Editor’s note: Koen Pauwels is co-founder of the DATA-Initiative and distinguished professor at Northeastern University, Boston. Thomas Fandrich is co-founder and managing director – U.S., at quantilope, New York City. Raoul Kübler is junior professor of marketing, Marketing Center Münster, WWU Münster.
For years, brands have been toying with the idea of a global consumer. A persona who’s preferences, digital competence and budgets all align in a connected world. Supply chain optimization, universally available products (such as digital apps) and connections made through social media all support the notion of a global consumer and the feeling that our cultures are becoming increasingly more similar around the world.
But how does a global consumer affect product pricing and marketing? The age-old dilemma of whether to localize or globalize product marketing (and marketing research) strategies remains a highly debated topic. For pricing specifically, it’s easy to assume that a steady increase in global wealth would result in the need to implement a global pricing strategy to optimize revenue and reduce tension on resources. A globalized pricing strategy would include unified, income-adapted prices for products with single price promotion campaigns, offering similar changes to product prices across countries.
However, our research tracking digital app purchasing behavior of consumers across 60 countries found that price sensitivities are not yet subject to globalization. As it turns out, there is a clear distinction between how consumers respond to changes in a product's price that substantially differs based on where they live. For example, in Italy, offering a 10% price discount will result in a near 5% increase in app popularity. However, in China, the same decrease in price will only result in an increased popularity of 1%.
The high degree of diversity in price sensitivity between nations emphasizes the need to localize price promotion activities accordingly. The data further shows that while decreasing prices will significantly improve demand and compensate for revenue decreases in Italy, India, Finland and Poland, a similar price promotion in the United States, Russia, South-Korea, Canada and China may backfire as the increase in demand will not make up for the revenue decrease caused by a lower price level. For example, a company running a 10% price promotion off of the regular price of product costing $2.99 will obtain more than twice the percentage sales increase in Italy versus in the U.S. As a result, revenues will go up in Italy but go down in the U.S. as the additional demand does not compensate for the margin loss.
The research further goes on to reveal distinct cultural characteristics that impact a country's average level of price sensitivity including degrees of general masculinity, individualism and income distribution. What we found is that price sensitivities are systematically higher in countries with higher masculinity and uncertainty avoidance such as Italy and Malaysia. However, countries with the lowest price sensitivities are those with low uncertainty avoidance and high-income inequality including Spain.
As such, price sensitivity depends on a variety of factors including both economic and cultural characteristics of each nation. Based on these variables, adding a high price tag to a product can have one of two reactions from consumers. For example, uncertainty around the value of a product can be reduced with a high price (as a measurement of its quality) or increased if a consumer is uncertain around whether or not a product is worth the high cost. Minimal variations in price sensitivity may have less of an impact on consumers in richer countries who have more disposable income, and as a result, changes in product prices represent a lower impact on their budgets.
A competitive advantage
For managers, understanding variance in price sensitivities provides a competitive advantage to accurately predict the performance of pricing campaigns. It further allows brands to adjust promotional offers based on region to maximum additional revenue.
To learn more about price sensitivity variance and how different countries rank read “App popularity: Where in the world are consumers most sensitive to price and user ratings?”