What Is Geographical Pricing & Why It’s An Underrated Growth Lever
Apr 2 2021
There are many factors that go into a successful pricing strategy. For SaaS businesses, pricing based on the target audience's perceived value of the product is the most common pricing strategy. To maximize the effectiveness of this strategy, you must accurately estimate the value your customers will place on your product. SaaS companies will often set up different pricing tiers targeted at different buyer personas, with features matching the needs of that group. What's often left out of the equation is the geographic location of the customer. In this post, we'll look at why that's a mistake and how adjusting your pricing to accommodate different locations can help grow your company.
A geographical pricing strategy is a practice of adjusting the price of a product or service depending on the geographical location of the buyer. The adjusted price often reflects the costs of shipping, local taxes, market competition, or willingness to pay. Geographical pricing helps improve profit margin, maximize revenue and increase sales in low-cost markets.
How to implement geographical pricing for your SaaS product
The simplest way to implement geographical pricing is what we like to call cosmetic localization. Many businesses list their selling prices only in their native currency. Expecting users to know or look up the conversions adds unnecessary friction and may cause hesitation in some buyers. Displaying your prices in the user's currency can help boost sales.
Simple cosmetic changes may help, but will not give the same growth benefit that true price localization does. So let's take a look at two methods you can use to implement proper geographical pricing for your SaaS product.
Price to match local currency and demand
Matching the local currency is the first step. After doing that, a simple geographical pricing strategy is to adjust the different prices for individual and different localities based on the demand for your product coming from those localities. For example, in some regions, piracy is a larger problem than in others. While you can't pirate SaaS products, you can pirate potential alternatives. This could make a populace in those regions much less likely to purchase and decrease your reach in that area. Lower prices in those regions can help spur sales. Similarly, some areas may have fewer options for what you are offering, increasing your customer pool and allowing for higher prices.
Comparable value-based pricing across all markets
A much more accurate way to localize your prices is to do a proper price sensitivity study for your particular product in a given area. This will not only tell you what customers' willingness to pay in that region, but also which features they may value over others. It's possible that you could see significant growth by adjusting your prices, as well as altering the structure of your pricing tiers to more closely align with the local buyer personas of a locality. In fact, you should take it a step further and adjust your marketing for those unique buyer personas as well. This will extract even more benefit from the cost of collecting the data.
Factors for successful revenue growth using a geographical pricing strategy
Although many businesses fail to put enough thought into their pricing strategy, determining your optimal price points is something that should be done carefully and with a plan. That same effort should be put into setting your initial prices and be repeated when you are going to localize them. Let's take a look at some factors you should consider when you're planning to localize your prices.
Your company's growth stage
In the beginning of your company's life, your pricing strategy is still in its infancy. Localizing too much here is a mistake, because it takes time and resources away from finding your ideal product-market fit. For the major areas you want to serve, start by localizing the currency, and perhaps the text on your site.
Once you get to the growth stage, you need to be pulling as many growth levers as possible. That means going all-in on true localization, conducting geographical pricing studies to find the ideal tiers and pricing for the major areas you are selling in, and localizing your marketing and copy for those areas.
If you've gotten to the late stage without any localization, then you are definitely losing out on profits. Localization is something you are going to have to do at this stage if you want to remain competitive. For businesses at this stage of development, geographical pricing should be part of a larger strategy to expand into new and possibly distant markets.
Reliable understanding of market opportunity
Each market is different, and not generically so. One product may be a hot-ticket item in one locality versus another, but the next product might fall flat. It isn't just the size of the economy, population density, shipping costs, point of production, or any single factor that determines what you can charge for a product in a given region. Culture, market realities in the region, and other factors play a huge role in how a given product is received there. If you haven't had pricing research conducted on a locality, there's a guarantee that you are missing out on an opportunity for more growth there. When you're ready to implement geographical pricing strategy, you want to make sure you have a firm understanding of the market opportunities unique to the regions you are targeting.
Lean initial rollout
One of the advantages of localizing from the startup stage as outlined in the first item of the section is that there's a built-in lean initial roll-out. This gives a company time to test each variable of the process in isolation or near isolation. You want to make sure you're focused on the optimization of every aspect of your localization, so this type of lean roll-out aids in keeping everything optimized as you continue to add more elements. You can do the same at any stage by localizing in steps as though you were just starting out.
Test and adapt
Another big problem businesses face is assuming that prices are something you just set and forget. Instead, you should view pricing as an iterative process. After the initial localization, you test out your new geographical pricing and adapt if it does not bring the results you were looking for. Additionally, you should re-evaluate all of your pricing, not just the localization, every 6 months to ensure you're continuously accounting for changing market dynamics.
Is geographical pricing the right strategy for your business?
We've mentioned that many businesses don't spend much time at all on pricing, which leads to losses. If your company is in the growth stage, localizing your pricing policies is likely something you should be doing. Is geographical pricing right for your business? Ultimately, it depends on your product. Cosmetic localization will almost always be worth it, which is why it's recommended even in the startup stage. As for full localization, it's certainly something you should at least look into.
Your market research may conclude that it's not worth it for whatever reason, but here are some benefits that you could miss out on by doing nothing:
Diversifies your revenue channels across markets
When you move from a single pricing model for all regions to multiple pricing models tailored specifically for each region, you unlock a much more agile revenue model that can adapt dynamically to each individual market.
Builds credibility on a local level
One thing that doesn't change about customers regardless of the region is that they like to be treated as more than a number. Implementing geographical pricing policies, as well as localizing copy and software lets customers in those regions know that you care about their business.
An underrated growth lever (if done right)
Pricing is one of the most important growth levers and utilizing geographic pricing correctly can be a relatively easy way to gain 25-50% higher growth rates, quickly. The key is having reliable research for the region, your competitors, and their retail prices so you price yourself into growth rather than out of the market.
Location-based pricing is a strategy used to more accurately reflect the costs of doing business in a certain area or to align better with the price sensitivities there. With this pricing method, prices are set differently depending on the locality doing the purchasing.
What is the best pricing strategy?
There's no universal "best" pricing strategy. For physical products, cost-plus pricing is a common and successful pricing method. SaaS businesses tend to perform better with value-based pricing. And of course, geographic pricing can be a great addition to both of those strategies.
How should I segment my target market?
This is something else, where there's no universally correct answer. Some products may segment neatly across a given demographic whereas others won't. Ideally, your segmentation, and the buyer personas that result from it, will be drawn from data such as analytics and from market research unique to your business or product.
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