I don't want to go into fair or unfair as the author does (that is a very complex discussion), but it is definitely the most optimal way to price your product. The basic idea is – charge every customer the max they are willing to pay. As long as everyone is above the break-even point, you will maximize your profits.
This is definitely not a new idea ("emerged these past few months" as the author states). I remember people would pack their bags with boxes of Microsoft Windows and Office when coming back from foreign trips. Same goes for subscription pricing. That premium $20/mo Netflix plan costs $4 in Turkey.
It's also a bit weird to see a service advertise their price discrimination. You are essentially saying "your country has a shit economy, so here's a discount" on the checkout page. And then are you also going to show the opposite – "you are in the USA so need to pay 50% more than average for this product"?
> it is definitely the most optimal way to price your product.
Yes, but it ignores some second-order effects. When you leave some money on the table by charging some users less than the max they are willing to pay (often referred to as consumer surplus), you get some benefits like more word of mouth, higher likelihood to get repeat purchases from a customer, and so on.
Think of the feeling you had the last time you bought something and thought "oh, this is so expensive i can barely justify paying for it" vs "oh my God, this is so worth the money I'm going to feel good for the next week and tell all my friends it's a no-brainer".
Most people underestimate these effects when they price discriminate.
Car rentals often show wide variation based on visitor origin. This was observed decades ago (I recall an economics professor mentioning it way back), and on a cursory check just now I was quoted up to 40% lower prices at an international airport, for an otherwise identical rental, by presenting as European* rather than American or Australian.
Such a difference cannot be explained by PPP or insurance factors. We might conjecture that consumer expectations account for the price discrimination, e.g. visitors from Europe may be accustomed to high quality integrated mass transit (including to/from the airport) and thus resent a high car rental price, whilst Australians and Americans assume they'll need a rental to get around, with consequently higher willingness to pay.
* tested with UK, France, Germany, Italy, and the Netherlands.
This same effect is why individuals get charged so much for healthcare. It's really easy to leverage information asymmetry to make a ton of money, rule #1 is to never let the customer know how much things cost to you
I am a bit contrarian on this. While I do agree that market segmentation maximizes revenue, I think that with regards of fairness, long term it is best that prices are the same worldwide.
The reason is because if someone in a poorer country gets a good at a lower price than someone on a richer country, that person will have less pressure to raise their prices to eventually reach real equality.
So the only real driver for segmentation for prices is to maximize revenue, not to be more fair.
I remember that before the EUR, the items in Zara stores had the prices in all European currencies (ESP, ITL, DEM, etc). It was simpler for production to just have one single ticket will all possible prices. If you made some algebra to compare actual pricing, you could see that prices were very different, but not because of fairness.
For example, at the time, the absolute value of a Zara product for Greece was above the absolute value of the same product in Spain. The GDP per capita of Greece was lower than the GDP per capita of Spain, but at the time in Greece Zara products were perceived as luxury items and in Spain were perceived as low cost, so Zara capitalized on that perception.
It's just taught as an assumption that you will do this in a business school's bachelors curriculum. For different countries they'd just treat it as a different market with different pricing but a lot of times it's done by acting like something is a different product through packaging and branding. Like the 150 dollar lip cream is probably chemically not that different than the 10 dollar one but they just make it feel more premium and sell it under a premium brand name. Or even just the way consumer electronics include or don't include features at various product levels is also price discrimination. (Which is why sometimes the low tier product includes a physical ability to do something but it's turned off with software or something. To nudge people willing to pay more to the one aimed at them.)
Back in the early 2000s so long as you were buying two or more copies of Adobe Photoshop it cost as much to hop on a 28 hour round trip plane ride from NZ to the US to buy those copies rather than purchase and download the software off Adobe's website (which was geolocked and priced to match the only local physical distributor).
With physical goods price discrimination is limited by arbitrage opportunity in moving the good from one country to another. With intellectual property licensing can tie a good to a location which means that the price discrimination can effectively be any amount.
