What is Purchasing Power Parity (PPP) ?

Until now, I had been working on a product (Malt) whose users are mostly in Europe, and more specifically in Western Europe.

I say mostly because there are Malt users in other parts of the world, but it's a very small percentage and we didn't focus on them.

So with Writizzy, this is the first time I'm working on a consumer product aimed at the whole world.

And yesterday I received this message:

Hi there,
Just wanna say your product is awesome.

I really love its simplicity and am thinking of subscribing to it.

However, can you implement a purchasing power parity policy? Your current pricing is too high for me at the moment. I lived in Indonesia (part of South East Asia).

Thanks

Well, that's a great question.

Purchasing power parity

Purchasing power parity (PPP) is a way of expressing value based on a country's purchasing power.

You probably already know this if you've heard of the Big Mac Index.

It's related to this famous purchasing power parity. The idea is to express this parity by illustrating it with the cost of a Big Mac in different countries (which includes the production cost in this specific case since it's a physical good).

And there's a real issue when you have users from all over the world using your product: **equitable **access to that product.

For example, if a product costs 10 euros per month, those 10 euros don't represent the same thing in Vietnam or the US in terms of purchasing power parity.

• The median salary in Vietnam is around 350 euros per month.
• The median salary in the US is around 3,800 euros per month.
• And in France, we're at around 2,000 per month.

So, a 10-euro product represents 3% of the median salary of a Vietnamese person, versus barely 0.3% for an American.

And 3% of a monthly budget is not considered in the same way at all when considering an expense.

So, I kind of lied to you—it's not just about fairness. Pricing is part of a strategy to acquire users.

If we spend hours defining that price for one country but then launch globally, there's by definition a huge design flaw. It won't work.

That's why some products can display different prices by country based on Purchasing Power Parity.

By the way, if you didn't know, this partly explains the success of VPNs. With a VPN, it's possible to pay less for certain services by connecting from certain locations.

Careful, I'm not telling you to do it, especially since most of these services are at war with this kind of practice and hunt down VPNs.

What about the production cost?

A natural question arises: sure, my buyer's purchasing power comes into play, but I myself have a production cost.

I pay for my servers in euros, at European energy costs. I need to pay myself, so can I really lower my prices for Indonesia?

First, you need to differentiate between two types of costs:

• Fixed costs: what I pay anyway—dev time, domain name, etc.
• Variable costs (or marginal costs): the cost related to usage, number of users, storage, API calls if they're counted by data volume, number of emails sent, etc.

The goal is to make money (or at least not lose it) on the marginal cost. A user shouldn't cost more than the variable costs.

And then you need enough users to pay for the fixed costs.

When you launch a company, fixed costs are largely overrepresented in the equation, so it indeed seems strange to lower your prices. But here you have to think in terms of marginal cost.

Having 1,000 French users at 10€ versus 5,000 users in Indonesia at 3€—well, actually it's more profitable (10,000 euros vs 15,000€). And obviously in an ideal world, you want both.

The VPN tourist problem

A pretty obvious question arises: how do you prevent everyone from connecting with an Indonesian VPN to pay less? Or put differently, how do you verify people's place of residence?

Because if tomorrow all US users connect with a VPN to pay 3 euros/month, the business model might struggle. And this is even more true for a company whose marginal costs include marketing, which is relatively much more expensive in the US than in Indonesia for the same result.

There are technical solutions:

• The country of issue of the credit card
• IP address (it's also possible to identify the main VPN providers)
• Ask for proof of identity (I strongly advise against this, and nobody's going to hand over their passport for 10€/month)

And then there's another solution: "I don’t care"—because you can accept that there will be a few cheaters but also tell yourself that the vast majority won't bother getting a VPN and using it to try to cheat for that amount.

Implementation on Writizzy?

With everything I've said, for me it's the equitable access aspect that speaks to me the most. I believe everyone should be able to easily access the service. So we're going to implement it, but we'll limit the dev cost of this feature.

Because it can actually be expensive to implement a whole price calculation system based on geography, etc. And it's also expensive to go through an external service.

I found an online calculator that gives us a consistent price by country.

So we're going to do it manually, on request, for users who send us an email. It will be documented, whether here through this blog post or in the documentation.