Intl brands' pricing strategy in China
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E-mail China Daily, October 1, 2012
Changing economic landscape forces multinational companies to alter pricing strategies in China
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Coach Inc is one of the first companies to realize the perception of Chinese consumers and profit from its early moves. [Photo/China Daily] |
Trawling through the various online shopping sites in China, one would be surprised to see the huge number of purchasing agents offering international products from reputed brands to Chinese customers. On Taobao, China's biggest online shopping site, at any given time one can find as many as 100,000 such agents of a varied scale offering diverse products such as cosmetics, garments, luggage, milk powder and health supplements.
Purchase agents are those who buy international brands from overseas markets, then sell them to Chinese customers with some built-in profit margins. One reason why they are so popular in China is that even though the products are being offered at prices higher than those in international markets, they are still cheaper than in a domestic company franchise store. Pricing products higher in China and attaching a premium to them is a common pricing strategy used by international companies to reach out to well-heeled customers.
While that strategy has worked in the past, companies are now realizing that having a premium price tag alone does not ensure robust sales or continued success. The price is now seen more as a separator and not a differentiator in the huge Chinese consumer market.
There is no doubt that pricing is an important element in the overall marketing mix of a company as it is directly related to product positioning. At the same time, pricing also governs other elements like product features, marketing channels and promotional activities.
George Yip, professor and co-director of the Center on China Innovation at the China Europe International Business School, says that international brands have to take into consideration the extra expenses they incur when developing new markets, especially when the sales volume is far lower than that in the home markets.
In such situations, companies often raise product prices in overseas markets to recover these costs, he says. But that is only part of the overall pricing formula, says Yip, author of Managing Global Customers.
"Foreign companies generally sell to a higher level of the economic pyramid in developing countries such as China. So essentially their customers can afford the higher price," Yip says.
"This is also a typical foreign market penetration pricing policy: Start high and move down later to expand the customer base," he says. "These high prices are sustainable if customers pay and there is no other cheaper competitive alternative."
With the Chinese economy largely resilient to the global economic turmoil and the "higher level of the economic pyramid", or the upper and middle class in China, expanding quickly, there is now more than ever a desire among international companies to find the right pricing strategy to stay ahead of the competition in China.
When people have higher purchasing power, it is natural for them to move up the economic ladder, says Gao Xudong, senior research fellow and vice-director of the Tsinghua University Research Center for Technological Innovation. "This is especially evident in the Chinese market," says Gao, former director of the MBA program at Tsinghua University.
"It is a rational choice for high-end brands to price higher in China," Gao says. "China is still a hierarchical society where people need brands to label their social status, and there is demand for every social class."
US leather goods maker Coach Inc was one of the first companies to realize the perception of Chinese customers and make hay from its early moves. Coach had 96 domestic retail locations in the Chinese mainland, Hong Kong and Macao as of June 30 this year and posted revenue growth in excess of 60 percent during its 2012 financial yearfrom July 2, 2011 to June 30, 2012.
The luxury goods maker says that there is a price disparity between the Chinese and US markets, but stresses that its products provide added customer values like essential luxury, status symbol and even a must-buy "local specialty", for those traveling to the US. Coach bags sell from upwards of 3,000 yuan ($475,366 euros) in China, whereas most of the bags in US outlets are priced under $300 (233 euros), or even in some cases under $100.
Jonathan Seliger, president and CEO of Coach China, says the price disparities also stem from unavoidable factors.
"In fact, price discrepancies exist in all countries for all brands," Seliger says. "There are many reasons for the price difference. This includes the cost of transportation, marketing and the opening and operation of stores."
In addition, he says: "We have been in the US for over 70 years and are the overwhelming No 1 brand there. This automatically allows for scale efficiencies. We do not yet have that in many international markets, including China."
Seliger is well aware of the purchasing agents and the queues of Chinese customers outside the Coach factory stores in the US. "We are happy to see increasing engagement with Chinese customers in both China and overseas markets," he says.
Seliger says the US company has a way to deal with this situation as it frequently updates the product lineup with new designs (almost every month). "So even those who fly frequently between China and the US may find it hard to find the very bag they are looking for in a Coach outlet," he says.
"As Coach offers monthly newness and products tailored for local markets, we believe the accessible pricing and local promotional initiatives are enough incentives to boost domestic consumption," Seliger says.
"We do not offer traditional products that last for 10 plus years like many other European brands."
At the same time, most of the Coach products in China are priced at about half the price of traditional European luxury brands.
"In terms of pricing, our products in each of the markets is priced 40-60 percent lower than most other European brands," he says. "Coach has always been positioned as an accessible luxury brand since its inception in 1941."
The unique positioning helps the US company differentiate itself from European brands which are at the top of the pyramid and target only a small group of exclusive customers, as well as the "mass market" brands that appeal to the general public.
"We work with the fast-growing middle class in China," he says. "We want to be selective but not exclusive."
According to analysts, the gift consumption tradition in China has also helped brands charge higher prices. More than 25 percent of the luxury products purchases in China are for gifts, says a recent report released by US consultancy firm Bain & Co.
Jeff Gong, director of Beijing Vogue Glamour Brand Marketing Inc, a brand consultancy, says there is a huge difference between Chinese and Western consumption behavior. "While the Europeans love to keep the good stuff for the family, Chinese people present it to guests or to others as a gift."
Dale Preston, managing director of retail measurement in China at market research firm Nielsen, says pricing varies depending on the sectors, but what people are ultimately after is "value for money", whether it is for self-use or as a gift.
"If you are a premium brand, give customers a good story and good history; while for products displayed on the shelf like a shampoo, tell them what the product can do for your hair, whether it can make your hair shinier. If the product can deliver what it promises, then the brand image will be solidified," he says.
Gao from Tsinghua University says Chinese people's penchant for high-end brands will last for some time, and hence the brands will enjoy a considerably long "golden period" in China.
"As the disparity between different social classes is huge, the social hierarchy won't disappear in a short time. So Chinese people will keep chasing after brands and those beloved brands will always remain on a high perch for a while," he says.
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