Archive for the ‘Pricing Strategy’ Category
Wednesday, June 27th, 2007
Why Do Western companies get it wrong?
Before moving on to discuss how companies should implement change in terms of their marketing and selling approaches, it is worth considering why Western companies often target the Chinese market in an inappropriate way. There are a number of reasons for Western companies’ apparent lack of understanding of how to market; many of these are self-evident and all of them stem from a lack of experience in the market.
Life cycle
Some of the ‘mistakes’ made by Western companies in terms of their marketing and sales approaches and messages can be explained by the fact that many of their Chinese activities are relatively new. Companies are providing solutions to needs which have only just emerged, and mutual understanding between buyers and suppliers is still developing.
There has been a strong tendency for Western companies to undervalue the importance of marketing in China, seeing it as something that takes place not at the beginning of the product life cycle, but once channel access and market penetration have been achieved. This is extremely surprising, given the sophistication of marketing techniques in the West, and may result from a lack of knowledge of the target market, as well as a lack of confidence that marketing techniques will be successful.
Focus on product, channels and price, rather than promotion
If Chinese companies tend to regard promotion as the only aspect of marketing, there is an opposing tendency for Western companies in China not to pay promotion enough attention. Western companies entering the market have frequently conducted some kind of channel (place) research, as well as an examination of the likely prices the market will bear. They have usually given a good level of consideration as to which products will appeal, albeit with insufficient thought to how these will need refining. However, analysis of the market assessment research being conducted by market research agencies in China will tell you that the 4th ‘P’, promotion, has often been completely ignored. Company resources have been thrown into understanding the size and nature of the market opportunity, with much less emphasis placed on how that opportunity should be communicated directly with the target market.
‘We know best’
A valid criticism made by Chinese businesses of their Western counterparts is that they sometimes appear hard-wired in thinking that everything they do is automatically superior to the local competition. Essentially, Western companies forget that marketing is about the profitable satisfaction of needs, and that if a need is different in China to the West, then the value proposition must also be different. Westerners tend to try to ‘re-educate’ Chinese buyers, rather than simply providing a value proposition that meets the market’s existing needs.
“Marketing is a ‘Western’ discipline – it’s less important in China�
Some Western companies, many of them guided by Western market entry consultants, tend to overstate the importance of relationship building in China, in that they see it as a substitute to marketing effort, rather than a complement. Good salespeople are sometimes left stranded alone in a small representative office, with no marketing capability to complement or assist them.
Communication problems
It cannot be denied that there remains a significant language barrier between Chinese and Western companies, albeit one that is closing as huge numbers of Chinese businesspeople learn English and increasing numbers of Westerners learn Chinese. Once companies need to interact at an operational rather than strategic level, mutual linguistic understanding can often be lacking.
Tips For Successful Selling In China
So, based on our own experience of selling in China, and in particular the experience of our clients and survey respondents, are there any ‘golden rules’ that can be used by foreign companies looking to market and sell in Chinese business-to-business markets? The answer is, of course, that there are differences by industry, geography and a host of other factors. We would argue that it is perfectly achievable for a Western company to succeed in the Chinese market, so long as it remembers the basics of marketing, and is prepared to adapt these to the local environment:
 Remember the marketing basics – Product, price, place and promotion are all important. All should be researched before and after market entry, in order to ensure that the value proposition meets and continues to meet the target market needs.
 Patience – Patience is required when applying the marketing basics to the local market. In particular, the sales process is longer and more complex than in Western markets, and local buyers will take time to be convinced that a Western company has the ‘local’ credentials to meet their needs.
 Listen – Only by listening will you be able to understand and therefore meet the local market needs. Chinese companies do not want to buy a product or service that has come straight off a shelf in the West.
 Relationships – Focus, but do not over-focus on relationships. Any salesperson must be prepared to be ‘friends’ with a potential supplier. However, this is as well as, not instead of, the 4 P’s of the marketing mix.
 Be confident in your quality – Western companies start from a strong position, in that they are usually assumed to have excellent quality. Focus on the value you add, and be prepared to explain why you can add value in China specifically.
