What are the pricing strategy considerations for companies operating in China? In this interview, Shengyun Lu shares his perspective as an experienced specialist in this field.
Can you introduce yourself, please?
First of all, I’m very honored to share my personal experience and professional expertise with Olivier Verot and Marketing to China.
MARKETING TO CHINA AGENCY
We are the top and most visible Web & Marketing Agency for China you will find on the web. Our Services: E-Commerce, Search Engine Optimization, Advertising, Weibo, WeChat, WeChat Store & PR.
My name is Shengyun Lu, I spent in total around 12 years in Paris since my arrival in 2014. Graduated from Ecole Polytechnique, I started my career in Paris by working in the corporate and consulting industries. I’ve both worked in Roland Berger Paris office and Shanghai office as a strategy consultant. Most of my topics during this period were to help MNCs to identify the growth opportunity in a fast-developing Chinese market. For example, the automotive industry was at double-digit growth during the exact same period.
Now I’m running the Shanghai office for a leading European consultancy and specialized in Topline power. We helped our client to think through their pricing, sales & marketing strategy in a structured way and help C-level management to make decisions based on data and facts
Can you speak about the different services you offer?
As strategy consultants, we help C-level management to make strategic decisions; meanwhile, differentiated from other consultancies, we are also very pragmatic and operational. We are keen on the implementation of our solutions or recommendations, and we provide “end-to-end” solutions to our clients through our different internal and external capabilities.
I structure our services and offerings in the “T” shape (see following graph), and make high-level comments about what we offer in each of the modules. In reality, each client is in a different business situation, and I believe also that asking the right questions can not only save time and investment from our clients; but also lead to the right solutions. Therefore, part of my job is also to help our clients to define the right questions, or “Scope of Work” in our consulting language.
What type of companies are interested by your services?
In my past experience as explained above, we collaborated a lot with MNCs in Chinese market on different topics; such as: market study, consumer insights, growth strategy or new business model ideation.
Nowadays, the Chinese market is evolving quickly. In some of the areas, China is even ahead of European or US markets. Moreover, China is characterized by its different market structure, business culture and ecosystem. When people use Facebook, Google or Youtube, while Chinese clients are more on the Wechat, Baidu or Youku. Therefore, our offering is also evolving aligned with the market needs; and we structure our new offering as following.
Firstly, we continue to work with MNCs in this highly competitive Chinese market on emerging topics. MNCs would need to understand the differences in Chinese business environment and Chinese ecosystem. We talk a lot about digitalization, but all MNCs companies will face the same issue in China: how to implement the digital transformation in China, and make it consistent with global approach.
Secondly, we collaborate with leading Chinese companies and are their external “brain”. As mentioned above, in many areas, Chinese companies are ahead of global peers; thus, there is no benchmark in the world and they would need to take the first steps.
Finally, from a functional perspective, both international and Chinese companies forget the power of pricing in sustainable and profitable growth. Although the Chinese market is highly competitive, it doesn’t mean that the entire markets are unprofitable or less attractive. If so, there would not be so many players still entering Chinese markets. I would love to illustrate the power of pricing in the next question with the graph.
Pricing, can you tell us a bit more about your methodology?
First of all, we need to explain why companies need to focus more on pricing. If we break down structurally the “profit equation”, we can see clearly three major components: pricing, volume, and cost. I believe that in today’s market, every company’s management focuses on the last two components meaning “volume” and “cost”. When talking with my clients, they are usually in a “binary” mindset; such as – “how to reduce my cost level and make the companies more efficient”; or “how to enhance my sales distribution network, or generate more traffics; hence obtain the growth”. But rare companies’ stakeholders ask themselves the question of pricing, while pricing is one of the major components in the profit equation.
It’s not that these companies don’t want to focus on pricing, but usually, the right pricing requires for deeper thinking, structured methodologies, and data analytics capability. Therefore, people rather avoid the question of “right pricing”. There are 3 major pricing methodologies: cost-based pricing, competition-based pricing, and value-based pricing.