My personal opinion is regulation should proscribe the price discrimination past some multiple of purchasing parity to curtail the worst possible abuses. Having said that it's not a major real world problem while piracy remains as an outlet for abused markets.
> It's also a bit weird to see a service advertise their price discrimination.
I think there are two angles here that are can be rational depending on what you are selling, and to whom.
One is "stakeholder consumerism" similar to e.g. fair trade coffee. Some consumers want their payment to be part of a system that shares benefits with other parts of the economy. The provider is saying to the rich world, who will provide most revenue: you pay more so that I can provide my service everywhere while maintaining some margin.
The other is reassuring people that your price discrimination "isn't personal". All prices must thread the needle of making the product more valuable than the buyer's next best alternative, but the alternatives vary from buyer to buyer. PPP isn't perfect but it's a non crazy proxy for what the buyer is giving up to have your product (eg one dinner in Switzerland vs a month's food in Cambodia). And yes, it's a weak proxy when one region has a really wide range of incomes.
Some places a dollar goes far, that cannot be construed as 'shit economy'. The place where a $10 USA haircut costs $0.5 need not be due to local (bad) economic situation. Similarly for food and other living essentials.
I encourage the author to take an economics class. There's a common trend of smart people trying to fumble through what amount to the first semester of economics. Even a brief exposure gives you enough knowledge to know the name of what you are interested in.
In this case, it's an argument for price discrimination -- charging different prices to different buyers based on their willingness to pay. And in fact "textbooks" is one of the examples given on https://en.wikipedia.org/wiki/Price_discrimination#Textbooks
This allows you to lean on what's already known. Specifically, identifying market segments with different elasticity and enforcing the scheme.
Have people started using the phrase "purchasing power parity" to refer to a pricing scheme that corrects for PPP? I think "parity" might be leading people astray because it actually just refers to an adjustment to GDP or other indicators for purchasing power. It doesn't refer to a pricing scheme. I could suggest the name "Purchasing Power Parity Pricing" if you want something you can say you "support".
(That said: I think this is isolated to extremely high margin goods and will not translate to others.)
This works only if the product you are selling has near 100% margin. If there is COGS involved (cost of goods sold), if your widget costs $15 to make it does not matter what target customer purchasing power is, you have to sell it at >=$15 or you are losing money. This is why you can not go to Somalia and purchase a Tesla for $10k or rent AWS compute at 1/10 of price for others.
> If there is COGS involved (cost of goods sold), if your widget costs $15 to make it does not matter what target customer purchasing power is, you have to sell it at >=$15 or you are losing money.
Reason why there's an uptick in SaaS companies in Eastern Europe, Asia, and West Africa. They can out-compete on price already and will gradually manage to build software of similar quality as their counterparts living in higher cost-of-living countries.
This has been Freshdesk [0] / Zoho (both based in India) modus operandii for one to two decades now. And one I'm keen on living upto.
yah, this is all econ 101 stuff. what you're talking about is a specific application of marginal analysis to a firm's pricing policy, namely, making sure marginal revenue is greater than marginal cost (or, MC ≤ MR), ignoring sunk costs (like fixed costs). in software, fixed costs are high, but variable costs (e.g., COGS) are tiny, which is why software can be priced at just about any level (including "free") and still be profitable (in the absence of competition).
the other economic concept at play here is arbitrage, which is being able to buy low and sell high risk free.
Good point. Could the PPP concept just be applied to your profits rather than your revenues, with a floor under which you just don't sell? Or, in the interest of equity at the cost of a little more complexity, deliberately round up pricing in profitable-after-COGS regimes to subsidize loss-after-COGS regimes?
This is a huge security flaw that I usually report as "client side pricing."
Passing the final price (or even just the currency) from the client to your payment processor allows a malicious actor to manipulate the price they pay for goods.
I think this attempt to rebrand this kind of pricing as "promoting fairness" is really unfortunate. Companies do not do this sort of thing to be more "fair" they do it to make more money. Always.
This tends to lead to consumer hostile behaviors such as (trying to) block VPNs and harassment of international travelers and migrants.
