This is an expanded version of a post I published in the SEO Dojo since then, I have literally had one email asking about it, so I decided to expand the forum post and publish it here.
I wish to pose a simple question:
How would you determine the price of a product or service for multiple countries?
- You could go through each country and work out a value.
- You choose a base currency and do real time conversions.
- You could use comparable item counting.
Each method has merits, but they are reliant on a lot of manual and repetitive work. They may also cost you when the method fails to take local conditions such as taxes into account.
Work out individual value – This is a long process, but probably the best when working with 1 or 2 currencies in familiar markets. For example, I’m likely to set Pounds, Dollars and Euros because I am familiar with costs in the US and in Europe, but I’m not so sure about prices in South Korea, for example.
Real time counting – (Determining a price in a default currency and converting it into alternative currencies on the fly.) This method has several issues: the price will change constantly, people are nervous of products with constant price changes, and it doesn’t take local taxes and other costs into account. Customers in the EU, for instance, wouldn’t be charged VAT.
Product Counting – (Finding a product similar to your own and using its price in each country to set your own.) The problem is that the product has to be the same in each country, and it doesn’t account for import costs.
So how do burgers help? Well, let’s start with an example:
I’m running a subscription site in multiple countries, and I want to display subscriptions to people in their own language and currency.
Identify the costs per country
For each currency, identify any additional costs such as sales taxes, shipping , and any additional costs associated with selling products or services in a country. If it costs you more to supply a country, be sure to include it in your price.
Choose a stable currency as your base
This does not have to be your country’s currency, since it’s just something to work from. For instance, if you use the Big Mac index, the default currency is dollars, so you may wish to use dollars. Or, you might choose the currency you do your accounts in.
Define the default currency levels
Next, work out the subscription levels in your default currency. Lets say we use $10, $20 and $30 as our levels. Obviously, how you determine the initial price is up to you, but I suggest testing multiple prices before settling on one. Also, remember when choosing a currency conversion system that you can override it when you need to.
Start counting Big Macs
No, seriously! A Big Mac is a perfect comparison tool. It’s made of the same ingredients in every country, and is competitively priced. This means that, while McDonalds makes a profit on each burger, it’s carefully calculated to be roughly the same % in ever country. For a list of the costs of a Big Mac in every country, you’ll need a subscription to the Observer, or you can go to www.oanda.com/currency/big-mac-index
Our next step is to count how many Big Macs are in our subscription. So, a Big Mac in the US costs $3.57 so 10/3.75, and we would need to multiply it by approximately 2.8 to equal our subscription. So, to determine the relative value of a $10 subscription in other countries, we find the value of a Big Mac and multiply it by 2.8.
Lets do a simple example: A Big Mac in the UK is 2.29, and when we multiply that by 2.8, it would be 6.412.
return round((floor($value/$cost) * $rate),0,PHP_ROUND_HALF_UP);
For PHP users a quick function where $value is default subscription, $cost of the burger in the default country and $rate is the current exchange rate. Works only currencies with similar exchange rates
The real economics of the Big Mac index
The example above is an extremely simple way to use the Big Mac Index. Economists will use the index to determine the purchasing-power parity, which was first proposed by Gustav Cassel. (Purchasing-power parity is when a countries exchange rate is determined by the price of a shopping basket from a super market)
The video from the (http://www.metalproject.co.uk/) explains how economists can compare Big Macs by country to determine the relative value of almost anything. However, this rate often varies wildly from the actual rate, which is affected by many other factors.
Always round up
Now, of course you’ll want to convert 6.412 to something a little less programmed, so round to 7,13,19. You’ll notice in this example that the bigger the value is, the more of a discount it’s getting, and the further it will drift from market demand.
Low inflation currencies probably should be rounded to the next 5 or 0 to maintain a nice pattern.
Note: This only works for low inflation currencies, so don’t try this with Zimbabwean dollars. In the example, our Pounds are now 10, 15, 20. Suddenly, the site is making a profit on the lower price and losing on the higher price. Ultimately, it works out even, so long as there is an even distribution.
What about larger subscriptions
Sometimes, Big Macs are just to small to be useful. As you saw in the previous examples, the more Big Macs you work with, the greater the rounding error will be. So, when dealing with larger numbers, we could use an alternate index.
One possible example is the iPod Index. Initially proposed back in 2007 by Comsec, the iPod has become as ubiquitous as the MP3. Unfortunately, they do not maintain the index, but it’s possible to recreate it using the Apple store and some googling.
One technique I’ve used is what I call ‘over pegged middle’. First, you need to know the number of subscribers for each level and the total income they bring in. Then, whichever total brings in the most income is the one you do the Big Mac check against.
Next, round that figure up to a 5 or zero and match the other subscriptions by using the same ratio as the original subscription. This will cause an imbalance because the majority of users will pay more, but it will also make higher earning subscriptions more tempting.
Any suggestions for how you would work out subscription prices?