As I wrote in a previous posting, Pricing is on the move and gaining prominence in China. In this article, I reprise that earlier article, but also expand on it.
In March 2013, I made my sixth visit to China in a little over three years, to conduct my ninth Value-Based Pricing workshop. Many of these workshops are ‘open enrollment’, attended by delegates from a wide variety of industries, and several have been corporate, in-house workshops.
When I first started going to China, sales of the open-enrolment workshops were relatively slow (but ultimately well attended). Approximately 80% of delegates come from business-to-business Multinational Corporations (MNCs) usually sporting job titles like Marketing Manager, Sales Manager or Product Manager. The other 20% hails from business-to-consumer multinationals. Local (domestic) Chinese companies never make an appearance.
My last visit to China (March 2013) was very different. The workshop sold out weeks in advance, and over 1/3rd of attendees were newly installed in roles with ‘Pricing’ in their title. One woman was even an (internal) “Customer Value Management Consultant”. What’s behind the change?
Among the drivers mentioned by attendees, a few were particularly interesting. The first is that the establishment of a corporate pricing function is a defensive measure. For three years, I’ve been hearing delegates say their European and American Head Offices have been telling these Chinese subsidiaries to improve their pricing. But rarely, if ever, is any sort of training and support provided to assist in the attainment of this objective.
One of the primary motivations for establishing a Chinese pricing function is to manage those expectations, and the gap between what prices the Chinese market will bear, and what Europeans and Americans think Chinese prices should be. Many attendees spoke of their pricing being “80% ‘strategic” and “20% localised”.
MNC’s operating in China need to understand than not all markets are homogeneous. The level of economic development is one explanation, but so to are cultural differences, business customs and sales acumen (more on some of these shortly). Just because a product commands a certain price in North-Rhine / Westphalia, doesn’t mean that price will be obtained in Jiangsu Province. The Chinese don’t want to be selling a German pricing structure to a Chinese customer.
Another interesting driver was input costs. As raw material prices rose about two years ago, more and more Chinese companies saw their margins eroded, primarily due to maintaining a cost-plus approach to Pricing. Resources were added not only to protect such margin erosion, but also to facilitate a move towards a more sustainable, value-based, approach to Pricing.
What can be concluded from these observations? Clearly, even the Chinese now recognise that customers don’t care about what things costs to manufacture. Customers care about the value they receive, and that cost-plus pricing is a flawed approach to pricing.
And for the first time this trip, I heard several Chinese companies admit that, if customers don’t see value in the price they charge, they’re more than happy to “sack the customer” and let them buy from the competition.
Other Chinese Pricing Challenges
One of the biggest challenges in China is the monetisation of services, and strategies used in Western economies don’t necessarily provide the solution. This challenge is particularly acute for B2B manufacturers of goods, and less so for companies providing services only (professional or otherwise), or technology companies.
This challenge is both a marketing one and a cultural one. Market segmentation is made difficult by the existence of “Guanxi” (discussed below), which makes it very difficult to charge different prices to different customers or industries. There is also room to improve the distinction between “setting prices” and “getting prices” (one company in attendance had recently gone from 60 day payment terms to 180 day payment terms).
From a cultural perspective, “seeing is believing” in China. Bigger is better, and measurement is critical to its quantification. Many customers do not see any value in B2B services procured from a manufacturer, and won’t pay for them because size and measurement are abstract concepts for intangible services.
Pay now and receive the benefits later is another paradigm that doesn’t conform to the “seeing is believing” manta. Chinese customers want instant gratification, benefits and return on their investment.
Not only is there a shift to value-based pricing occurring in corporate Pricing in China, but there is also a small, emerging interest in pricing solutions, not just pricing technology, but also a suite of holistic processes, policies and procedures as well. Many are still managing their Pricing in Excel spreadsheets. One or two have developed sophisticated Access database tools, but an interest in more sophisticated technology solutions is slowly staring to emerge.
Ironically, I heard (secondhand) reports of one European company using pricing technology globally, except in China. But they do treat their Chinese subsidiary as a customer for the purposes of this technology solution, in an attempt to charge higher prices in the Middle Kingdom.
So if there is a shift, from cost-plus to value-based pricing underway in China, is it being accompanied by a shift towards value-based selling? Unfortunately, the jury is out on this question. Ask a Chinese salesperson if s/he is selling on the basis of value, and the answer will be in the affirmative. Ask anyone else (including expats, of whom there have been many attend my workshops), and they will tell you the opposite. The author has initiated research in this area to seek a definitive answer to this question.
What is unquestionably clear is that Sales Management has a huge role to play in China, as does a “carrot-and-stick” approach to sales force compensation.
What cannot be denied however is that culturally, doing business in China is different from doing it in the West, in many ways:
- The Chinese acknowledge and respect hierarchy. Chinese organisations are vertical, and place a very strong emphasis on seniority, rank and title. As a result, employees are very cautious about what they say when their boss is in the room;
- Personal interests and initiatives can be subordinated. Being the first to come up with an innovative idea can be considered “showing off”. Group thinking is preferred over personal initiatives because groups, not individuals, are accountable;
- This hierarchy and bureaucracy means that the Chinese take longer to make decision, and decisions are based on ensuring that the balance of all parties is taken into account;
- This reciprocity, trust and mutual obligation among all parties forms a social and business platform in China known as “Guanxi”;
- And for these reasons, the Chinese often find it difficult to say “No”, they prefer to make concessions at the end of a negotiations, rather than as it progresses, and they often don’t consider contracts legally binding (rather, they are a ‘draft’, subject to change).
There is no doubt the Chinese economy has slowed down a bit over the last three years. I predict that those Chinese companies that have recently established Pricing Departments will weather the storm much better than those that have not. The tight Chinese economy will really test those low-cost (domestic) Chinese companies that have been applying downward pressure on prices over the years.
Want to discuss your Chinese Pricing strategy?