 Be methodological, but flexible – One of the qualities that defines Western businesses is their methodological approach to doing business. It is clear that when this turns into a dogma about how business should be done, Chinese companies quickly lose interest in your offering. However, do not be afraid to highlight the methodological nature of your offering, as this is something that is valued by Chinese businesspeople and seen to be lacking in some Chinese businesses.
 Be prepared for plenty of negotiation – The Chinese approach to completing deals relies heavily on many rounds of negotiation, and this is something that any potential supplier must be aware of. It is almost inconceivable that your first proposal (particularly your first price) will be accepted. Companies wishing to do business in China should consider the price they are willing to accept for their offering, but never open negotiations at this level.
 Avoid exaggeration – Focusing on the credentials you have, rather than exaggerating to make up for perceived deficiencies, is to be recommended. Chinese companies want above all to trust their suppliers.
Matthew Harrison is a Director of B2B International and B2B International China, and currently based at our office in Beijing. If you would like to share your views on this paper or hear more about our research, consultancy and training services in China, please call the Beijing office on +86 (0)10 6515 6642. Alternatively comments and queries can be emailed to beijing@b2binternational.com.
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Monday, June 18th, 2007
This blog is the first place you will be able to read our latest white paper written by Matthew Harrison, Director of B2B International China.
Marketing and Selling to Chinese Businesses
By Matthew Harrison, Director of B2B International China
About This Paper
This paper is based on 100 in-depth interviews with business owners and senior purchasers throughout Beijing and Shanghai. Companies of all sizes were interviewed, from those turning over US$1.5m through to multinational companies. Companies were divided into quotas to ensure a cross-section of different types of manufacturing and service companies.
About B2B International China
B2B International’s Asian office provides marketing research, marketing strategy consultancy and marketing training courses to Western and Asian companies alike. The company specialises in obtaining information direct from Asian markets and converting this data into intelligence and advice. The team is based principally in Beijing but specialises in obtaining and analysing information across the whole Asia Pacific region.
We provide a range of services designed to:
• Help Western companies with a presence in Asia expand and strengthen that presence
• Help Western companies without a presence in Asia establish a presence there
• Assist Asian companies establish a presence in Western markets
• Provide training and consultations on marketing techniques and strategies to Western and Asian companies alike
Introduction
The question of how to market and sell to companies based in China is one that is debated endlessly by foreign companies seeking to profit from the huge potential of the country. Views expressed by businesspeople claiming to know the secret of success in China vary wildly, from those (generally newcomers) who say that marketing and selling in China is ‘just like home’ through to those (usually those with at least a couple of years’ experience in China) who exaggerate the unique nature of Chinese business and Chinese people to such an extent that selling in China sounds like an impossibility. The reality is that these two positions are both equally crass and incorrect – there is no reason why a Western company with a flexible, patient and ‘listening’ approach to marketing and sales should not succeed in the Chinese market.
This paper is based on a survey of Chinese business opinion in the two key cities of Beijing and Shanghai. Our aim is to dispel some of the myths propagated about Chinese business, and explore the reasons behind both successful and unsuccessful marketing and sales approaches in China. We do not seek to provide definitive ‘one size fits all’ answers to companies looking to establish or increase their presence in China; rather to put forward some general guidelines for companies from outside China to bear in mind.
Chinese Attitudes Towards Marketing and Sales
It is worth mentioning straight away that the principle of ‘marketing’ in business-to-business markets is less widely recognised in China than in more mature markets. Commonly, marketing is viewed as a service department for the sales department, its role sometimes seen as little more than taking care of the company logo and brochures. In short, marketing is defined by many in Chinese businesses as consisting of only the ‘promotion’ element of the 4 Ps. ‘Product’ is the job of engineers, ‘price’ the job of salesforces and ‘place’ the job of senior management. At worst, marketing departments are derided as ‘Spending departments’, their apparently superficial output seen as a poor substitute for the relationships that are so important in a Chinese business environment.
