Understanding the market, customer perceptions crucial for long-term gains in China

The pricing of a product or service is not an easy decision for any company. There are many issues that must be taken into consideration, especially when a multinational company is entering a new international market such as China.

The price is an important aspect to marketing a product as, rather than costing the company money, the price provides a direct source of income to the company. So it is important that a company makes the right pricing decision.

In deciding the right price, there are some basic conditions that must be satisfied. Whatever price is charged, it must at least cover the costs of manufacturing and bringing the product to the market. Therefore, the price offered cannot be too low, as the company will lose money, which is not sustainable over time.

Alternatively, the price offered cannot be too high as it will be too expensive and people will not buy it. So ensuring that the price is not too low or high can be a tricky situation for managers.

Many global companies enter the Chinese market and must strategically decide the best approach to pricing its product.

There are several approaches a company can take.

Skimming: This is where the product is introduced in the market at a high price, and then lowered over time. This often occurs with new technology, as the manufacturer wants to quickly cover the costs of research and development, and launching the new product. Customers who are "innovators" often want new technology as soon as it reaches the market, and will be willing to pay extra to obtain it.

However, as the technology becomes less unique and competition increases, the company will lower the price to make it accessible to the wider market. Apple Inc often uses this method.

Prestige: A company will use prestige, or premium, pricing as a strategy where companies with luxury products or exclusive brand image/reputation will price the product at the high end of the price range. Customers knowing that they are buying high quality will expect to pay the higher price. Louis Vuitton and Rolex are examples of brands that can command these high prices.

Global: Some multinationals will standardize not just the product, brand image and advertising, but also the pricing. This means that what it charges in China will be the same in the UK, US and Europe. This sends a message of consistency about a brand. Multinational companies like Starbucks have used this strategy.

Market: A market price strategy often occurs in an established market where a new brand is introduced at the same price as the competitors. The international marketer must have a good knowledge of the local Chinese market, and be able to promote the product on criteria other than price, such as product style, ingredients, availability and good advertising. Producers of lower-priced fast-moving consumer products such as chocolate bars often do this.

Penetration: This is another strategy for a company entering an existing market whereby the product is offered at a price lower than the competitors. The hope is that at the lower price customers will be drawn to the product resulting in a high amount of sales and a greater market share. An example of this is the Chinese car company Great Wall, which entered the car market in Australia in competition with established companies like Toyota, Holden and Ford.

A company can also reposition itself with different price strategies, for example, starting with price skimming and then as the competition grows, changing to a penetration pricing, although the company must consider its effect on the brand image.

But some companies adopt a "wait and see" policy to discover what the market is doing before varying its price strategy.

The author works with the Business School of the University of Technology, Sydney. The views expressed here are not necessarily those of China Daily.

(China Daily 09/28/2012 page7)