Price Localization

What is Price Localization?

Price localization is the practice of adjusting prices to match the currency, market dynamics, and purchasing power in different regions. Companies localize prices by either displaying the local currency, setting different prices for different regions, or both.

Price localization helps businesses price their products more accurately and fairly in relation to their customer base and local market, while also providing customers with the best possible value for the product or service they are buying. It’s an ideal way to attract customers in new markets and understand buying behavior at different price points.

Synonyms

• Pricing localization
• Geographical pricing
• Location pricing
• Zone pricing
• Localized pricing
• Price internationalization

Importance of Price Localization in Pricing Strategies

Even if currency conversion is fairly simple and the US dollar is accepted elsewhere, organizations that solely transact in one currency leave serious money on the table. If international customers are put off or confused when they can’t view prices in their local currency, their chances of converting are considerably lower.

Expanding into new markets isn’t just about currency conversion, though. It’s also about playing into local market dynamics. Companies that fail to account for local pricing trends (like varying purchasing power and price elasticity in certain regions) miss out on potential customers or turn them away with inflated prices.

Without a competitive pricing strategy, a company that is better prepared to cater to local needs will outcompete them 10/10 times.

Uses Local Currency

Many think changing the display currency is merely a cosmetic modification. In reality, it has a huge impact on sales and revenue. Not adjusting the currency from USD to the local currency can potentially deter customers and lead to significant financial losses.

This is largely due to the psychological barriers and inconvenience it creates for the international customer. When prices are displayed in a foreign currency, customers might subconsciously feel the product or service isn’t meant for them.

The additional step of manually converting prices can also disrupt the customer’s purchasing journey, leading to cart abandonment and lost sales. Customers prefer simplicity and familiarity, and the lack of price localization can create unnecessary hurdles that negatively impact the buying experience.

As a consequence, businesses that don’t localize prices experience a decline in conversion rates, which directly affects revenue.

Reflects Local Value of Products

Purchasing power makes a huge difference for both foreign and domestic products. Local taxes, economic environment, and consumer trends all factor into pricing decisions. Companies that don’t take this into account risk offering customers a poor value proposition.

In a large city with high living costs and taxes like Los Angeles or New York, it wouldn’t be profitable to offer the same prices as a small town in Alabama. It also wouldn’t be necessary, considering local residents expect to pay higher prices for most goods and services.

The same goes for overseas customers. A product that might be considered expensive in the US might be reasonably priced in a developing country due to their local economic situation.

Price localization helps businesses stay competitive by offering their products at prices relative to the customer’s location, helping them create a more attractive value proposition and increase sales.

Benefits of Price Localization

Price localization is one of the best kinds of competitive pricing because it allows businesses to tailor their prices to the needs of local customers.

Here are some of the most essential benefits of a localized pricing strategy:

Increases Sales in Target Markets

Used correctly, it can attract new customers in places with high competition or a lack of market penetration. It also maximizes revenue in less competitive areas by charging based on customer need and whether or not the product is easily accessible in the area.

An interesting example of this is the Big Mac Index, which measures the purchasing power of different countries by comparing local Big Mac prices. This is an example of price localization in action, and it’s used to compare the relative strength of different currencies and cost of living in their relative areas.

In Switzerland, a Big Mac costs almost $8. In Venezuela, that same Big Mac costs less than $2.

Let’s say McDonald’s decided to standardize the price of the Big Mac across the board, pricing it right in the middle at $5. They’d lose in the high-cost market due to lower profits against the higher costs of owning a business. And they’d lose in the lower-cost market because far fewer people would pay the higher price.

Maximizes Exchange Rate Benefits

Currency exchange rates fluctuate, so only processing payments in one currency ends up costing businesses more money.

Since the customer gets paid in their own currency, that’s how they will pay regardless. Payment gateways charge merchants commissions based on the exchange rate when multiple currencies are involved.

In these cases, the exchange rate isn’t immediately calculated and accounted for. The bank or payment processor does that (at a favorable rate for them).

So, the vendor effectively makes a small percentage less on every transaction in that region. As they continue to transact, a few dollars here and there add up to tens of thousands in lost revenue very quickly.

Companies that automatically display and accept a customer’s native currency don’t have to worry about the unseen processing fees banks levy on every transaction.

Helps Manage Position in Local Markets

Not localizing prices can create a poor value perception among customers. If what they expect to pay for a product or service and what it’s priced at are misaligned, sales plummet. This can go both ways.

• If a buyer’s perceived value is lower than a product’s price, they won’t see it as valuable enough to justify a purchase.
• If their perceived value is higher than its price, the organization is either leaving money on the table or the buyer will see it as cheap and untrustworthy.

Since it’s impossible to know exactly how all local markets will react to pricing, benchmarking based on competitor pricing using the price localization method helps businesses safely estimate reasonable prices in new areas.

Helps Finance Team Manage Multi-Currency Billing

On the surface, it might seem like price localization makes it harder to process payments. In reality, the opposite is true.

Not localizing prices leads to misallocation and manipulation of currency exchange rates, which can create extreme financial headaches for global businesses.

When offering payment options in multiple currencies, companies must ensure that all conversions are done at the right rate. Otherwise, they will almost certainly end up with inaccurate financial records (and, in the event of an audit, costly fines).

Converts Local Currency into Primary Currency for Sales and Financial Reporting

Most organizations use billing software that supports currency conversion at the checkout level. Almost every billing, invoicing, and accounting software (even the free ones) handles multiple currencies. And they usually automatically convert them for financial reporting.

