Purchasing Power Parity Pricing

Reading Time: 8 minutes

Let’s talk about burgers and why they matter for how much you can sell as a digital creator.

A Big Mac in the United States costs around $5. You’d have to pay ¥20 for the same burger in China. But the exchange rate between the Dollar and the Yuen is not 1 to 4; it’s more like 1 to 6.5 — and that’s a difference of 40%.

Now, the Big Mac is a franchise burger. Wherever you go, you can expect to get the exact same product. McDonald’s has built a highly optimized logistics chain to make this possible, no matter where the burger is served. So why does the exchange rate suggest that the Chinese burger should cost ¥32 —6.5 times the price of a US version— instead of the ¥20 you will actually have to pay?

The financial experts at The Economist wondered about this back in 1986. They came up with a clever and not-so-serious way to track burger prices and infer how much national currencies are undervalued and overvalued against each other, using the prestigious Big Mac as a baseline product. The result was the Big Mac Index, a continuously updated list of Big Mac prices in local currencies.

Burgernomics —the application of the Big Mac Index— suggests that the 40% difference between real-world price and what the exchange rate suggests means that the Chinese Yuen is actually 40% undervalued against the US Dollar.

And that is what the Purchasing Power Parity Pricing movement is trying to fix. You’ll reach Purchasing Power Parity when you correct the current exchange rate for the relative purchasing power related to a comparable product. And that’s the Big Mac.

Using the Big Mac Index, you can adjust the price of your goods and services to be reasonably affordable for people from a country with a severely undervalued currency against the Dollar.

Historically, this didn’t use to be a big concern for most businesses. Before the digital global economy, you’d build out your business in one country, then create a subsidiary in another, and give them the tools to adapt to their local markets. Prices would be handled at that level, and no central steering was required.

But for the creator economy, where individual creators sell digital products globally, this is an actual problem. You’re one person selling to an audience spanning the whole globe. You set the prices. And if you put them the wrong way, you can price out entire countries from ever being able to afford your products.

This is a problem many digital entrepreneurs are entirely blind to. I certainly was for the longest time. I priced my products in US Dollars, oblivious to the fact that those prices kept most of my global audience outside of my little bubble from purchasing my products. It wasn’t until my readers-to-be from India complained about the incredibly high price of my books on Amazon that I looked into this issue.

What I found was underwhelming. Most creators who had control over the prices of their products just didn’t care. And even for the few that did, no major platform out there supported an easy way to adjust prices for a global customer base with wildly varying currency values.

Thankfully, there are a few do-it-yourself solutions out there, like ParityBar (now defunct). I even found a SaaS solution called ParityDeals — which I use for all my digital products. These tools detect where a potential customer visits from and offer them a coupon code for a particular percentage off the final price, thus correcting for the difference in currency value between where you provide your product and from where they buy it.

In other words, Purchasing Power Parity Pricing tools correct your prices so they are equally affordable to your customers, no matter where they come from. It’s the ultimate price-centric empowerment tool.

It’s not all about burgers, either. A few other indices look at different goods, like the Mac Index (tracking Apple product prices) or the Latte Index (tracking Starbucks prices). Neither of them is perfect: some incorporate inflation rates, some ignore the costs of sale to the local franchisers. They’re not accurate, but they’re better than nothing.

So there really is no excuse for me not to integrate location-based pricing into my products. If it’s just about doing the necessary work, this should be a no-brainer.

Yet it wasn’t.

When I considered adding it to the Twitter course I released recently, I felt an immediate sense of doom, a substantial threat of loss. I thought I might be making a mistake. For someone who publicly claims to have empowerment as a core value, this felt very contradictory.

It took me a while to figure out why I was this hesitant about making my product more affordable by adding dynamic pricing, and I want to share my concerns and how I reflected my way out of them with you today.

Concern #1: I’ll lose money

I initially hesitated to use Purchasing Power Parity Pricing for my info products because I feared losing revenue. After all, adjusting prices is usually a downward trend: you make things cheaper so that people can afford them.

On the surface, this means that you might be missing out on revenue. But you’re also expanding the pool of potential customers. With extremely low marginal costs of distributing digital products, it doesn’t matter if one person pays $50 or ten people buy the product for $5. Your overall revenue will be the same. But your reach just increased by 400%!

When I stopped looking at the dollars and started considering the marketing potential of adding Purchasing Power Parity Pricing, I realized how much of an empowerment move this can actually be. By opening up whole new markets, you don’t just get more sales; you get access to entire networks of severely underserved professionals.

As I said earlier: most creators don’t care about Purchasing Power Parity Pricing because they’re not even aware of it. Those creators sell their products for prices that whole economies can’t afford. Consequently, bootlegged copies are being sold or even more blatantly pirated. The moment someone actually pays attention to the price discrepancy, you can expect to find that once people buy your work —legitimately and without having to mortgage their houses— they will start talking to their peers. The word-of-mouth potential of serving your customers in a way that empowers them is incredible.

