What is price localization?
When you change prices to meet the currency, market conditions, and buying power in different areas, this is called price localization. Companies show costs in the local currency, set different prices for different areas, or do both.
When using price localization, businesses can price their goods more correctly and fairly for their local market and customer base. Customers also get the best value for the goods or services they buy. It’s a great way to get people to buy in new places and determine how they act when prices vary.
Synonyms
- Pricing localization
- Geographical pricing
- Location pricing
- Zone pricing
- Localized pricing
- Price internationalization
Why price localization is essential for pricing strategies
Businesses that only deal in one currency miss out on a lot of money, even if changing currencies is easy and the US dollar is accepted everywhere. Customers from other countries are much less likely to convert if they are annoyed or confused when they can’t see rates in their currency.
But changing currencies isn’t the only thing that needs to be done to enter new areas. It’s also about taking advantage of how local businesses work. Companies that don’t consider local pricing trends, such as differences in buying power and price elasticity, miss out on customers or turn them away with high prices.
If they don’t have a competitive pricing strategy, a company that knows how to meet the local market’s needs better will beat them ten times out of 10.
Uses local money
Many people think that changing the display currency is just for show. It significantly affects sales and money coming in. If you don’t change the currency from USD to the local currency, you could lose a lot of money by turning away people.
The main reason for this is that it makes things more complicated and more annoying for foreign customers. Customers may unconsciously feel that the product or service isn’t for them when prices are shown in a different currency.
The extra step of directly converting prices can also get in the way of the customer’s buying process, which can cause them to abandon their cart and lose a sale. Customers like things to be easy and familiar, and being unable to localize prices can make things more complicated than they need to be, ruining the buying experience.
Because of this, conversion rates go down for companies that don’t localize their prices, directly affecting their revenue.
Shows what products are worth in the area
When it comes to both foreign and local goods, purchasing power is very important. Prices are set by considering local taxes, the economy, and market trends. It’s possible for businesses that don’t think about this to give people the wrong value.
If you were to offer the same prices in a prominent place like Los Angeles or New York, where taxes and living costs are high, you wouldn’t make any money. Also, there’s no reason to do it since people in the area already expect to pay more for most things and services.
The same goes for buyers from other countries. If a product is expensive in the US, it might be called cheap in a developing country where the economy is still growing.
By setting prices based on where the customer is, price localization helps businesses stay competitive by making their goods more appealing to customers and boosting sales.
Pros of Setting Prices Locally
Price localization is one of the best ways to keep prices low because it lets companies change their prices to fit the needs of people in their area.
Here are a few of the most essential advantages of setting prices based on location:
Targeted markets see more sales.
When used correctly, it can bring in new customers in places with much competition or insufficient market penetration. It also makes the most money in areas with less competition by charging based on what the customer wants and how easy it is to get the goods there.
The Big Mac Index is a fun example of this because it compares the cost of Big Macs in different countries to see how much money people can spend. It’s used to compare the strength of different currencies and the cost of living in different places. This is an example of price localization in action.
A Big Mac costs almost $8 in Switzerland. That Big Mac costs less than $2 in Venezuela.
If McDonald’s chose to make the Big Mac the same price everywhere, say $5, that would be the middle price. In the high-cost market, they would lose because the business costs are higher, so they would make less money. They would also lose in the market with lower prices because not as many people would pay more.
Gets the most out of the exchange rate
Since exchange rates change constantly, businesses that can only accept sales in one currency spend more money.
The buyer will always pay in their currency because that’s how they get paid. Payment gateways charge businesses fees based on the exchange rate when more than one currency is used.
The exchange rate isn’t worked out and paid for immediately in these situations. That’s done by the bank or payment provider (at a reasonable rate for them).
The seller makes a little less money on each deal in that area. As they keep doing business, small amounts add up quickly to tens of thousands of dollars.
Businesses that show and accept a customer’s home currency don’t have to worry about the handling fees that banks add to every transaction that can’t be seen.
It helps keep track of your position in local markets
Customers may not think you’re getting a good deal if you don’t localize your prices. People will buy less of a good or service if the price is higher than what they expect to pay for it. This could go either way.
If a buyer thinks a product is worth less than its price, they won’t buy it.
If what someone thinks something is worth is more than what it costs, either the company is losing money, or the buyer will think it is cheap and not reliable.
Businesses can safely guess what prices to charge in new areas by comparing their prices to those of their competitors using the price localization method. This is because it’s hard to know precisely how each local market will react to different prices.
It helps the finance team handle billing in multiple currencies
It might look like price localization makes it harder to process funds at first glance. The truth is that the opposite is true.
If you don’t localize prices, you could end up misallocating money and changing foreign exchange rates, which can cause global businesses a lot of financial trouble.
Companies that let people pay in more than one currency must ensure that all changes happen at the correct rate. Otherwise, they will almost certainly have the wrong financial records, which could lead to expensive fines in the event of an audit.
Changes local currency into the primary currency used for transactions and accounting
Most businesses use payment software that lets them change currencies at the checkout level. Almost all accounting, billing, and invoicing tools, even the free ones, can work with multiple currencies. And for financial reporting, they generally change them automatically.