This is a crucial feature for businesses with customers in different countries because it allows them to accurately report their sales and revenue without having to manually convert each currency, saving time and minimizing potential errors.

Types of Price Localization

There are three main types of price localization:

• Cosmetic localization
• Market localization
• True localization

Depending on a company’s growth stage and goals, the type of localization strategy it implements will vary. Ideally, they’d use all three. But younger companies won’t have that much data right away.

Cosmetic Localization: Display Local Currency

Cosmetic localization is the most basic approach to price localization. It doesn’t involve changing prices in any meaningful way. It simply presents the same product with different currencies and labels.

For online businesses like ecommerce and SaaS, it’s as simple as using a website localization service and a payment processor that supports international transactions. Just like a site can be adapted to multiple languages, the same holds true for currencies.

Every company should use cosmetic localization at the very least. Even early-stage companies can implement it and reap the benefits fairly easily.

Market Localization: Reflect Local Market Demand

Market localization is when companies adjust their pricing to reflect local market demand and characteristics. To do so effectively, they have to take into account purchasing power, cost of living, political and economic stability, competition in the area, and other elements that can affect how people view prices.

Demand-based pricing can work in a number of ways, depending on the type of product an organization is selling.

Gasoline is a good example. It’s typically priced higher in metropolitan areas, lower in suburban areas, and extremely high in rural areas where there is only one gas station for 50 miles. With such little demand in areas like the mountains, gas station owners can (and, economically speaking, should) charge what they want.

True Localization: Reflect Local Product Manufacturing Costs and Cost of Living

True localization is price optimization based on real-time local costs, cultures, and customer preferences. With true localization, organizations run actual price sensitivity studies to figure out customers’ willingness to pay.

Geographical pricing exemplifies true localization because it factors in regional economies, purchasing power parity, and market saturation. The Big Mac Index is the perfect example — in areas like Western Europe, Australia, and New Zealand, a Big Mac costs more because running the business is more expensive, as is sourcing the ingredients. In South America and many parts of Asia, it’s significantly cheaper.

True localization requires the most effort to implement. Companies have to factor in local manufacturing costs (if applicable), supply chain infrastructure, transportation costs, taxes and fees, delivery charges, currency fluctuations, cultural preferences, and much more. But it also brings the most consistent results and highest ROI.

Early-stage companies typically don’t have enough data to fully execute this type of price localization. But every growth- or late-stage company that wants to make an impact in an international market needs to consider it.

Developing a Price Localization Strategy

International and domestic businesses alike need to find a way to effectively implement price localization if they want to remain competitive against their multinational counterparts.

Follow these five steps to develop your own price localization strategy:

Research Customer Geographical Data

The easiest way to get started with price localization is to understand the region you’re expanding into. Research the region’s demographics and economic conditions to get an idea of what potential buyers in the area currently make, spend, and save. If you have current customers in the region, start with the customer data you have and build upon it.

It’s also a good idea to look your total addressable market in the area compared to market saturation. In general, the closer that ratio is to 1:1, the more competitive it is. Based on the level of competition, you’ll know how much margin you can get away with.

Access Competitor Pricing Data

It’s never a good idea to “copy” competitors. But competitor pricing can tell you a lot about what you can get away with charging in a new region.

It’s also the best benchmark to use if you have direct competitors that offer similar pricing to you in other regions. If you sell similar products or find success with comparable pricing strategies in other areas, it’s reasonable to assume you can use a similar approach when you expand. At least, it’s a good place to start.

Depending on the type of product differentiation you primarily use, you may not be able to directly compare price points. Horizontally differentiated products (e.g., Coke and Pepsi) will have very similar pricing, while vertically differentiated products like a clothing brand could have a huge spread in pricing.

In any case, relying solely on competition has its limitations. In areas with high living costs and limited competition, setting prices too high could exclude you from the market. Striking a balance and aligning pricing with value is crucial.

Determine Currencies

Foreign transactions come with several complexities:

• Fluctuating conversion rates
• Taxes and fees
• Local taxes different from your home country
• Salaries and wages
• Production and import costs for certain products/components
• Local banking rules and regulations

Running a profitable business overseas is much different than running a proftable business in your country. In addition to revenue coming in in foreign currency, you’ll begin paying taxes, fees, and salaries in that currency as well.

When implementing price localization internationally, many businesses struggle with price optimization. They often have to decide whether to sacrifice short-term profitability for long-term growth and cultural acceptance.

Apply Geographic Segmentation

Segmenting your market geographically is an effective way to target different customers in different regions. It allows you to move away from a one-size-fits-all approach and provide specific offers tailored to particular countries.

Suppose a US-based SaaS company decides to change its pricing model depending on where it operates. Since the US is a highly competitive market with a high demand for B2B software, a tiered pricing strategy with high- and low-end packages is practically a requirement. In a smaller market like Europe, however, the company might choose to only offer one or two.

Apply a Localized Pricing Strategy

A localized pricing strategy could mean different product pricing, or it could mean different pricing models altogether. It’s up to you.

Applying this strategy is somewhat of an ongoing process. It isn’t something you can do and forget — you have to continuously track customer data and adjust prices as necessary to remain competitive.

The best way to keep up with the changing market is to use dynamic pricing software, which automatically adjusts your prices based on customer demand. This will give you the flexibility to quickly respond to changes in the market, such as new competitors or seasonal trends on a micro level.

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