Why you should consider cultural factors in pricing

Pricing in foreign markets presents retailers and manufacturers with a major challenge. Many companies make the mistake of not adapting their pricing strategy to the respective country. Why can this lead to problems? Consumers from different cultures perceive prices and numbers differently. To maximize your revenues, you, the online retailer or manufacturer, should take a close look at the psychological pricing perceptions and significance of numbers in your new markets before even expanding. In today’s article, we offer you some initial pointers.

High and low-context cultures

Culture implies a unique combination of values, attitudes and behavior, but also of symbols. It influences the thinking and actions of its adherents both consciously and unconsciously and is therefore also of great importance in pricing. In cultural sciences, a distinction is made between high and low-context societies. This separation traces back to the anthropologist Edwart T. Hall, who used it to describe the communication styles of different cultures (Hall, E. T. 1976: Beyond Culture). In cultural circles where high-context communication predominates, content is conveyed not only by (written) words, but also by gestures and facial expressions, as well as embracing social status and common friends. The messages therefore tend to be rather implicit, whereas business relationships are based on trust and develop more slowly. In addition, things often remain unsaid in these societies, but are nevertheless understood. In low-context cultures, the speaker or information provider requires less contextual information. The focus here is on the factual level and communication is more direct. In essence, what has been said is also meant. Business relations begin and end faster and are based mainly on facts and less on trust between the partners.

About 96 percent of the world’s population can be assigned to the high-context end of the scale. The remaining four percent of low-context cultures include the USA, Germany and Scandinavian countries. Germany is one of the few nations of low-context culture. Accordingly, it is often difficult for us to understand the behavioral and communications habits of high-context cultures. 

 

Cultural differences in pricing perception

Roger M. Heeler, Adam Nguyen and Zinaida Taran apply the distinction between high and low-context cultures to international pricing in their paper, “High-Low-Context Cultures and Price-Ending Practices”. The researchers selected ten countries for their study: the high-context cultures China, Hong Kong, Japan, India, Brazil and Argentina as well as the western low-context cultures the USA, Australia and Norway. In addition, they opted for Italy – another western country, which, however, ranks among the high-context cultures. This clearly demonstrates that it is the difference between high and low-context and not the categorization into Western and non-Western countries that influences price perception. Between 350 and 650 price examples were evaluated per country.

The main results of the study show that:

• Price endings with ‘9’, or so-called threshold prices, appear much more frequently in low-context cultures (44 percent) than in high-context cultures (23 percent).
• Endings of ‘0’ predominate in high-context cultures (50 percent compared to 30 percent in low-context cultures).
• A final figure of ‘8’ has symbolic significance in China, Japan and Hong Kong.
•  Price endings with ‘5’ are more frequent in low-context cultures (14 percent compared to 11 percent in high-context cultures). At 26 percent, however, India is a clear exception.

The study "Patterns of Price Endings Used in US and Japanese Price Advertising" by Robert M. Schindler comes to similar conclusions. This work concentrates exclusively on the USA (low-context culture) and Japan (high-context culture). The design of the last decimal place for both countries is listed in the two left-hand columns. By far the most frequently used last decimal place in the USA is ‘9’, at 46.5 percent, followed by ‘0’ (22.8 percent) and then ‘5’ (15 percent). In Japan, at 91.7 percent, the ending ‘0’ is used most frequently. The two right columns depict the design of the first decimal digit – for example the ‘8’ in 7.89 euros. In the USA, a ‘9’ is also used most frequently here (52.2 percent), followed by the ‘5’ (22.3 percent). The Japanese, on the other hand, usually prefer an ‘8’ (37.5 percent) as their first decimal place. In second spot comes the ‘5’, with a 14.5 percent usage.

The table offers an overview of the use of various numbers as decimal places in the USA and Japan. For the USA, the number ‘9’ is the most widespread, both in the first and second decimal places. In Japan, on the other hand, the first decimal place is often an ‘8’ and the last a ‘0’.

Using cultural scientific findings for pricing

The two studies illustrate, above all, that the illusion of special offers using threshold prices is harder to convey to consumers from high-context cultures. They even tend to view such a pricing strategy as manipulative and even withdraw their trust from the company concerned. A safer pricing strategy in high-context countries is therefore the use of rounded prices. If you, the retailer or manufacturer, still want to use fractional prices, then these should always sound realistic and deliver the consumer real savings.

You can also find out which price psychological findings are relevant for pricing in our three-part series on the subject:

1. How to use the findings of price psychology for your online shop
2. Optimized price setting with pricing psychology
3. Pricing psychology: Influenceable phenomena of customer behavior

Despite its valuable insights, pricing psychology is only a small part of the research you need to perform before entering the market. Two other critical components consist of market and competitor analysis. Our Business Intelligence suite, provides you with exactly the data you need for strategic pricing decisions – both up-to-date and language-independent. You can discover, for example:

• What prices your competitors set for articles you also carry in your assortment
• Which of your articles offer a pricing increase potential and for which you should lower the cost
• When whatever price changes were performed by your competitors
• Which pricing strategies market participants and your competitors are pursuing
• Which new competitors are entering online retail and what their pricing and product policies are