Automatically basing this on PPP will make governments much more interested in gamifying PPP measures (such as what Argentine did with the Big Mac Index). This is setting aside all the other issues with calculating PPP in a fair way worldwide.
I'm Jules, previously working on Exportator, a solution to generate Parity Promo Codes, now working on pricery.io to help digital products price themselves at PPP prices with Stripe in 5min.
Parity pricing combined with selling in localized currencies is a MAJOR move to increase international sales. They are 3 ways to localize prices:
Love the topic, would love to know how to help the cause
PS: Regarding VPNs. A, very few people use it to cheat. B, if it makes you feel better, services like ipinfo.io index IP ranges used by VPN providers. Which means to cheat PPP one would have to use private VPN. In other words, 99,9% of VPNs can be detected, in which case, just default back to a $USD price. Pricery helps you offer cosmetic prices, PPP pricing, and VPN protection in 5min out of the box with Stripe. Would love to chat [email protected]
I was aware of this potential issue when I implemented PPP on my course. It turns out almost nobody uses this trick, although a few told my about it. I guess when you are transparent with your users, they are actually happy to pay the fair price? Or maybe I’m too naive ;)
In Apple's case, you as a customer, need a valid payment method from the country your account is going to be.
PS: Apple, probably Google too, have tiered pricing where you choose the price of your app or your content will cost and Apple takes care of the local pricing which is adjusted to your users purchasing power.
As Brazilian, I always ask for parity prices for services charged in dollar. It’s been a while our currency went downhill; right now, it’s BRL 5 for USD 1. That “only USD 9” that’s a no-brainer in the US becomes very costly when converted to BRL.
Surprisingly (or not), most SaaS I do business with give me parity prices. I really appreciate that and it makes me more loyal to them.
I hate this. I also hate that the cost to produce an item/product is sometimes quite opaque. I don't care if you think I can pay more. Stuff like this just tells me your ripping me off to get a larger margin of profit.
This is irrational thinking as an end user. All that matters is that the product provides enough value to justify the price. The price in other countries may as well not exist if they aren’t offers available to you.
I was going to write something whiny here, but when I opened the course site I reconsidered. I'm from the Netherlands, and based on that, got a 20% discount.
Which is only fair, given that we're a developing nation and all that, but a first for me. We normally pay +20%. So I'm now totally convinced of PPP being fair.
On an unrelated note, SaaS prices can lead to funny situations, especially when tangible costs per customer approach zero. At work we were negotiating with a SaaS vendor.
Them: our quote for your intended use is 230K/y.
Us: Actually, we only have 20K of budget.
Them: That'll work too.
Makes you wonder how far below 20K we could have gone.
You should offer products at the cost to provide them plus a reasonable profit margin. If you're charging so much more than it actually costs you to provide that you can make it equally affordable in Switzerland and Somalia, you're already an asshole and no amount of social activism pricing will erase that.
You're missing the fact that most courses (i.e. the ones that aren't wildly successful) have a large upfront cost. The marginal cost might be a tiny fraction of the price, but that doesn't necessarily translate to a profitable enterprise overall.
You can see the same effect with railways and aeroplanes. There's definitely plenty of operational costs, but the capital costs are relatively high so you want to keep your capital goods (the railways/trains/planes) active all the time even if you only make a tiny profit on each service. However, these businesses often only pan out if they can attract high-margin customers (e.g. business class flyers).
What is "cost to provide" for a SaaS product? Just the marginal computing costs? You have to recover your development costs somehow, apparently that makes you an asshole.
How people here in Europe, for example CZ. Can buy things for even higher price in EUR than in USD, yet median salary here is 4x smaller than median salary in US.
Ridiculous.
I would consider this if i operated a consumer SaaS. For a b2b product you really need to spend all your pricing energy on finding ways to charge your best customers more, not find more marginal customers that will erode your gross margins.
Pricing isn’t about “fair”, pricing is about an offer’s utility to the buyer in relation to the financial abilities of the buyer. Anything else will sooner or later fail, and sometimes cause extreme damage while falling.
