Geographic and International Pricing

Geographic Pricing Approaches

Geographic pricing addresses how to handle price variation across locations. Key approaches include:

FOB Origin Pricing

Price is set at the shipping point; customer pays freight. Simple to administer but shifts burden and unpredictability to customers. Works well when customers have freight leverage or when shipping costs vary significantly.

Uniform Delivered Pricing

Same price everywhere, with freight costs averaged across all customers. Simple for customers and sales teams. Nearby customers subsidize distant ones. Works when freight is small relative to product value or when simplicity matters most.

Zone Pricing

Different prices for different geographic zones based on freight cost bands. Balances simplicity with cost accuracy. Define zones to be meaningful (significantly different freight costs) but manageable (not too many zones).

Basing-Point Pricing

Price calculated as if shipped from specified point(s), regardless of actual origin. Historically used in heavy industries (steel, cement). Potentially anticompetitive if used to coordinate industry pricing—legal risks require careful consideration.

International Pricing Complexity

International markets add layers of complexity requiring careful navigation:

Currency Considerations

Price in local currency to simplify customer decisions, but manage exchange rate risk. Options include regular price adjustments as exchange rates move, currency escalation clauses in contracts, pricing with built-in exchange rate buffers, and hedging through financial instruments.

Local Competition

Competitive landscapes vary by country. Premium positioning in one market may face economy competition in another. Local competitors may have cost advantages. Research each market's competitive dynamics independently.

Tariffs and Duties

Import duties affect landed cost and competitive position. Factor duties into pricing analysis. Understand tariff classifications and work with customs experts to minimize duty burden legally.

Transfer Pricing

Prices charged between related entities across borders have significant tax implications. Transfer prices must be defensible as arm's length—what unrelated parties would charge. Tax authorities scrutinize aggressively. Work with tax advisors to establish compliant transfer pricing policies.

Gray Market Prevention

Gray markets occur when products intended for one market are resold in another, typically from low-price regions to high-price regions. This undermines pricing strategy and damages channel relationships.

Prevention strategies include

Contractual restrictions: Prohibit unauthorized resale in distribution agreements (enforceability varies by jurisdiction)
Product differentiation: Different packaging, features, or model numbers for different regions
Price corridors: Limit cross-region price differences to levels below arbitrage profitability
Track and trace: Serial number monitoring to identify leakage sources
Channel selection: Work with distributors committed to territorial integrity

Case Study: Managing International Price Corridors A consumer electronics company faced persistent gray market problems—products sold at 30% discount in Southeast Asia were appearing in European retail channels, undermining authorized distributors and premium positioning. Analysis revealed the arbitrage economics: even with shipping and handling, resellers could profit when price gaps exceeded 20%. The solution: establish maximum price corridors of 15% between any two regions. This required raising prices in lowest-price markets (reducing volume but improving margins) and selectively reducing prices in highest-price markets. Gray market activity declined dramatically—the economics no longer worked. Regional contribution actually improved as margin gains in low-price markets exceeded modest volume losses.

Key Takeaways

Geographic pricing approaches range from simple (uniform) to complex (zone, basing-point)
International pricing requires managing currency, local competition, tariffs, and transfer pricing
Gray markets emerge when regional price gaps exceed arbitrage costs
Price corridors and product differentiation help prevent unauthorized cross-border arbitrage

Prevention strategies include

Contractual restrictions: Prohibit unauthorized resale in distribution agreements (enforceability varies by jurisdiction)

Product differentiation: Different packaging, features, or model numbers for different regions

Price corridors: Limit cross-region price differences to levels below arbitrage profitability

Track and trace: Serial number monitoring to identify leakage sources

Channel selection: Work with distributors committed to territorial integrity

Case Study: Managing International Price Corridors A consumer electronics company faced persistent gray market problems—products sold at 30% discount in Southeast Asia were appearing in European retail channels, undermining authorized distributors and premium positioning. Analysis revealed the arbitrage economics: even with shipping and handling, resellers could profit when price gaps exceeded 20%. The solution: establish maximum price corridors of 15% between any two regions. This required raising prices in lowest-price markets (reducing volume but improving margins) and selectively reducing prices in highest-price markets. Gray market activity declined dramatically—the economics no longer worked. Regional contribution actually improved as margin gains in low-price markets exceeded modest volume losses.

Key Takeaways

Geographic pricing approaches range from simple (uniform) to complex (zone, basing-point)

International pricing requires managing currency, local competition, tariffs, and transfer pricing

Gray markets emerge when regional price gaps exceed arbitrage costs

Price corridors and product differentiation help prevent unauthorized cross-border arbitrage