Parity Pricing Beginner's Guide

by Jules Maregiano ยท October 11, 2021

Parity Pricing consists in adapting digital product's prices to their visitors country's purchasing power to generate more revenue

Parity Pricing (short for Purchasing Power Parity Pricing) consists in adapting the price of a product to the purchasing power of potential customers, usually in an international context.

Taking into account purchasing power is a way to make a product more in tune with the economical reality of foreign potential customers. Rather than a discount, it should be seen as an adaptation to a different situation.

Far from being just a good deed, it also is a powerful way for businesses to open new markets and generate more sales.

This article will give you all the keys to understand the concept and put it into action for your business to generate more sales around the world.

This is a long read so if you're in a hurry, here is the gist it:

Key Take-Aways ๐Ÿ’ก

A dollar is not worth the same across the world. Despite being online, and speaking English, most people can't afford Western prices. Companies need to take into account Purchasing Power disparities.

Parity Pricing unlocks untapped markets. Spotify, Netflix, and others use PP to open huge new markets, increase their sales, and prevent local competition.

Easy to set up, fast results. Some tools and payment providers make Parity pricing very easy to implement. It instantly increases businesses' conversion rate.

What's Parity Pricing? ๐Ÿง

Concept

A can of Coke in the US costs $1 but the local equivalent of 10ยข in emerging countries. Why?

You might have noticed that when traveling in emerging countries: Locals have less money.

Coke wouldn't sell many cans at $1, so they adapt to their local markets.

They take into account the Purchasing Power dis-Parity amongst countries.

Since Purchasing Power differs between countries, even regions, economists needed a tool for comparing them. The only currency everyone's familiar with is time. So by counting how long at the average salary one needed to work to buy a specific good, they could come up with a price equivalent in each country.

Example

Let's take an example and compare ๐Ÿ‡บ๐Ÿ‡ธ USA's and ๐Ÿ‡ง๐Ÿ‡ท Brazil's purchasing powers:

A basic Netflix subscription costs $US8,99 in the US where the average hourly rate is $11.26. Therefore it takes ~48 minutes to pay for your monthly Netflix subscription.

But in Brazil, the average hourly rate is $8.99 You'd have to work 59 minutes more in Russia to buy that same subscription.

It doesn't seem like much... until you realize that means you need to work 25% longer in Brazil than in the US.

โ„น๏ธ Find out by how much % you should decrease your standard, Western, price in every country, with our Purchasing Power Parity Calculator.

Parity Pricing the Old Way: Big Mac Index

Premise

Business school students have heard of Purchasing Power Parity with a famous use case: The Big Max Index. The idea was simple:

  • There are McDonald restaurants all around the world
  • They're all using local ingredients, workforce, and real estate
  • That basket of goods to make a Big Mac is taking into account multiple industries

How long at the average wage does it take to afford a Big Mac?

By using the common currency - time - to compare a similar product - Big Mac - economists could build an index useful to compare purchasing powers across countries.

And it made a lot of sense: Many companies in the '90s and still today use that index as a standard for pricing when opening new countries.

Big Mac Index Limits

But it had its limitations: Import duty and local taxes would differ, local street-food made McDo a premium restaurant in some countries, all ingredients couldn't be produced locally, labor staff costs could be significantly different, etc.

For parity pricing to make sense for businesses to make sense they have to be able to make a margin. And that often implies very low delivery or production costs. Big players like Coke or McDonald's have over time reached such a position but many can't.

That's why export physical goods have always had a premium flavor. Funny side-note: Most of the time they're not that premium in their countries of origin.

Price of 1 Big Mac in USD across the world

source: EDM.com

Parity Pricing in the Digital Space: Spotify Use-Case

Advantages of Digital

Digital goods (apps, software, video games, streaming services, online courses, etc.) have many advantages over physical goods, the biggest ones being:

  • No marginal costs. Printing one more copy of your software, giving away one more license costs virtually nothing. That's not saying it costs nothing to make: Developers are far from being free; But once the product is online, producing one copy costs a fraction of a cent in database bills.
  • No shipping costs. Speaks for itself. The cost of selling to a Japanese customer is the same as the cost of selling to a Pakistani.

