B2C e-commerce is on a rapid rise globally. According to eMarketer, 14% ($4.1 trillion) of all global retail sales happened over e-commerce in 2019. This is set to grow to 22% by 2023, at a growth rate of 18% YoY.  Unsurprisingly, a growing proportion of e-commerce is happening across borders.

A study by Nielsen back in 2016 had indicated that 57% of online shoppers purchased from overseas retailers. Today, UNCTAD reports that 11% of the total global e-commerce volumes in 2017 were cross-border. Research reports published by AEBMR and AliResearch indicate that by 2021, cross border e-commerce will account for 33% of global volumes (i.e. $994 billion), and this will continue to grow at a CAGR of 27%.

This rise is led by various consumption verticals. According to BCG, while e-retail remains the largest vertical in online commerce (40%-60%), new categories led by digital content subscription, contextual commerce on social platforms, and expanded categories of Direct-to-consumer (D2C) offerings (ranging from mattresses to education, gaming, coaching, healthcare, and so on) are on the rise.

With most indicators pointing to an increasingly border-less consumer market, now more than ever, businesses need a clear road map for their cross-border strategy. Entering new markets to tap into opportunities is fraught with various challenges. Language, culture, consumer tastes, economic conditions, regulatory structures, and localized competition are few of several factors that vary between markets.

Arguably, how a business chooses to price its products is vital to its success. In this article, I try to capture the various implications that pricing in foreign currencies could have on a business’ success or failure in entering a new market. All things considered - I argue that pricing in a customer’s native currency can confer a decisive advantage on internet businesses attempting to enter new markets.

Pricing options in global e-commerce

Businesses with a global retail customer base can broadly choose to price their products and services in two possible currencies. They can either price in the currency of their domicile (e.g. Netflix can choose to charge its users in US Dollars, as the holding company is domiciled in the USA), or charge in the currency of their user’s domicile (e.g. Netflix can charge a user in the UK in British Pounds, a user in Singapore in Singapore Dollars, and a user in India in Indian Rupees).

At first thought, this choice can present itself as a problem of convenience.

Why shouldn’t all prices be set in US Dollars? After all, the US dollar is the most popular global reserve currency. More than 60% of the world’s forex reserves are maintained in US dollars. It’s also the most highly traded currency globally (ahead of the Euro, Yen and Pound).

Alternately, why shouldn’t a business charge in their native currency? Currency fluctuations pose a risk to profitability. Contrary to popular beliefs, experts stated that the weakening of the Pound from the Brexit vote resulted in overall income reduction for British exporters. Collecting revenues in foreign currencies can result in high conversion and hedging costs. Receiving revenues in the native currency on the other hand helps keep revenue and cash management simple.

Inherent to this decision, is a choice between favouring what’s convenient to the customer, versus what’s convenient for the business. Understanding how a customer would respond to this choice, is vital to making an informed decision. (I will later touch upon the factors that businesses must consider)

How do customers engage with pricing?

Fundamentally, an average reasonable customer’s response to pricing, independent of geography, can be broken down into 3 broad steps:

  1. Understanding
  2. Acceptance
  3. Payment

Any friction in either of these steps can cause a customer to opt out of a purchase. Let’s examine the impact the choice of currency can have in each of these steps.

1. Understanding the price

When customers see prices, they sub-consciously draw numerous inferences with regard to the purchase.

Is this a competitive price? Are there better substitutes for this price? Is a higher price justified? Does it fit within my budget?

Much like how we think about most other things, we draw comparisons and measure value in a native language. When customers measure monetary value (like setting budgets), customers default to using their native currencies. This makes sense particularly when a product or service has local substitutes. It helps customers compare apples with apples. Consequently, when customers see prices in a foreign currency, they suddenly need to translate. This can give rise to friction.

Take for instance a company like USA based CodeMonkey, which offers online coding lessons for kids. CodeMonkey offers its plans in US dollars to customers globally, including the UK. So when a parent residing in the UK sees these services priced in US Dollars, s/he now has to do mental math to calculate the price in British Pounds, to figure out how much it’s going to cost. Besides the mental math, it can create a general feeling of dissociation (an implied feeling that the product was not originally conceived for use by UK customers). UK based Blueshift on the other hand allows users to at least view prices in HKD$, EUR€, USD$, and CAD$.

Studies have proven that price complexity that increases the time, effort, and cognitive (numeracy) skills required to make a choice, or find the best offer, can lead to confusion. Lack of familiarity with conversion rates can create a break in the purchase flow between seeing the price, and making a decision. Unless the product, service, or brand is locally prominent, unique (lacks substitutes), or locally endorsed, this could cause a customer to prefer a familiar (and maybe pricier!) local substitute. In the case of the concerned UK parent, for comparable products, it's likely s/he would prefer going with Blueshift for coding lessons, to avoid the complication of understanding Code Monkey’s pricing.

2. Accepting the price

Let’s suppose a customer does some quick arithmetic after confirming the exchange rate (which BTW can swing 6-8% in a single month!). What happens next?

Pricing psychology

One of the pitfalls of pricing in a foreign currency, is that it often fails to account for localized purchase behaviour and price psychology. Cultural triggers vary from country to country. One study on price psychology revealed that Americans, Norwegian and Australian consumers respond better to prices that end in a nine (for example, $15.99), whereas in China, Hong Kong, Japan, India, Brazil, and Argentina, items sell better when prices end in a zero ($16.00). A rather colloquial account of this phenomenon by a HackerNoon user went as follows:

When a user sees your product at (for example) €20, they see the number, they see that it's twenty, and they decide in a split second whether twenty is a reasonable price. When they realize that it's twenty Euro* and the price is actually thirty of their local currency, then, despite their conscious awareness of how currency works, the price has effectively increased by 50%. This can hurt purchasing depending on how devoted they are to the service. Even if ‘30 of something' is a fair price, their brain got used to the idea of 'twenty of something' and now they stop and reconsider. This disjoint is especially noticeable at higher values; at €90, you're below the 'one hundred' threshold; at $135, you're suddenly above it.”
Purchasing Power Parity, a.k.a. the Big Mac Index

Direct conversions into local currencies also fail to account for purchasing power parity between consumers in different market, which accounts for factors such as costs of living, and inflation. As trite as it sounds, Paddle emphasizes a simple truth:

Customers won’t pay for your product in their currency - or any other - if the price is wrong.”