The first two pricing methodologies are characterized by their simplicity in logic thinking; such as: people usually know better their cost structure, therefore price could be the cost plus a “mark up” for margin. Or in the competitive Chinese market, people prefer to benchmark their prices with their major competitors, and gain market share with a lower pricing strategy. If we think thoroughly, these two pricing methodologies have a common default which is – “ the consumer is missing in the evaluation of pricing”. Consumers don’t buy products based on their cost, but they buy based on the values the products deliver to them. Secondly, competition based pricing is one of the key root causes for pricing wars. It’s already well explained in the “Game Theory” and “Prisoner’s dilemma”.
We recommend our clients to put their consumers in the centric of their process, including product design, service offering differentiation, and pricing. This is the only method where companies can not only understand their consumers’ needs but also extract the right values through their needs and set the right price level. The pricing methodologies are very theoretical, and we will provide some of them we usually use in our consulting work, such as Conjoint Analysis, APTO, etc.
The key here is not to implement the methodologies in a rush to measures the values; on the contrary, it’s worthy to think through the values perceived or delivered to your consumers, prioritize the values; and decide on which is the right methodology in a specific use case.
Can you share one of your case studies with our readers?
Let me give you a sanitized example which is in Consumer Goods industry which is more speaking to every reader.
First step: it’s important, as explained, to understand the values perceived or delivered to your consumers. We see clearly several pitfalls when companies don’t use a “consumer-centric” approach or don’t unlock “pricing power” at an early stage. In concrete cases, companies usually leverage their own experience or sometimes imagination to design products without consumer research, or large scaled survey. It creates a mismatch between consumers’ needs and their WTP (Willingness-to-Pay). In order to maintain the wished market (/or pricing) positioning, companies need even to enhance their product design when launching into the market. Usually, the story ends with “over-engineered products” or “heavy discount”.
Second step: it’s important to use structured and data-driven methodologies. We support companies, in this step, to select the best methodologies to use in the specific use cases. Moreover, we support them to design the questionnaires in order to extract correctly consumers’ WTP; and even the monetized value of each feature. Conceptually, companies will be able to build up their prices when designing their products by adding features. The end game of the methodology is to help companies to set up a structured internal pricing logic, which we called a “Price Tree”.
We illustrate below with 2 simple examples within the large-scale survey. On the left side, consumers are able to see the product, give their impression on perceived values, and accordingly make a budget proposal. On the right side, we leverage Conjoint Analysis where we put different products with different features today. We simply ask consumers to pick one of them shown on the screen and quantify how they make decisions and for how much they would probably buy. It’s a real simulation of consumers’ purchase process.
What are the 3 most important things for a brand to be successful in China? What brands according to you do an amazing job in China?
In my opinion, there are 3 key factors that will determine a brand’s success in the Chinese market. Within the 3 factors, the first factor is of course the predominant and lays the foundation for the following ones.
- Be close to your consumers
- Be open to the local ecosystem
- Be proactive and reactive to the local market
The Chinese consumers are characterized by several layers of complexity which brands don’t see often in Europe. First, the Chinese market is huge. Brands need to be focused rather than being ambitious. A consumer in Shanghai has different needs and price sensitivity compared to a consumer in lower-tier cities. Second, the consumers’ needs evolve extremely quickly. It’s relatively easy to build up a brand in short term compare to Europe, but it’s of course relatively easy to make a brand disappear if it doesn’t address consumers’ needs properly. Finally, within the large consumer population, there are different segments and profiles. They perceive different values towards the same brand and have very different use cases.
Most Chinese brands are catching up with international brands; moreover the younger Chinese consumers are educated and grow up in a different world where China holds relatively stronger power than in the past. Therefore, they don’t have the same preference as their elder generations. We can name lots of Chinese local brands in different industries, and all of them are potential candidates for market winners in the future. For example, Huawei is clearly pushing Samsung out of the market and being a real challenger for Apple; NIO, or Xpeng are serious competitors for Tesla in the automobile industry.
There are too many to list but the common point of them is they put Chinese consumers in the center of their approach. People just need to look at the public communication of William Li, founder of NIO to understand.
To conclude this discussion:
Chinese consumers are characterized by several layers of complexity that brands don’t see often in Europe/the US. This includes huge markets, rapid changes in the market (think e-commerce), and many consumer segments to consider. It is important to use structured data-driven methodologies which include product design, service offering differentiation, and pricing strategies tailored to your target audience. Have you considered how the price might affect customer retention? What has been your experience with this so far?
Connect with Shengyun on Linkedin to learn more about his services.