There is a saying that “who controls the pricing, who can control the market”. As mentioned in the article opening, the customers are willing to spend much time on the brand word of mouth research because they find an unbelievable product pricing. Also, the consumers also are willing to spend a lot of money to buy a pair of sports shoes. It’s because the market value of this shoe is much higher than the store retail price.
However, the fact is most of the companies don’t have the ability to control the pricing. It’s not only because there are few giants in each industry. But also, there is a long list of variable costs by country in the cross border ecommerce sector, such as tariff, landed cost, fulfillment, marketing,etc. And most importantly, due to country of origin, there are the variable factors like culture and import regulations that increase the variants.
Being said that, setting the brand product pricing is totally feasible based on your business goal, product value propositions. Thus, in this article, I’ll walk you through some must-have elements to set the pricing in the cross border ecommerce business.
Product Pricing – Why Is Vital in the Cross Border eCommerce
1. Target Customer Perception – Cheaper, Better
In some product categories, customers can buy from the domestic market online, however every country would have a tax-free quota for each citizen in these product categories. For example, some cosmetics and lip-sticks might be priced at US$100 on a cross-border eCommerce website, that includes international shipping, tax and 14 days refund guarantee. When you look into some domestic stores, the pricing might be higher or much more than US$100. So, customers absolutely will prefer to buy on these websites if it’s nor urgent. When coming across discount festivals such as Christmas, it might be even cheaper.
Also, the currency rate does also matter. For example, when USD is stronger than Yen, some USD customers know to leverage VPN and drop by the brand of Japanese cross-border websites. Compared to the product priced at USD, they will purchase at the lowest rate.
Pg = Median product pricing anchor (comparable fixed value) - the current product pricing
Thanks to these factors, the customer perceives that the pricing can be lower, and this type of customers get more sensitive to the product pricing. It’s because they care the product function itself, we call the gain value Pg
This type of product pricing anchor effect is mainly from the product function itself. Basically there is no outstanding difference between webstores, although some might have additional added value like gifts, free shipping etc. Therefore, for the customers, the lower pricing, the higher value. If the product unit pricing is high, customers might research the word of mouth. If the product unit pricing is low, basically they will purchase instantly.
2. Product nature of uniqueness & rarity
In some product categories, customers might not be able to buy the version in domestic markets, such as limited versions, healthcare, etc. Thus, apart from the functional value, customers care more about the trading value.
Pt = Median product trading pricing anchor (Variable value) - the current product pricing
As mentioned in the opening, customers are willing to pay more for a limited version of spore shoe. Apart from the personal identity, lifestyle taste, and brand preference, it also has a higher pricing in the second hand trading market.
For this type of product category, customers are not sensitive to the product pricing at the moment. They are more caring about the trading value and the trading pricing anchor point. The value can reflect on satisfying their personal preference, showing off identity or monetising by selling out. Afterall, they know there are some sports shoes priced at a lower price with the same shoe function or quality.
3. Country of origin
Take the Chinese tea seed oil for example. China tea seed oil is well-known globally, as well as Japanese wasabi. Customer perception thinks the product quality is better and the price should be higher. However, although this type of product has the advantage of country of origin, they can generally be replaced. For example, Italian olive oil, or Japanese tea seed oil can be the substitute of Chinese tea seed oil. Because of this, product pricing for this type needs considering both value – functional gain value and trading value
Total value = Gain Value + Trading Value
Apart from the gain value, customers also care about the trading value like the country of origin culture, purchase preference. In terms of pricing anchor, you need to not only refer to the competitors, but also have to look around the substitute product pricing as well.
How to set the appropriate product pricing
Now we have a fundamental understanding of the customer perception in cross border online shopping. Also the two primary values are effective in the customers’ mind. Below are the three must-have components to set the product pricing.
1. Cost-drive: Basic P&L calculator
Basically the goal of any cross-border ecommerce business is for sales and profitability. So having a P&L calculator is very basic, and of course you should have your own algorithm to calculate the profit margin based on the business model. The tips and tricks are you should have the P&L spreadsheet by market, channel, sales model. For example, if you have 50 cross border longtail markets, you should have a P&L for each country, that total is 50 pieces. And in each country, if there are two channels to sell, you should totally have 100 pieces. The SKUs can be different of course, or the same.
In each P&L spreadsheet, these fundamental cost should be included:
- Product source cost per unit, or MOQ per unit cost (If you have a local warehouse in the target market, this would show as the landed cost)
- Landed cost (If it’s the international shipping), that includes the international shipping cost, tariff cost/custom clearance cost, domestic fulfillment cost
- Refund cost: For example, 1 refund out of 1000 orders
- Payment Processing fees per transaction: No matter how many payment processors you are using, such as stripe, PayPal, etc. Merchants generally let customers select the methods they prefer. Thus, normally you would use the most expensive fees out of all to calculate the cost
- Marketing cost: customer acquisition cost, affiliate commission per order, discount code, coupon code, free shipping, etc
- Payout currency handling cost: It depends on which currency you prefer to use and calculate the cash flow. As the currency rate fluctuates, you might have some cost if you convert from one currency to the other. For example, if your product price is set in USD, and your cash flow currency is in RMB, the USD currency rate drop might affect your final income.
Tips are tricks:
Cross border eCommerce webstore target multi markets and it makes sense the strategy is different with the head market. In this calculation, landed cost and marketing operation optimisation are two key elements to affect the result. For example, it’s not realistic to rent a warehouse in each country, so the cost can be hugely different between shipping to Vietnam and shipping to Mexico from China. And also the product demand and brand penetration in each country are different. So the new acquisition cost would be different among markets.