Demand for products and services vary between geographies depending on scarcity, trust, competition, culture, and consumer needs. As a result, it is possible that customers find the converted price beyond their willingness to pay (or below, signalling a missed revenue opportunity). Starting to think about pricing in local currencies allows a business to account for local consumer behaviour in response to price points, which could lead to wider customer adoption, higher revenue gains, and better consumer insights. According to an HBR study, localization helped Penney's stock price more than triple between 2000 and 2004 as a result of this approach.

There is further evidence of this approach. Netflix charges a different subscription fee in different markets (see table below). In a comparison of prices of a Macbook Air, an iPad, and an iPhone, Pricerunner found that the three items combined were cheapest in Tokyo at $2,225, the most expensive in Sao Paulo at $4,160, and would cost $2,745 in New York. The Economist’s ‘Big Mac Index’ highlights as of January 2020, that a Big Mac costs £3.39 in Britain, and US$5.67 in the United States. The implied exchange rate is 0.60, whereas the actual exchange rate at the time was 0.77.

Cart abandonment at checkout

Lastly - let’s suppose that our customer accepts the price. Further down the checkout process, she notices that the price charged by the seller isn’t the same as the amount reflecting on her invoice at checkout. This gives rise to yet another point of friction.

At the time of forming their decision to purchase, most customers don’t factor in processing charges and hidden exchange rate mark-ups that banks and credit card companies often levy to process foreign currency transactions. These charges often increase the customer’s cost by 3%-4%. Such charges typically surface towards the end of the checkout process. Fluctuations in exchange rates often further worsen the spread between the advertised price and the final price.

This can leave the customer feeling either confused or manipulated or both. The perceived lack of transparency inherent to the foreign currency payment process drives many irate customers to abandon their purchase at checkout. Reports by the Baymard Institute and Adyen indicate that anywhere between 16%-50% of all cart abandonment cases arise due to extra charges at checkout. For purchases that are recurring in nature, such fluctuations could make expenses unpredictable, leading customers to prefer purchases with lower pricing complexity.

3. Paying the price

Finally, after jumping through the hoops, a customer still has to choose a method to make the payment. If a customer is required to pay in a foreign currency, depending on the payment methods approved by the business, they would either use a credit card, or resort to internet banking facilities.

I’ve already highlighted that customers incur an additional cost of 3%-4% when they pay in foreign currencies using credit cards. But it’s important to remember that in many emerging markets, many active e-commerce customers don’t have access to credit cards. According to Worldpay’s Global Payments Report 2020, only 35% of global e-commerce payments were made using credit or debit cards in 2019. According to GlobalData, that number is even lower in the APAC region at 28%, even though it contributes more than 60% of all e-commerce sales globally. Only 9% of global e-comm payments are made using bank transfers.

This clearly indicates that the remaining customers prefer alternate methods of payment.

The Worldpay report highlights that 42% of e-commerce payments have shifted to alternate payment methods. Customers in both developed and emerging markets are increasingly switching to lower-cost, digital payment methods such as digital wallets, ‘buy now pay later’ solutions, and online bank transfers using local rails, that often don’t levy any transaction charges, but are usually incapable of processing cross-border transactions. Not offering customers the option to utilize domestic payment systems can result in high opportunity costs.

Evidence of what works

Addressing the distrust amongst consumers against paying in a foreign currency can reap huge rewards. According to a survey conducted by Profitwell, businesses that adopted pricing in local currencies, while accounting for local purchase behaviour, achieved growth rates that were 200% higher than companies that didn’t adopt localization. Average MoM growth rates in APAC amongst such companies was 31% compared with an 8% growth rate amongst non-localized competitors.

A survey conducted by E4X (Cambridge Mercantile group), of online shopping habits amongst customers in the UK, Australia, Germany and Canada, found strong evidence in support of a local currency pricing approach. Some of its key findings were (quoted directly from the report):

86% UK, 80% Germany, 68% Australia, 63% Canada will find products on a USD only website and then search for them on an alternative, locally priced website to make their purchase.
65% UK, 47% Australia, 43% Germany, 39% Canada will leave USD only website in order to calculate exchange rates before deciding to make the purchase.
71% UK, 59% Australia, 53% Canada report they are likely to spend more money on a site that prices in their local currency.
Regardless of nationality, the vast majority of respondents are concerned with how much they will be billed for exchange rates when shopping in USD 88% UK, 76% Australia, 76% Germany, 39% Canada.

The path ahead

With the ongoing COVID epidemic, reports suggest a 108% increase in YoY e-commerce volumes, owing to the lack of access to brick-and-mortar supplies. Search Engine Land reported E-commerce ad spending jumped from $4.8 million the week of February 17 to $9.6 million the week of March 9.

With uncertainty surrounding our new-normal, post-lock-down world, there will be a predictable long-term shift in consumer shopping behaviour in favour of online commerce. Now, more than ever, is the time for businesses operating digitally, to embrace ways and means to adopt pricing strategies that align with the localized customer needs and behaviour.

(Having addressed what might work for customers, in my next post, I will address the challenges faced by businesses in enabling local currency pricing, and highlight methods that global businesses have successfully adopted.)