Complexity will invite arbitrage. What happens when someone enterprising enters all countries and surfaces the lowest price codes on a web site for everyone to find? Or when someone buys via VPN and consumes without.
To ensure this system is not abused, you need to match consumption IP location and purchase IP location. If you have consumption via wildly varied IPs that would be a red flag as well. By letting the price difference be known, you encourage a normally willing and able customer to use you via VPN instead.
[+] [-] paxys|3 years ago|reply
I don't want to go into fair or unfair as the author does (that is a very complex discussion), but it is definitely the most optimal way to price your product. The basic idea is – charge every customer the max they are willing to pay. As long as everyone is above the break-even point, you will maximize your profits.
This is definitely not a new idea ("emerged these past few months" as the author states). I remember people would pack their bags with boxes of Microsoft Windows and Office when coming back from foreign trips. Same goes for subscription pricing. That premium $20/mo Netflix plan costs $4 in Turkey.
It's also a bit weird to see a service advertise their price discrimination. You are essentially saying "your country has a shit economy, so here's a discount" on the checkout page. And then are you also going to show the opposite – "you are in the USA so need to pay 50% more than average for this product"?
[+] [-] Ozzie_osman|3 years ago|reply
Yes, but it ignores some second-order effects. When you leave some money on the table by charging some users less than the max they are willing to pay (often referred to as consumer surplus), you get some benefits like more word of mouth, higher likelihood to get repeat purchases from a customer, and so on.
Think of the feeling you had the last time you bought something and thought "oh, this is so expensive i can barely justify paying for it" vs "oh my God, this is so worth the money I'm going to feel good for the next week and tell all my friends it's a no-brainer".
Most people underestimate these effects when they price discriminate.
[+] [-] inopinatus|3 years ago|reply
Such a difference cannot be explained by PPP or insurance factors. We might conjecture that consumer expectations account for the price discrimination, e.g. visitors from Europe may be accustomed to high quality integrated mass transit (including to/from the airport) and thus resent a high car rental price, whilst Australians and Americans assume they'll need a rental to get around, with consequently higher willingness to pay.
* tested with UK, France, Germany, Italy, and the Netherlands.
[+] [-] jonas21|3 years ago|reply
https://www.joelonsoftware.com/2004/12/15/camels-and-rubber-...
[+] [-] SQueeeeeL|3 years ago|reply
[+] [-] antaviana|3 years ago|reply
The reason is because if someone in a poorer country gets a good at a lower price than someone on a richer country, that person will have less pressure to raise their prices to eventually reach real equality.
So the only real driver for segmentation for prices is to maximize revenue, not to be more fair.
I remember that before the EUR, the items in Zara stores had the prices in all European currencies (ESP, ITL, DEM, etc). It was simpler for production to just have one single ticket will all possible prices. If you made some algebra to compare actual pricing, you could see that prices were very different, but not because of fairness.
For example, at the time, the absolute value of a Zara product for Greece was above the absolute value of the same product in Spain. The GDP per capita of Greece was lower than the GDP per capita of Spain, but at the time in Greece Zara products were perceived as luxury items and in Spain were perceived as low cost, so Zara capitalized on that perception.
[+] [-] tracerbulletx|3 years ago|reply
[+] [-] greycol|3 years ago|reply
With physical goods price discrimination is limited by arbitrage opportunity in moving the good from one country to another. With intellectual property licensing can tie a good to a location which means that the price discrimination can effectively be any amount.
My personal opinion is regulation should proscribe the price discrimination past some multiple of purchasing parity to curtail the worst possible abuses. Having said that it's not a major real world problem while piracy remains as an outlet for abused markets.
[+] [-] HWR_14|3 years ago|reply
Given network effects, and depending on your horizon, I'm not even sure everyone needing to be above your breakeven is required.
[+] [-] evrydayhustling|3 years ago|reply
I think there are two angles here that are can be rational depending on what you are selling, and to whom.
