As China’s upper-middle class continues to expand, finding the right price strategy is key for many global marketers to stay ahead of the competition in China. We will look at some emerging factors that international luxury brands will have to consider when pricing their products in China.
Scale the economic pyramid
“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,” explains George Yip, professor and co-director of the Center on China Innovation at the China Europe International Business School. “This is also a typical foreign market penetration pricing policy: Start high and move down later to expand the customer base.”
Gau Xudong, senior research fellow and vice-director of the Tsinghua University Research Center for Technological Innovation seems to echo Yip. “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.”
One of the international brands that has understood this idea best is Coach. As of June 30 of this year, Coach had 96 domestic retail locations in mainland China. The brand posted revenue growth in excess of 60 percent from July 2, 2011 to June 30, 2012. Brand representatives say that there is a price disparity between the Chinese and US markets, but Coach stresses that its products provide added customer values like essential luxury, status symbol and even a must-buy “local specialty”.
Price disparities are unavoidable. “In fact, price discrepancies exist in all countries for all brands,” President and CEO of Coach China, Jonathan Seliger says. “There are many reasons for the price difference. This includes the cost of transportation, marketing and the opening and operation of stores.” He adds, “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.”
Pricing based on cost is old-fashion, it’s about the “total experience”
Most industry insiders agree that if you’re pricing based on cost, you’re living in the dark ages. Pricing in the modern luxury market, particularly in China, should be dependent on total experience of the product or service. Pricing is dependent on consumer expectations and the international pleasure experience does not come cheap. Total experience is the money machine for international luxury brands.
“For example,” explains Daniel Lutz, senior vice-president of Nestle Ltd, Greater China region, “if an ice cream is only for cooling down, you just need to make something from water and sugar, which will be very cheap; but if the customers’ expectation is to indulge, they would like to pay more for products with milky chocolate and almonds on the top, which can be more expensive than the cost of the ingredients.”
One international company that has taken this idea and run with it is Starbucks. The brand is seen in China as an American one, which gives it a positive image. “Urban people like to reward themselves with these slightly expensive products to make them feel different and exclusive. If Starbucks lowers the price, it might cost the exclusivity of the brand, and customer erosion,” says Mike Bastin, a researcher from the School of Contemporary Chinese Studies at Nottingham University.
Be aware of high investment costs
Pricing by cost may be old-fashion, but brands still need to be aware of the high cost of market entry. Gavin White, group general manager of glo London, a British chain of casual restaurants, says that property prices and rent in Shanghai are no longer cheaper than in London, particularly if a location wants English-speaking employees. He reports that staff turnover can be very high, and that utilities are more expensive in China than in the UK.
Brand strength and geography affect pricing
Higher pricing is often decided by the brand strength of a company. The Hilton brand is so well established that it is able to lead the market in terms of price in many markets. But as the brand moves further into the second- and third-tier cities, the prices will be adjusted accordingly, he says.Philippe Garnier, vice-president of sales and regional marketing APAC, Hilton Worldwide
The pricing strategies will be different as more hotels come up due to vast disparity between the east and the west, as well as rural and urban areas of China, says Harry Tan, general manager of Days Inn China. While a three-star hotel room in Beijing can command prices of 500-600 yuan, a five-star hotel room in Jiaozuo, Henan province costs only 300-400 yuan.
“The pricing is decided by a number of factors, but the location and the brand are often the key considerations,” says Garnier. “It will be a very dynamic process.”
Embrace the middle class by introducing sister brands
Brands are moving down the consumer chain to approach those with decent income but not yet super-rich, as the consuming power in the second- and third- tier cities has tremendously increased. Some brands that have marketed themselves toward the middle class in the West decided to appeal to a higher-class market when they entered China. It can now be difficult for them to grow their customer base without damaging the fragile balance between exclusive and mass-produced.
When Levi’s arrived on the Chinese scene in 2001, they set a price point of about $100-$150 on each pair of jeans to appeal to the wealthy (the same jeans were going for about $70 in the US). In August 2010, however, Levi’s launched a sister brand, Denizen, in Shanghai, presumably to attract a middle-class audience without diluting the appeal of Levi’s. A pair of Denizen’s costs approximately $48-$65 dollars.
“When customers shop for the Denizen, they also have a chance to know more about the Levi’s brand, which they can scale up to in the coming years,” says Terence Tsang, the former senior vice-president of Levi’s.
Meanwhile, Coach is hoping to straddle between being selective but not exclusive. “We work with the fast-growing middle class in China,” Selliger says. “We want to be selective but not exclusive. 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.”