This feature is essential for companies with customers in different countries because it lets them report their sales and income correctly without changing each currency by hand. This saves time and reduces the chance of making mistakes.
Different Ways to Keep Prices Local
We can group prices into three main types:
- Localization of cosmetics
- Localizing the market
- A real localization
The type of localization plan a company uses will depend on its growth stage and goals. They should use all three if possible. When a business is new, it won’t have that much information yet, though.
Localization for looks: Show local currency
Localizing prices for cosmetics is the simplest way to do it. It has nothing to do with naturally changing prices. It just shows the same item with different names and currencies.
It’s easy for online businesses like e-commerce and SaaS because they must use a website localization service and a payment processor that works with foreign transactions. A website can be changed to work with different languages; the same is valid for currencies.
At the very least, every business should use decorative localization. Even companies in their early stages can easily use it and gain from it.
Market localization: Answer the needs of the local market
Market localization means that businesses change their prices to match the needs and traits of the local market. To do this well, they need to look at people’s ability to pay, the cost of living, the area’s competition, and other things that can change how people think about prices.
Different businesses can use demand-based pricing differently based on the goods they sell.
Another one is gasoline. Gas is usually more expensive in cities, less expensive in suburbs, and very expensive in rural areas, with only one gas store every 50 miles. Since there isn’t much demand in places like the mountains, gas station owners can (and should) charge whatever they want.
Accurate localization: Consider the area’s cost of living and making products.
Pricing that is truly localized takes into account local cultures, costs, and customer tastes in real-time. When businesses genuinely localize, they do real price-sensitivity studies to determine how much customers are willing to pay.
Geographical pricing is an excellent example of absolute localization because it considers buying power parity, market saturation, and regional economies. The Big Mac Index is a great example. In places like Western Europe, Australia, and New Zealand, a Big Mac costs more because it costs more to run the business and get the fixings. It’s much less expensive in South America and many parts of Asia.
The hardest thing to do is to adopt accurate localization. Companies need to think about many things, such as the costs of making things locally (if necessary), the infrastructure of the supply chain, the costs of shipping, taxes and fees, delivery costs, changes in the value of the currency, cultural preferences, and a lot more. But it also gives the most reliable results and the best return on investment.
Most of the time, early-stage businesses don’t have enough data to implement this type of price localization fully. But any company in its early or late stages that wants to make a name for itself in a global market should consider it.
Making a plan for price localization
Businesses at home and abroad need to figure out how to use price localization effectively to stay competitive with global companies.
To make your price localization plan, do these five things:
Find out where your customers live.
Learning about the area you’re moving into is the best way to start price localization. Find out about the area’s population and economy to get a sense of how much money buyers there can make, spend, and save. If you already have customers in the area, use that information to start building your list.
The size of your total accessible market in the area should also be compared to the size of the entire market. Most of the time, it’s more competitive when that number is close to 1:1. It will depend on how much competition you can get away with.
Get pricing information from competitors.
People should never “copy” what other people do. But looking at how much other people charge can tell you a lot about how much you can charge in a new area.
Also, it’s the best standard to use if you have straight competitors in other areas that offer the same prices as you. If you sell similar goods or have success with similar pricing strategies in other places, it makes sense to think that you can do the same thing when you grow. It’s a good start, though.
If you use a specific type of product difference, you might be unable to compare prices directly. Prices for horizontally differentiated goods, like Coke and Pepsi, will be very close. Prices for vertically differentiated goods, like clothing brands, could be very different.
No matter what, depending only on competition has its limits. If you set your prices too high in places where living costs are high, and there isn’t much competition, you might not be able to get customers. It’s essential to find a balance between price and worth.
Find out about currencies.
There are a lot of things that can go wrong with foreign transactions:
- Changing rates of change
- Fees and tax
- Different taxes in this country than in your home country
- Pay and salaries
- The price of making and importing certain goods and parts
Rules and laws for local banks
Making money with a business in your own country is very different from making money with a business in another country. You will start getting paid in foreign currency for things like taxes, fees, and salaries, in addition to getting paid in foreign currency.
Many businesses struggle with price optimization when they try to localize their prices abroad. A lot of the time, they have to choose between short-term profits and long-term growth and widespread acceptance.
Use segmentation based on geography.
You can reach different people in different areas by dividing your market into geographical segments. You no longer have to use a one-size-fits-all method; you can make deals specific to each country.
Let’s say a US-based SaaS company changes how it charges for its services based on where they are used. The US market for business-to-business software is very competitive, and there is a lot of demand for it. Because of this, a pricing plan with high-end and low-end packages is almost necessary. But if the market is small, like in Europe, the company might only give one or two.
Set prices based on where you are.
A localized pricing plan could mean different prices for the same product or a new way of setting prices. You decide.
Using this approach is an ongoing process. You can’t just do it and forget about it; you must keep an eye on customer data and change prices to stay competitive.
Dynamic pricing software, which changes your prices based on customer demand, is the best way to keep up with a constantly changing market. As a result, you will be able to quickly adapt to small changes in the market, like new rivals or seasonal trends.
