A student sent in this question:
Hi Mark, my name is …, and I took your Pragmatic Pricing course in August of 2014. I have a question about pricing that I was hoping you could help me out with.
I currently manage an international sales team and distributor network that we sell our software products through outside of the US. I held an international sales team summit this week with the goal of invigorating some stalled international sales performance. We had a discussion around establishing regional pricing for our distributors. The idea was that there are models for channel selling that set different prices for a specific region based on the value of our products that that region will bear. Do you have any guidance on establishing specialized list pricing for distributors based on any past experience you have?
Does it always just simply fall back on value-based pricing – i.e. we should price our products based on the perceived differential value that that our customers IN A SPECIFIC REGION have?
You pretty much have it nailed! In a region, start by figuring out the end customer price. Who are your competitors in that market? They often change based on region. How much are those competitors charging their customers? How much better are you? What is that worth? Once you’ve used Value Based Pricing to determine the end user price in that region, then determine how much margin that distributor needs to be motivated to sell your product. There tend to be industry norms that also vary by region, as I’m sure you know. You need the margin in the region to make sure they will push your product over your competitors. With those two pieces of information, you can now back into what your price per region should be.
If only it was that simple though. That’s the theory, but now you have to worry about currency exchange rates. How many different price lists must you have? The more price lists you have the more complex it is to manage both for you and for your accounting/finance team. Is arbitrage possible, meaning can some customers or distributors buy in one region and resell in another?
Regardless, your thinking is spot on.