Figure 1 – The 4 Ps Of Marketing
In contrast to some Western markets, the salesperson and more broadly the principle of selling are widely respected in China. Two issues perhaps lie at the core of this fact – firstly the entrepreneurial spirit of the Chinese people, and secondly the importance placed on relationships in business decision making. A good salesman must almost by definition be adept at forging not only relationships, but also friendships with potential customers. This makes a good salesman respected almost by definition, and also implies a long sales process, with all of the on-the-ground presence, learning and patience that this involves.
Part 2 will be published on Wednesday 20th June.
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Thursday, June 14th, 2007
With the launch of Apple’s much mooted iPhone on the horizon, many leading phone manufacturers are rallying together to try and proactively take a lead… or is it just a reactive damage limitation exercise? Can the might of the iPhone brand and all the hype surrounding it take on an entire industry? Only time will tell.
The article below, from the Financial Times has all the details.
Mobile phone groups take on iPhone
By Maija Palmer in London
Published: June 13 2007 22:02 | Last updated: June 13 2007 22:02
The mobile phone industry will on Thursday launch a challenge to Apple’s iPhone, by unveiling a low-cost, flat-rate music service that can be accessed on most handsets in Europe and Asia.
The MusicStation service has backing from the handset manufacturers Nokia, Sony Ericsson, Motorola and Samsung and 30 mobile phone operators and all four music majors – Universal Music Group, Sony BMG, EMI Music and Warner Music International – as well as several independent labels.
Music companies are hoping that MusicStation will help kick-start mass-market consumption of music over mobile phones.
The service launches just ahead of Apple’s iPhone debut in the US on June 29. The iPhone will give users easy access to Apple’s iTunes online music store, building on the success of the company’s popular iPod portable music player.
“We were keen to jump through the finish line first,� said Rob Lewis, chief executive of Omnifone, the privately-owned UK start-up company behind the MusicStation service. “All European and Asian consumers will have access to MusicStation well before iPhone’s arrival in those regions.�
Telenor, the Scandinavian operator, will be the first to launch the service in Sweden, but it is expected to be rolled out throughout Europe, Asia and Africa over the next few months.
Manufacturers will begin producing handsets that have been pre-loaded with software to access MusicStation. Many of these devices will be mid-priced, in contrast to the iPhone, which will have a price tag of about $499. It is estimated that 100m MusicStation-enabled handsets will be sold over the next 12 months, dwarfing the 10m iPhone handsets Apple aims to ship in the next year.
The industry estimates that mobile music consumers on average download just six songs a year, at a typical price of £1 (€1.48) a song.
Music groups stand to increase their earnings significantly by taking a share of the weekly €2.99 flat fee that MusicStation charges consumers for unlimited access to a catalogue of more than 1m songs. The fee includes all downloading charges.
Users will be able to listen to the songs and store them on the phone, but not burn them on to CD or distribute them over the internet.
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Tuesday, June 12th, 2007
There was a very interesting post from Seth Godin on his blog at the end of last week. In the post, Godin suggests that there are three main ‘humps’ that result from different pricing strategy. The post is below, so let us know what you think of it (or you can click here to view the post on Godin’s blog). If you want more information on pricing why not have a read of our white paper “The problem with price”.
I’ve been working on a video project and thinking about pricing. That led me to this chart, which is more conceptual than accurate.
Let’s go through it, starting with the stick on the left.
FREE stuff spreads. You don’t make any money from the thing you’re giving away, but you do get attention, which is worth as much, or more in many cases.
Charge even a penny, though, and the drop off is huge.
Jump over to the middle hump, the one without the question mark.
REASONABLE PRICING puts you right in the middle of the market. With reasonable pricing, you can move just a bit to the left or the right to find the sweet spot, the spot where you can balance money for promotion or shelf space or advertising against keeping your price low. Most of us are familiar with the shape of this curve in our industry. For example, hardcover books go for about $21. At $28, you have more money for co-op and ads, but sales go down a bit. At $19, you can’t promote much, but sales go up a bit.
Move a bit to the left to the first hump with a question mark.
