Price escalation: What retailers and brands should know?

The more you expand your business, the more new things you need to pay attention to. One of them is price escalation. Price escalation means that a product may have a different price in different markets. 

Why price escalation happens and how it can be overcome are just some of the issues we will address in this post.

What is price escalation?

As you can probably tell, price escalation is an economic concept. The general idea behind it is that the items’ prices will rise when its exported and imported into a new country (market). In such cases, the product price can vary from market to market. 

You might think that this is similar to inflation, and you would be correct. However, the important difference here is that price escalation refers to an individual product, therefore, it doesn’t have an impact on the whole market. 

Expectedly, these price changes will affect your business costs. You’ll have to take into consideration additional costs such as – transportation, shipping, and storing costs, as well as different import/export tariffs. 

Of course, if you’re operating only in one country, you won’t have these additional expenses. But, if you are a brand that’s becoming more successful, it’s natural to expand your business to other markets. You’re probably aware of these additional costs, but other reasons can provoke price escalation. 

Let’s check them out.

What can cause price escalation?

Besides these already familiar reasons, there are a couple of others you need to consider. If your business is operating internationally, it would be good to be covered on all fronts.

First of all, working internationally means working with different currencies. That would require a strategy on its own because multi-currency can affect your pricing strategy. 

During the past couple of years, many brands and retailers have faced location-specific issues, mostly because of Brexit. Brexit has brought many important changes to the eCommerce sector, mostly related to VAT (value-added tax). This trade agreement between the UK and the European Union has been stretched around for 4 years, but it finally took effect on January 1st, 2021. New VAT regulations took place, and everyone – from business owners to price monitoring tools – had to adjust. 

Another thing to keep in mind is that different markets require different prices, therefore, you’ll have to be careful about price escalation. Clients from different locations have different preferences, and it’s not so easy to keep track of everything by yourself. Speaking in the eCommerce language, you’ll have to monitor prices from location-sensitive stores. That’s usually called geographical pricing. 

How to overcome price escalation? 

There are probably many ways to solve price escalation, but we’ll explain the most common ones:

• Selling locally
• Finding free trade zones
• Using specific contracts
• Using price monitoring tools

The first option can be deciding to sell locally. For some businesses, this can do the trick, but remember, a shorter way doesn’t need to be the best one. Finding easier solutions is always preferable, but only if it benefits your business. Be careful not to limit your options just because you don’t want to work on a slightly more complicated solution.

The next option would be finding free trade zones. This could be a good option if you want to sell internationally but at the same time avoid additional costs. Free trade zones require doing some research first. You need to investigate whether your market in those countries is big enough. Keep in mind that you’ll most probably need a lawyer who will deal with international contracts which is also not so cheap. 

Another option to avoid price escalation is to use specific contracts. When operating internationally, one of the ways to ensure yourself is to add a price escalation clause to your contacts. This clause will define what happens if a price escalation occurs. In other words, you can define whether the price will be increased or negotiated if the prices for other complementary goods (or raw materials) increase. Therefore the negotiations can begin if a price reaches a certain level. By doing this, you ensure that you stay protected from any hidden costs. 

To avoid price changes that can result in lower profits, you should rely on price monitoring tools. Before making any price changes, you need to understand what you want to achieve. Since you’re not operating alone on the market, your competitors must be taken into the equation as well. Brands and retailers usually have many competitors and keeping track of their actions is almost impossible without a price monitoring tool. These tools will allow you to follow your competition constantly and automatically. 

Wrap up

We hope that with this post we’ve managed to draw your attention to the importance of price escalation. 

International business can bring many benefits and higher profits, but it also comes with certain problems that smaller businesses don’t have to face. If you think about price escalation in time, you will provide a more secure income and have more satisfied customers.