Challenges of setting international floor prices
An international floor price is a minimum net price on a product, across all global markets in which it's sold. It is a powerful way to combat cross-border, grey market pricing risk; i.e. sales occurring outside of regular channels, such as selling to a distributor in one country who sells to other countries with whom you have different price.
Floor prices help minimise this exposure, and help prevent profit erosion through poor local pricing structures. They also provide clear guidelines for retail negotiations and can inform brand strategy. Fantastic, right? Ultimately, however, setting international floor prices isn’t easy – no one said it was. So, what can you do to help?
One of the greatest challenges to international floor pricing is the impact of local factors such as: the need for competitive pricing in each market, the need to maintain your brand value. It’s all well and good minimising international risk, but if you continually surrender market share you’ll end up losing so much volume that pricing becomes moot.
The next challenge is currency, particularly since forex rates have been very unstable recently. Large changes in the value of the pound, euro, dollar etc., are leading to daily changes in cross-border risk, and considerable pricing complexity.
Thirdly, floor prices should be based on robust data. Inaccuracies will result in either a lack of confidence in the decisions you make, or sub-optimal pricing. We have seen many examples where companies have been inconsistent in the way they collected, processed and reviewed their data. This led to poor quality analysis, and resulted in low compliance locally as trust in the data was low.
So, what can you do?
Step 1 – Get absolute clarity of your data
Any pricing decision should be based on accurate, uniform data. Data should be collected across all operating countries at the same point in time, it should be captured in the same way by implementing an international structure or framework for your trade terms across all markets. This means all your decision-making analysis across each of your operating countries will be based on like-for-like data.
Any data you collect should be validated through a careful review process to ensure a high level of accuracy so you can make the most informed decisions. Containing all this information within a single place will also allow immediate analysis of your data, giving you the ability to model changes such as duty increases of forex updates across your entire data set at once.
Step 2 – Implement floor prices as guidelines
We consistently see floor prices are most successful when they are implemented as guidelines. Strictly enforcing price locally may result in loss of share, with minimal impact on international grey market risk. Instead, advising on price with a strict process for review, allows you to balance the need to be competitive locally, as well as consistent internationally. Single currency price setting will help with this, as it will naturally capture additional risk due to currency fluctuations, allowing proactive management of your pricing strategy.
Step 3 – Be transparent
Ultimately the transparency of your decision will determine how successful its implementation is. You must have a clear strategy and logic behind your floor pricing, which is openly communicated with all your affiliated countries. This will help them buy into the strategy and embrace the change… Good luck!