REALLY LOW PRICING is a whole new world. That’s when something becomes cheap enough to be irresistible to someone who might not consider the category at all. This is what happens when MP3 songs go from 99 cents to 20 cents. This is what happens when you sell a hardcover book for $10. There’s no room for big promotion, at least at first, but as WalMart has shown us, you can get scale at the super low end and have plenty of profit left over to hire fancy PR firms and lobbyists and ad agencies.
The last hump, the one on the right, is usually unexplored.
REALLY HIGH PRICING is the domain of specialty markets and superstars. Elton John gets $300,000 to do a bar mitzvah. John Cleese offers training videos that cost $1000 for one DVD. This is the land of high service and extreme exclusivity.
What’s interesting about the four choices is that most organizations are only familiar with one. Ask them to try another and they freak out. They don’t even want to consider it.
I think real growth can come when you get out of your comfort hump and create a blend. Understanding how to live in multiple worlds and to balance them isn’t obvious, but the opportunities are worth it. Ben Zander’s brilliant book costs $10.20 at Amazon in hardcover. Buying the DVD costs $1495.00.
If he wanted to sell the DVD in large quantities, he’d need to price it differently and sell it in a different channel. But if he wants to work with trainers and the distributors who sell to them, he’s exactly in the center of that third hump.
Careful about the Y axis (volume). Units aren’t always the goal. (that’s why I said this chart was conceptual). FREE gets you the most units, REALLY EXPENSIVE the least. But depending on your objectives, units might not be the point.
It’s not important to know the right answer, which hump to choose, because there isn’t one. It’’s essential to know the question, because there are four distinct choices, and not choosing is still choosing.
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Wednesday, May 30th, 2007
Here is the fourth and final part of Tim Harford’s fantastic article on pricing and segmentation.
Perhaps you are a company director rubbing your hands with glee as you read this, planning to deploy a range of clever price-targeting strategies in your own business. Before you get too excited, you’ll need to deal with the leaks in your price-targeting system. There are two potentially catastrophic leaks or great holes in an otherwise brilliant marketing scheme. If you don’t deal with them, your plans will be in ruins.
The first problem is that supposedly price-insensitive customers may not play the self-targeting game. It’s not hard to persuade price-sensitive customers to steer clear of an expensive product, but sometimes it is more difficult to prevent the price-insensitive customers from buying the cheaper one. This is not a problem in the case of small price differences; we have already seen that you can get some customers to pay a modest mark-up in absolute terms, but the mark-up can be huge in relative terms.
Some of the most extreme examples come from the transport industry: travelling first class by rail or air is much more expensive than buying a standard ticket, but since the fundamental effect is to get people from A to B, it may be hard to wring much money out of the wealthier passengers. In order to price-target effectively, companies may have to exaggerate the differences between the best service and the worst. There is no reason why standard-class railway carriages shouldn’t have tables, for instance, except that potential first-class customers might decide to buy a cheaper ticket when they see how comfortable standard class has become. So the standard-class passengers have to do without.
The 19th-century French economist Emile Dupuit pointed to the early railways as an example: “It is not because of the few thousand francs which would have to be spent to put a roof over the third- class carriage or to upholster the third-class seats that some company or other has open carriages with wooden benches… What the company is trying to do is prevent the passengers who can pay the second-class fare from travelling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich… And it is again for the same reason that the companies, having proved almost cruel to the third-class passengers and mean to the second- class ones, become lavish in dealing with first-class customers. Having refused the poor what is necessary, they give the rich what is superfluous.”
The shoddy quality of most airport departure lounges across the world is surely part of the same phenomenon. If the free departure lounges became comfortable, then airlines would no longer be able to sell business-class tickets on the strength of their “executive” lounges. And it would also explain why flight attendants sometimes physically restrain passengers from the cheap seats from stepping off the plane before the passengers from first and business class. This is a “service” aimed not at economy-class passengers but at those looking on in pity and disgust from the front of the plane. The message is clear: keep paying for your expensive seats, or next time you might be on the wrong side of the flight attendant.
