difference in selling an online service in Canada versus selling the same service in Kenya. But what matters is the vast differences between customers who are purchasing that same service across both countries.
This is not just a matter of fairness. It is also a question of scalability.
Do you want to saturate only the American and Canadian markets? Economic growth in Africa is projected to be higher, percentage-wise, in the next decade or so, than in North America. So, clearly, you shouldn't ignore any emerging market where you can sell your services.
The objective, then, is to raise your prices in Canada and lower your prices in Kenya. If your customers complain, tell them they can get the lower price when they move to Kenya. (They will enjoy a cheaper grande latte and more affordable Big Mac there, as well.)
If you want to go global, you too should consider diversified pricing. But how?
Location-dependent pricing
I have done business with people in almost 50 countries. I have different fees that I charge for public speaking, depending on the physical location of events. I also have location-dependent fees for courseware licensing and membership in my company, Happy Melly. Once I started looking into the topic of purchasing power, it was not difficult to come up with an acceptable solution.
I did not use the Starbucks or the Big Mac indices because they've been criticized as being poor reflections of purchasing power across countries. They offer prices for only one product, and for just a small sample of countries. A better choice -- though still not perfect--was to take a look at Gross Domestic Product per country, per capita.
This Wikipedia page shows three lists of GDP, from different sources. I didn't attempt to determine if any of these was the "best," so I just took the average of the three lists, resulting in a new ranking of countries. I could have used the individual numbers for them, to calculate 250-plus location-dependent fees for my products and services. But that would have driven my bookkeeper nuts. So, to keep pricing simple, I divided the big list into five categories:
- Category A: Hong Kong, Kuwait, Luxembourg, Norway and Switzerland
- Category B: Australia, Germany, Sweden, United Kingdom and the United States
- Category C: Chile, Italy, Japan, Poland, Russia and South Korea
- Category D: Bolivia, China, Egypt, Mexico, Nigeria and Thailand
- Category E: Afghanistan, Cambodia, Ethiopia, Somalia and Yemen
Related: 10 Things Managers Should Factor Into An Innovation Process
Now I needed five price differentials for my products and services, one for each category of countries. (If you're interested in the complete spreadsheet, shoot me an email.)
The benefit of this approach was that the broad categories prevented discussions such as, "Why is your product slightly more expensive in Spain than in Italy?" The difference in GDP between these countries is too small to warrant differentiated pricing. Therefore, I let Spain and Italy fall into the same category and charged the same prices in both countries. But the difference between Switzerland and Somalia was enormous, and my fee structure reflected that.
Go global now!
Like me, more and more people are doing business in different countries. And, like me, they must figure out what they can charge for their services, in a way that makes sense in the local market. Following the approach I describe here, you can now define a pricing structure for your company that is both (reasonably) fair and scalable, across any number of countries in the world.
I admit, this method is not perfect. (For example, I have only one number for GDP per capita across all 50 states of the United States.) And, yes, there might be available a better purchasing power parity index available elsewhere; surely, there are more advanced methods out there for turning an index into a fee structure.
But it's better than charging one fixed fee equal to the price of a hamburger for François in Switzerland, but also equal to half a house purchase for Fathima in Sri Lanka.
After all, we entrepreneurs want to be fair about this.
