International Pricing Corridors
While we have seen substantial price adjustments in Europe since the advent of the Euro, important price differentials still prevail in many markets, representing an important threat to companies (and unfairness to customers).
Prices for identical products often differ by more than 40% between neighboring countries..
For a large part, these differences can be explained by local differences (customer preferences, brand strength, competition, regulations…) and, per se, they are not a problem and may even represent a profit opportunity by setting the ‘optimal price’ in each country which takes into consideration these differences…
But the reality is more complex, because retailers or wholesalers (or large clients that manage their supplies internationally) can increasingly take advantage of price differences between countries to reduce their price …. and bring havoc to your distribution strategy in the process
The Grey Trade Mechanism is simple
- Purchase of product in low price country
- Modification of product (if required)
- Transport of product to high price country
- Sale of product with higher margin
Coping with the International Pricing Challenge. What should companies do to cope with this unavoidable trend?
- Determine the optimal price in each individual country
- Find out whether parallel imports occur at these prices or whether large retailers are likely to follow' a Regional buying policy.
- If warranted by the above, implement a Regional price corridor
How does the PRICING corridor work?
It defines a ‘Reference Price’ for the Region
- Optimal Corridor Price for the Region
- Region based on competitive mapping
Country level deviations from Reference price
- Reflect local competitive & market conditions
- Are limited so as to limit parallel trade
Key Questions to answer include:
- Width of price corridor
- Level of price corridor, i.e. price level in the middle of the corridor
- Implementation, controlling and monitoring of the corridor
- What is the optimal position within the corridor for each individual country
It should also clearly define what price should be the basis of the Price Corridor ? (List price, Lowest net sales price, Average net sales price, …)
PriValEdge has defined a robust approach to Establishing & managing Regional Pricing Corridors, deployed successfully for a number of clients
Regional Pricing corridors represent, most of the time a good ‘compromise’, whilst prices are not ‘optimal’ given specific local conditions, they are usually not far from it and they keep the ‘parallel trade’ threat in check , thereby enabling us to actually control
Which would otherwise have been largely controlled by the parallel traders
PriValEdge can also help you optimize the level & width of the pricing corridor with our ‘multi-country Price optimization models’.