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.

Paul’s Pricing Dictionary: Inter-Regional Delta – Positive Illustrations …

P 38x38 I was asked if could explain the value of inter-regional deltas a little more or at least give an example. It’s a metric which lots of folks don’t get, and so they dismiss it, which is great for me because when they do that, their pricing is automatically “sub-optimized” and so needs someone to come along and “optimize” it for them – Pricing Problems? Better Call Paul 281-782-9821.

While I have a lot of great negative examples of things that have gone wrong when people have ignored and/or been blissfully unaware of inter-regional deltas, I thought I’d start with a couple of positive ones in this blog. So imagine these two real cases (numbers, countries changed):

a) a guy on the US bid desk calls me up: could I send him the latest inter-regional deltas by product and also send the overall trend for the past couple of years? Sure. He is US-based but bidding on a global contract for a multi-national based in Germany and thought it might give him a better idea of how to discount in Europe relative to the US. You know, if our list prices are (say 5%) higher in Europe than the US then he could discount (say 3%) more in Europe, and – given the same product mix, etc. – still get the same margins. That’s right. He had been paying attention. But if the competitors’ inter-regional delta was greater and much higher in Europe than we were (say 15%), then they would have to increase their discount in Europe by a much a bigger amount than we would (say 10%) to be competitive. But they would have to know their inter-regional deltas to realize that they had to do this. Right. So could I confirm that our major competitor was still unaware of this inter-regional delta stuff? I could: their inter-regional deltas were still inconsistent and showed that they were clearly not monitoring it. I could hear the wheels turning in his mind. I could sense the opposition were already being out-maneuvered. We won the contract.  Imagine that in reverse: your competitor has worked out which metrics you are ignoring and is playing the game in the full knowledge that he knows what you’re ignoring and funnily enough you lose the bid.

b) a business unit leadership meeting at their QBR sitting around and reviewing their competitors’ pricing. Not their own pricing. Nor even the competitive premiums between their pricing and their competitors’. Just the competitor’s pricing, viewed through the lens of inter-regional deltas. This was sort of fun because we knew they didn’t monitor inter-regional deltas. It’s also sort of creepy when you start to realize that you understand more about your competitors’ pricing than they do themselves. So the questions began. So six months ago their lowest pricing was in China and now it is Canada? Yes. And before China it was the US. Yes. And their current up-sell strategy in APJ is structured completely different to and inconsistent with US & Europe. Yes. Why would they do that? Well, we know that they are not doing it deliberately. It’s just a consequence of neglect. Now, if we just …….. so you can imagine how the conversation goes. Or maybe you can’t. Also we knew we were having a discussion about our competitors’ pricing that we knew they weren’t having about ours. Precious.

So here’s a metric which most people on the planet are familiar with and use – more on that in a following blog – and yet some either ignore it through blissful ignorance or think they can choose to ignore it, presumably because they think they know better. So, knock yourselves out. Ignore it at your leisure. As the pulmonologist said when he was asked why he was at the cigar smokers’ convention, “These people are meant to be intelligent, they’ve been warned: but it’s great for business.”

Paul’s Pricing Dictionary: Inter-Regional Delta

P 38x38 Inter-Regional Price Delta, n

A pricing metric used by successful global businesses for pricing efficiency, effectiveness and grey marketing mitigation. For those of you who would like to be global and successful but don’t know what an inter-regional delta is, or why it is significant, or more simply, are wondering why you are not achieving your business objectives, call 281-782-9821.


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