One is "stakeholder consumerism" similar to e.g. fair trade coffee. Some consumers want their payment to be part of a system that shares benefits with other parts of the economy. The provider is saying to the rich world, who will provide most revenue: you pay more so that I can provide my service everywhere while maintaining some margin.
The other is reassuring people that your price discrimination "isn't personal". All prices must thread the needle of making the product more valuable than the buyer's next best alternative, but the alternatives vary from buyer to buyer. PPP isn't perfect but it's a non crazy proxy for what the buyer is giving up to have your product (eg one dinner in Switzerland vs a month's food in Cambodia). And yes, it's a weak proxy when one region has a really wide range of incomes.
[+] [-] dragonwriter|3 years ago|reply
[+] [-] jasonpeacock|3 years ago|reply
https://www.computerworld.com/article/2588337/amazon-apologi...
[+] [-] RobotToaster|3 years ago|reply
Hence the popularity of Turkish and Pakistani VPN tunnels.
[+] [-] achow|3 years ago|reply
Some places a dollar goes far, that cannot be construed as 'shit economy'. The place where a $10 USA haircut costs $0.5 need not be due to local (bad) economic situation. Similarly for food and other living essentials.
[+] [-] coffeeblack|3 years ago|reply
[+] [-] mr_toad|3 years ago|reply
Only if you have no competition. If you do, you can expect them to undercut your most profitable markets.
[+] [-] kevinpet|3 years ago|reply
In this case, it's an argument for price discrimination -- charging different prices to different buyers based on their willingness to pay. And in fact "textbooks" is one of the examples given on https://en.wikipedia.org/wiki/Price_discrimination#Textbooks
This allows you to lean on what's already known. Specifically, identifying market segments with different elasticity and enforcing the scheme.
Have people started using the phrase "purchasing power parity" to refer to a pricing scheme that corrects for PPP? I think "parity" might be leading people astray because it actually just refers to an adjustment to GDP or other indicators for purchasing power. It doesn't refer to a pricing scheme. I could suggest the name "Purchasing Power Parity Pricing" if you want something you can say you "support".
(That said: I think this is isolated to extremely high margin goods and will not translate to others.)
[+] [-] freediver|3 years ago|reply
[+] [-] ignoramous|3 years ago|reply
Reason why there's an uptick in SaaS companies in Eastern Europe, Asia, and West Africa. They can out-compete on price already and will gradually manage to build software of similar quality as their counterparts living in higher cost-of-living countries.
This has been Freshdesk [0] / Zoho (both based in India) modus operandii for one to two decades now. And one I'm keen on living upto.
[0] https://archive.is/h1n6z
[+] [-] paxys|3 years ago|reply
[+] [-] clairity|3 years ago|reply
the other economic concept at play here is arbitrage, which is being able to buy low and sell high risk free.
[+] [-] Arubis|3 years ago|reply
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] libeclipse|3 years ago|reply
A bigger issue is that anyone with a VPN can access the discount
[+] [-] mike_d|3 years ago|reply
Passing the final price (or even just the currency) from the client to your payment processor allows a malicious actor to manipulate the price they pay for goods.
[+] [-] shkkmo|3 years ago|reply
This tends to lead to consumer hostile behaviors such as (trying to) block VPNs and harassment of international travelers and migrants.
Automatically basing this on PPP will make governments much more interested in gamifying PPP measures (such as what Argentine did with the Big Mac Index). This is setting aside all the other issues with calculating PPP in a fair way worldwide.
[+] [-] julesmaregiano|3 years ago|reply
I'm Jules, previously working on Exportator, a solution to generate Parity Promo Codes, now working on pricery.io to help digital products price themselves at PPP prices with Stripe in 5min.
Parity pricing combined with selling in localized currencies is a MAJOR move to increase international sales. They are 3 ways to localize prices:
1/ Display price in local currencies. Aka "cosmetic pricing". Do you know what 670₪ is worth? Same for $US for many 2/ Bill in local currencies. I wrote an article on how billing in local currencies help win precious % https://www.pricery.io/blog/how-to-turn-stripe-currency-conv... 3/ Parity pricing. Here is a calculator I made to give one an idea of the how a price feels in another currency: https://www.localizationtools.io/purchasing-power-parity-cal...
