Nuanced pricing approach required in China

30 March 2010

BEIJING: Brands hoping to make in-roads in China must take a nuanced approach to their pricing strategy, research by McKinsey has found.

According to Max Magni and Yuval Atsmon, who work for the consultancy's Shanghai office, "cutthroat competition keeps prices low in China even though the sales tax is often higher than it is in the United States."

More specifically, they suggested that shoppers in the rapidly-growing economy focus on value to an even greater extent than their less well-off counterparts in other nations.

"Our research shows that the Chinese recall product prices with amazing accuracy, constantly comparison shop, and will go out of their way to buy at the lowest price," Magni and Atsmon argued.

A can of Coca-Cola is available for 35 cents (€0.26; £0.23) in China compared with $1 in the US, while a Big Mac Value Meal costs $2 and $4 in these two countries respectively.

Tide, the detergent owned by Procter & Gamble, is also around 60% cheaper per load in the first of these two markets at present.

Despite this, there are instances where Chinese consumers are willing to pay a premium for certain items when compared with their peers in more advanced countries.

One reason for this is that price is typically associated with quality, a trend that has been exaggerated by high-profile product safety scandals in the recent past.

"The belief that cheaper products are less trustworthy than expensive ones runs so strong that a cut in price by a multinational immediately awakens consumers' suspicions," Magni and Atsmon said.

In many cases, purchase decisions are also determined by a desire to improve an individual's status, with Starbucks, the coffee house chain, being one beneficiary of this habit.

"Its audience is concerned less with the fact that buying a Starbucks latte is, by local standards, a luxury, than they are with the prestige they gain by tapping at a laptop in a Starbucks café," said Magni and Atsmon.

Moreover, the giving of luxury goods as gifts, and the effort to avoid "appearing stingy or making the recipient feel unimportant" can have a major impact.

One sector that has seen the effect of this kind of "reverse price war" is baiju, an alcoholic drink that serves as a popular present.

Prices in this segment have climbed by around 300% in the last five years, a movement encouraged by the introduction of a brand which was double the price of any other in 2004, leading rivals to mark up their own offerings.

In a similar fashion, a tall Starbucks latte costs $4.50 in China, measured against $3.50 in the US, while a pint of Häagen-Dazs ice cream is around $11 in Chinese supermarkets, falling to $4 in the US.

"If you are considering this tactic, remember, in the Chinese market, there are exceptions for every rule," Magni and Atsmon concluded.

Data sourced from McKinsey; additional content by Warc staff