2. Market value-driven: Target market price anchor
Changes always go beyond plans. No matter how precise the calculation is, it can’t reflect value to customers if the pricing doesn’t consider the local market. The pricing appeals to the customers in the 1st place, but customers have an anchor in mind. One of the anchors must be from the local market.
For example, the brand lipstick you are selling is priced at US$100 locally, however your webstore pricing is US$120 and also the shipping time would take 8 – 10 days. So it totally makes sense your webstore performance is not good in terms of sales.
“Who controls the pricing, who can control the market.”
The fact is you can’t fully control the pricing in a way if you want to reflect the product market value. So you might need to sacrifice the profit margin at the end.
No matter what, you need to clearly understand your product pricing anchor in the local market. And here are the five ways you can refer to and they help you set the product pricing.
1). Market competitors’ pricing and selling strategies
This type of price monitoring is particularly vital to the functional product category. If your competitor’s product is priced at US$100, the same functional or brand product at your side is priced at US$120, you need much effort to convince customers. Furthermore, the selling strategy also matters. For example, your competitors might sell at the same price, however they also offer free shipping, coupon code for the first purchase, etc. Meanwhile, it might impact your performance if you are not.
2). Substitute product pricing and trading value
Product categories that often are popular thanks to their trading value matters in the pricing anchor research in the target local market. For example, if you are reselling a brand sport shoe, the pricing might be similar with the local other brand shoe, however the trading value in the second hand market is less than them. So you need to put much effort into telling your brand story, so customers can gain more trading value from a lifestyle preference and personal identity. That covers the gap of trading value you lost from the monetisation.
3). Pricing by referring to local channels
Customers might get used to purchasing from different channels in each country. For example in the USA, people who purchase electronics products often go to Amazon, BestBuy, Target.com and B&H. The product listing cost and transaction commission vary by channels. However, it’s impossible the pricing is lower than your brand webstore, unless it has a strategic reason behind.
4). Local market event and festival calendar
Each market has some common festivals/events with the global scheme (blackfriday, Christmas), but also has local ones. For example, single day or double 11 day in China is a well-known event and you can’t miss out on this event if you aim to drive more sales. During these events and festivals, you are able to observe the selling strategies from competitors and substitutes.
Furthermore, observing the pricing from events and festivals is vital for you to set a regular product pricing. It’s because you don’t want to set a lower ceiling of always-on product pricing. When events or festivals come up, you haven’t any space to lower the price.
5). Outside-in product pricing testing
Digital marketing in fact facilitates the brands and merchants to implement the outside-in product pricing approach. Basically, that means you can let the market reaction tell you how much you should set. For example, you can set up dynamic advertising or dynamic landing pages for different audience segmentation to run a/b content testing. Of course, product price is part of the content to engage with the customers.
After a while of testing, basically you are able to find out the median value of pricing that has a stable and higher conversion rate. Meanwhile, the pricing makes sense compared to the market value. It’s appropriate, which is not too low or too high.
3. Cash inflow-driven: Strategic business and financial modeling
McDonald isn’t earning profit from selling burgers, and Google isn’t earning profit by charging users monthly fees. Cash inflow source can be different with the earning spot of the products which you are selling. In the cross border eCommerce, pricing by cash inflow strategy is critical and core to succeed.
It’s because only relying on selling products is not sustainable due to lower threshold entering into this industry. Sustainability requests a comprehensive business model that diversifies the cash inflow spots. Below are the three classic examples of cash inflow modeling influencing the product pricing.
1) B2BC cash inflow model
Building up a cross border ecommerce store is not only for orders from direct customers. At least, not all of the markets rely on the D2C. Many merchants use the website as a price anchor effect window, for facilitating their distributors, agents and resellers selling the products.
Normally this type of cash inflow model is the product pricing on the cross border eCommerce website is higher than other channels. Its purpose is to build a price anchor spot, and tell a story that the brand would help build brand awareness in the target market. So the resellers, agents and distributors can be relieved to buy a wholesale deal from the brand. In other words, the brand mainly earns profit from the wholesale deals, which has a huge amount of sales volume although the profit margin per transaction is lower than the order from D2C.
2) Bundle selling strategy
This is another classic cash inflow strategy by reselling some big brands’ products bundling with owned brand accessories. Take smart home security cameras for example. Big giants like Google nest, Ring camera, Blink, etc normally give resellers 15% – 40% markup to resell the products in their channels. Only replying on the device is not smart and sustainable, because basically your product and price are controlled by the Brand.
Many merchants would OEM or ODM the branded accessories for those devices they are reselling. Particularly the giants are also selling, for example a ring camera bundled with solar panel can cost you US$300, but you can sell bundled with your owned brand that just is priced at US$200. Most of the customers don’t care if the solar panel is the Ring brand or not. They care more about the device.
So even the merchant can’t earn profit sustainably from the device, as long as it is bundled with the branded accessories. The profit margin is very divine.
You must be familiar with this type of promotion, such as a US$1000 gift card that can free your first purchase item that is under US$100. (Normally it comes along with a T&C that waived 1st purchased item is not refundable). Or you should see these ads that joining a membership priced at US$99 dollars can let you enjoy free shipping, 5% discount and 2 free Netflix movies throughout the year.
This type of membership or loyalty program might not earn much profit. In case one, the promotion has waived US$100 of the customer 1st purchase. However, it locked the rest of US$900 in future money, for the purpose to avoid leaking to competitors and also the future profit can cover the US$100 cost.
Also in case two, the brand might not earn too much or even has a risk to lose from the customer product checkouts, because the membership includes free shipping and 5% discount through a year. However it can instantly create a cash inflow of US$99 from every customer. Once the customers might not come back to purchase often, or even don’t redeem the netflix movies. Basically the profitability from non-product transaction is very juicy
Cross border eCommerce is a number and calculation game, as the product pricing is vital and plays a very core role in the whole selling journey.
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