Paul’s Pricing Dictionary: Inter-Regional Delta – a globally used metric … so why not use it?

Man playing chess with monkeyWhen people outside the US are buying any significant item for either business or personal use, they will always compare the local price to the US price – or that of some other low-friction trading zone like Hong Kong or Dubai or the UK or the Netherlands – both at a list and promo price level. Then that data is used to negotiate a bigger discount from their local supplier, or they’ll import it or have their brother-in-law export it to them. The transparency of global prices on the internet, the low cost and ease of international communications, shipping and payment – as well as movement of people around the world – has made this much easier than it used to be.

Yes, it’s called the gray market. Yet an inter-regional price delta doesn’t have to trigger a grey market shipment to cause an adverse financial impact to you. This is the big gotcha that most people don’t get. Most of the time the information is used by your customers to screw a better discount out of your local sales people who are generally pretty powerless to resist, particularly if you haven’t armed them with basic information like inter-regional price comparisons that your customers have. And in the process you will have ticked off those customers too – did they really have to put all that effort in just to get the discount they “deserved” out of you – as well as left your sales-force demoralized and disenchanted?

So what I like about this metric as a pricing manager is (a) applying it your own prices is a quick, simple control mechanism, particularly with today’s volatile exchange rates (b) applying it to your competitors’ prices yields a deep understanding of their behavior.

Did I mention that this is a quick, simple, inexpensive metric to monitor? No product feature adjustments required as with competitive analysis ….

Did I also mention that much more expensive competitive analysis will not identify this as an issue? Particularly if your competitors are monitoring your inter-regional deltas – knowing that you are not – and are pricing accordingly.

Yet for some reason a lot of execs think that they can choose to ignore this metric. It is very strange behavior. I think that it is to do with over-confidence: see my blog Pricing: which other discipline would give you a B+ for being smart enough to be a “Don’t Know”? Because there are absolutely no benefits to be had in ignoring this inexpensive metric, but potentially huge disadvantages and costs if you do.

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