Spotify's mindset

Spotify became over the last 10 years the best example of turning these features into a key component of their growth strategy: By charging a monthly fee of $14.39 in Denmark but only $1.58 in India, they seemingly took a huge risk. But they understood a few things:

  • Music is universal. Therefore their product was too. The catalog would differ slightly between countries and the app had to be translated, but these were minor considerations compared to the potential upside in revenue.
  • Streaming is preferred to piracy if affordable. People don't like piracy. They do it because they can't do otherwise. Did you think piracy was over? Think again. In emerging countries, most TV, music, and software are sold via cable TV pro crackers, DVDs at markets, and illegal low-quality streaming.
  • Price has to be right. Some cultures are more or less sensitive to price. Spotify found out most people won't spend more than 1% of their monthly income on music. They had to take this into account and they did.

Since they had no marginal costs, a $US1,59 customer was still bringing in more money than no customer at all. Actually, the sheer size of markets like India and Brazil (respectively 1.4B and 200M inhabitants) made them more valuable than France, Germany, and the UK combined.

Price of the basic Spotify subscription across the world

source: The Economist

Parity Pricing is the #1 Barrier To New Markets

Parity Pricing is not a slight optimization.

In the digital space, it's actually the #1 barrier to market. Software companies often think they need to translate their software, that emerging markets don't need their products or that they are not worthy of their time.

India is a common candidate for English-language software companies wanting to export abroad:

  • It's a huge market: 1,4 billion people.
  • Relatively well connected to the Internet with 700 million users.
  • And a significant amount of them speaks English: 125 million speakers.

Problem: Half the population earns less than $US400 per month.

Compared to the American $US3,000 monthly median income, that's 7,5 times less money to spend. In other words, your Netflix's most basic $8.99 plan - does not equal, but feels - like a $US8.99 x 7,5 = $US67,42 monthly spend to Indian customers.

Offering purchasing power parity in India instantly opens a huge market.

If your product is famous in France, how about opening it to the Francophone African market? They are 70M French speakers in France, but 270M in the whole world. The same goes for Spanish: Spain is 47.5M inhabitants but has 559M speakers worldwide.

Purchasing Power Parity Index by country

source: OECD ยท World's Bank

The Risks of Neglecting Parity Pricing

Parity pricing can act as a tool for opening new markets. But it's also a moat used by these companies to protect themselves.

In the '90s-'00s, China was infamous in the Western world for ruthlessly copying Western products. So-called counterfeit products were a logical answer to a need that was not fulfilled: The need for quality products at an affordable price.

Nowadays, you find vibrant communities of developers in many emerging countries. If they can not access the Western version of the software they need, they'll copy it. It's called Copy-catting.

Many local businesses and individuals need for high-quality digital products. Companies adopting Parity Pricing instantly diminish the risk and size of local competitors appearing.

How to start providing Parity Pricing

Setting up Parity Pricing can seem like a daunting task: Conversion rates, currencies, payment systems, and many other variables could be taken into account. But they are quick wins:

Offer Parity Coupons

That's it. If you don't want to think about conversion rate, keep your payment system exactly as it is today and offer promo codes based on your visitor's country of origin. Software such as Exportator plugged on a Stripe payment system lets you get started in 2 minutes.

What about Proxy/VPN users? Exportator detects the use of 99.99% of them and falls back to your standard pricing when it does. Promo codes can be embedded in your pricing to be totally invisible, or on the contrary, be used as a marketing tool.

Set your payment system for multiple currencies

Stripe, PayPal, Paddle, Braintree, Shopify, all offer some degree of currency management. When picking a price in each currency, don't just convert your USD price to the local currency: Adapt each country's prices to their purchasing power. You can use our Purchasing Power Parity Calculator to gauge by how much your price should be adapted.

Build your own system

For bigger players, building a custom solution makes the most sense. That's what are doing Spotify, Netflix, but also Steam, and Slack. By detecting and authenticating users' location and credit cards, they minimize potential fraud. They also use their own data to find the ideal optimal price for each country instead of relying on macro-economical indexes.


At Exportator we believe in a universal Web where everyone is taken into account. We support it by making Parity pricing as easy as possible to provide. Follow us on Twitter and Facebook making parity pricing the norm on the Internet.

Sources:

https://www.statista.com/statistics/653926/music-streaming-service-subscriber-share/

https://www.musicbusinessworldwide.com/spotify-doesnt-cost-9-99-everywhere-and-thats-absolutely-fine/

https://www.cashnetusa.com/blog/which-countries-pay-most-least-spotify-premium/

https://www.statista.com/statistics/266808/the-most-spoken-languages-worldwide/

https://fred.stlouisfed.org/series/MEPAINUSA672N

Jules Maregiano

Jules studied export and was in charge of marketing a fast-growing SaaS. He created exportator after realizing the power of PPP for digital sales growth and to make the web cool again.

Let's make PPP the norm on the Internet
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