In the supermarkets, we see the same trick: products that seem to be packaged for the express purpose of conveying awful quality. Supermarkets will often produce an own-brand “value” range, displaying crude designs that don’t vary whether the product is lemonade or bread or baked beans. It wouldn’t cost much to hire a good designer and print more attractive logos. But that would defeat the object: the packaging is carefully designed to put off customers who are willing to pay more. Even customers who would be willing to pay five times as much for a bottle of lemonade will buy the bargain product unless the supermarket makes some effort to discourage them. So, like the lack of tables in standard-class railway carriages and the uncomfortable seats in airport lounges, the ugly packaging of “value” products is designed to make sure that snooty customers self-target price increases on themselves.
Consider a hypothetical organisation, TrainCorp, a passenger train company. TrainCorp owns a train that always travels full. Some of the seats go at a discount of £50 to leisure travellers who booked in advance, to senior citizens, to students or to families. The other tickets cost the full price of £100 and are bought by commuters and other business travellers. This is a fairly standard group-targeting strategy: by giving away a few low-price tickets, TrainCorp restricts supply and acquires the ability to demand high prices by offering tickets to only the buyers with the highest willingness to pay. (It might be profitable for TrainCorp just to fence off some of the seats and restrict supply that way, but it’s even better for them to fill the spare seats if they can.)
We know at once - if we are economists - that this is inefficient. In other words, we can think of something that would make at least one person better off without making anyone else worse off.
That something is to find a commuter who was willing to pay a little less than £100, say £95, and who decided to travel by car instead, and offer him a seat for £90. Where does the seat come from, since the train is full? Well, you take a student who is in no great hurry and was willing to pay a little more than £50, say £55, for the seat and politely throw him off the train. But you refund the price of his ticket, plus an extra £10 for his trouble.
Where do we stand now? The comuter was willing to pay £95 but only paid £90. He’s better off by £5. The student was willing to pay £55 for a £50 ticket, so if he’d been allowed to ride, he’d have been only £5 better off. But he has just been given £10, so the student is also happy. And what about TrainCorp? Well, TrainCorp just transformed a £50 ticket into a £90 ticket and made a more profitable sale. Even after paying £10 compensation to the student, the company is £30 ahead. Now everyone’s a winner; or they would be if TrainCorp adopted this system instead of its group price- targeting strategy. But of course, that’s not what happens, because if TrainCorp tried it, commuters who were willing to pay £100 would hang around for the £90 tickets, and students who weren’t willing to pay £50 would buy tickets anyway and wait to be paid to get off. The whole affair would turn out badly for TrainCorp, who is the one who gets to set the prices.
In case your head is spinning a little, here’s the quick-and-dirty summary: the group price-targeting strategy is inefficient because it takes seats away from customers who are willing to pay more, and gives them to customers who are willing to pay less. Yet airlines and railways still use it, because the alternative of individual price-targeting isn’t feasible.
OK, so sometimes price-targeting is less efficient than a uniform price; sometimes it’s more efficient than a uniform price. But we can say more than that. Whenever price-targeting fails to expand the number of sales and merely moves products from people who value them more, like commuters, to people who value them less, like students, as in the case of TrainCorp, it will definitely be less efficient than a uniform price. Whenever price-targeting opens up a new market without affecting the old market, it will definitely be more efficient than a uniform price.
And there’s a middle position. A lot of group price-targeting does a bit of both: it opens up some new markets but also wastefully moves products away from high-value users to low-value users. For example, my book, The Undercover Economist, is published in hardcover at a high price, and the paperback edition emerges later, at a lower price. The aim is to target a higher price at people impatient to hear what I have to say and at libraries. One good result is that the publisher will be able to sell paperbacks more cheaply, because some costs will be offset by the hardcover sales, and so the book will reach more people. One bad result is that the early version is much more expensive than it would be if there was only a single paperback edition, and some buyers will be put off. That’s what life is like in a world of scarcity: when companies with scarcity power try to exploit it, the situation will almost always be inefficient, and - equivalently - we economists will almost always be able to think of something better.
This is an edited extract from “The Undercover Economist” to be published in the US on November 1 (Oxford University Press $26) and in the UK on March 2 2006 (Little, Brown £17.99). cTim Harford 2005.
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