Love the topic, would love to know how to help the cause
PS: Regarding VPNs. A, very few people use it to cheat. B, if it makes you feel better, services like ipinfo.io index IP ranges used by VPN providers. Which means to cheat PPP one would have to use private VPN. In other words, 99,9% of VPNs can be detected, in which case, just default back to a $USD price. Pricery helps you offer cosmetic prices, PPP pricing, and VPN protection in 5min out of the box with Stripe. Would love to chat [email protected]
[+] [-] ipince|3 years ago|reply
[+] [-] scastiel|3 years ago|reply
I was aware of this potential issue when I implemented PPP on my course. It turns out almost nobody uses this trick, although a few told my about it. I guess when you are transparent with your users, they are actually happy to pay the fair price? Or maybe I’m too naive ;)
[+] [-] mrtksn|3 years ago|reply
PS: Apple, probably Google too, have tiered pricing where you choose the price of your app or your content will cost and Apple takes care of the local pricing which is adjusted to your users purchasing power.
[+] [-] FormFollowsFunc|3 years ago|reply
[+] [-] HideousKojima|3 years ago|reply
[+] [-] sachinneravath|3 years ago|reply
[+] [-] rpgbr|3 years ago|reply
Surprisingly (or not), most SaaS I do business with give me parity prices. I really appreciate that and it makes me more loyal to them.
[+] [-] yboris|3 years ago|reply
https://income-inequality.info/
It's really eye-opening stuff to see that someone earning US poverty level income of $11k means they earn more than 85% of people in the world!
You can see the code for it on Github as well: https://github.com/whyboris/Global-Income-Distribution
[+] [-] anfilt|3 years ago|reply
[+] [-] Gigachad|3 years ago|reply
[+] [-] fleddr|3 years ago|reply
Which is only fair, given that we're a developing nation and all that, but a first for me. We normally pay +20%. So I'm now totally convinced of PPP being fair.
On an unrelated note, SaaS prices can lead to funny situations, especially when tangible costs per customer approach zero. At work we were negotiating with a SaaS vendor.
Them: our quote for your intended use is 230K/y. Us: Actually, we only have 20K of budget. Them: That'll work too.
Makes you wonder how far below 20K we could have gone.
[+] [-] quickthrower2|3 years ago|reply
[+] [-] causality0|3 years ago|reply
[+] [-] chad_oliver|3 years ago|reply
You can see the same effect with railways and aeroplanes. There's definitely plenty of operational costs, but the capital costs are relatively high so you want to keep your capital goods (the railways/trains/planes) active all the time even if you only make a tiny profit on each service. However, these businesses often only pan out if they can attract high-margin customers (e.g. business class flyers).
[+] [-] jojobas|3 years ago|reply
[+] [-] RektBoy|3 years ago|reply
How people here in Europe, for example CZ. Can buy things for even higher price in EUR than in USD, yet median salary here is 4x smaller than median salary in US. Ridiculous.
[+] [-] tpmx|3 years ago|reply
https://europa.eu/youreurope/citizens/consumers/unfair-treat...
"Price discrimination is not allowed"
[+] [-] jasmer|3 years ago|reply
Think of how your valuable NA/European customers will react knowing their peers in country XYZ get the same product for 80% less?
How will that affect the perception of your brand?
It's quite a complicating factor.
[+] [-] encoderer|3 years ago|reply
[+] [-] benevol|3 years ago|reply
Bonus: You don't need to worry about/collect/pay VAT in God-knows-how-many-different-countries around the world.
[+] [-] coffeeblack|3 years ago|reply
[+] [-] dzink|3 years ago|reply
To ensure this system is not abused, you need to match consumption IP location and purchase IP location. If you have consumption via wildly varied IPs that would be a red flag as well. By letting the price difference be known, you encourage a normally willing and able customer to use you via VPN instead.
[+] [-] unknown|3 years ago|reply
[deleted]