And yet, I shied away from talking about it. Even as I understood that I had no reason not to drop my prices dynamically, I still hesitated.

I even hesitated to tweet about it! I thought that if I shared that I was thinking about implementing Purchasing Power Parity Pricing, people would stop buying my course because they would rather wait for a lower price.

What a selfish and limited thought. Of course, they would wait! That’s the logical consequence of not having dynamic prices: right now, my work is severely overpriced for many people who might need it the most. If they can’t afford it now, what does it matter? They wouldn’t be able to buy it anyway.

When I finally got around to tweeting about it, I got incredibly positive responses. People from all over the world encouraged me to go forward with this, either because they had done this for their own products or had bought products at a dynamic discount before.

I was also made aware that my focus on sales came from not knowing how much money I really wanted to make from my course. When I talked about my reservations with Danielle —my partner in life and business— she pointed out that I had no idea what my “enough” number was for the course. How much revenue does it need to drive for me to consider that it’s making “enough.”

Once I found a number for that —somewhere around $2000 every month— I quickly understood that this is not just about maximizing per-customer revenue. Reaching enough people to sustain this is equally important.

I know that this sounds like I don’t understand basic economics. But when you’re concerned about things without knowing where your concern comes from, your thinking is severely biased. It took me a while to even recognize that I wasn’t thinking straight.

But it eventually happened. I found clarity by talking to my peers and the most important person in my life. If there is only one thing you take away from all of this: talk to your loved ones. They can help you find your way out of a rut.

My fear of losing revenue quickly subsided. With new and hungry markets opening up for me, I stopped focusing on revenue and looked into how I could realistically implement this for my info products.

Concern #2: This will be hard to maintain

And that’s when another round of negativity kicked in. The more I looked into setting this up across platforms, the harder it became.

All solutions I found used coupon codes to facilitate the dynamic price reductions. People in Slovenia get 20% off, customers from Namibia only pay half for the product. That means that there are several coupons to maintain, and that needs to happen on each platform (that supports coupons).

Initially, that sounded like quite a lot of work. But it’s really a “fix-when-broken” issue. You set it up once, and you’re good to go. For empowering a whole batch of countries simultaneously, keeping a few coupons in sync is more than worth it. If a customer detects a problem, they’ll reach out — and I can fix it then.

But with these coupons existing, some maybe even granting a 70% or 80% price reduction, comes another problem: abuse.

Fear #3: People will abuse it

Having grown up in the era of Napster, LimeWire, and eDonkey, I remember too well how easy it was to access things for free that weren’t supposed to be. I know the mindset of someone who can’t reasonably afford something. And I know the lengths someone will go to to get what they want.

One of my fears surrounding Purchasing Power Parity Pricing was that people would try to game the system: I feared that people from the US would act like they’re from Bangladesh to get a discount.

Not only could people try and act as if they’re from another country, but they could leak the discounts to a public forum. Changing discount coupons regularly isn’t something I want to do manually.

Thinking about all the ways people could cheat this well-intentioned attempt at creating equality seriously made me reconsider adding Purchasing Power Parity Pricing.

In my mind, this potential for abuse was something I didn’t want to risk. But the more I thought about it, I came to a conclusion that every stoic would be proud of (if they would allow themselves to feel pride): some people will abuse this, and there is nothing I can do about it. I can’t change their mentality problems with my prices. No price, high or low, will keep them from selfishly seeking my work for their benefit without giving something back.

People will abuse this. And it’s alright.

There is a baseline level of defense I can employ: not show the fact that I even offer Purchasing Power Parity Pricing to people who wouldn’t get a discount in the first place. A few tools out there have VPN detection, which is also nice.

But overall, I trust that most of my audience, themselves aspiring founders and creators, understand what a value exchange is and why paying for products is a good thing. I won’t be able to help the people who would cheat or steal, anyhow.

It’s like when people yell at you on Twitter because they have a different opinion: instead of focusing on the few negative voices, you have a choice to focus on all the people who chose to NOT yell at you.

I do the same here: instead of looking at the potential cheaters, I focus my attention on all the wonderful people that will use this as an opportunity to legally buy my product for a more sustainable and empowering price.

Conclusion: I’ll do it anyway

And that leaves me with only one conclusion that is also an announcement. My course Find your Following will be using Purchasing Power Parity Pricing from today. Depending on where my customers are located, they’ll receive an offer for a coupon code when they navigate to my course landing page.

Yes, it’s an imperfect solution. The codes only work on Gumroad and Podia, as neither Udemy nor Skillshare support creating these kinds of coupons.

But it’s a start, and if you are a creator selling info products to a global audience, I invite you to try Purchasing Power Parity Pricing as well.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.