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?
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