Consumers often make decisions based on what they hear or see. Brand awareness is a crucial factor in marketing exertions. Advertising play a huge role imprinting in people’s minds certain brands and what they stand for. With the huge selection of products today, inexperienced consumers use their brand awareness as a numerous choice method in buying products. As consumers, even when we are exposed to another brand that serves the same need, we tend to select the same old brand that we already know. Even if the new brand has a lower price, beacuse as a human nature, we tend to be risk averse and less likely to change. Lets take sports drinks as an example, PowerAde and gatorade, they both serve the same need, have the same flavors, personally i feel they both taste the same. However, Gatorade has a slightly higher price, but, some consumers prefer it on PowerAde. This is because they built an image in there minds that this product serves there needs in a better way. And it is not easy for them to shift to PowerAde.
The video below explains a very interesting fact about how colors can impact our willingness to pay. As human beings we are not all trained to deal with numbers. We tend to look at colors and visuals before looking at prices, and here is where company branding play a huge role. Taking cars as an example, a consumer’s willingness to pay increases if a car’s color is red. The human mind tend to send a signal that it is brighter and better, when in reality it is the same. Another factor that determines how we react towards certain products is advertising. When we watch the same commercial over and over and the brand name keeps on popping in front of our eyes, or we listen to the name very often, we tend to shift towards this certain product. Not because it is better, just because in our minds we created an image that this product is what we desire.
Moreover, brand awareness is also related to pricing, and consumers perception towards prices, specially when consumers are price sensitive. Pricing decisions are very important when launching a certain product. Consumers will link the price to this product, and will make decisions based on this fact. Changing the price later can be critical because of what consumers have perceived in there minds. Lets take chocolate bars as an example, in the 1970’s chocolate prices increased, firms found it hard to simply change the price on candy bars, because this will change there image in consumers minds. What they did is that they simply made chocolate bars smaller in size, selling them for the same price!
Why does success for any business differ from one country to another? And why is understanding the culture a key indicator to the success of a firm? Shopping behaviors differ from society to another, but can these differences influence store prices? Unfortunately they do, this is because price sensitive consumers search for lowest prices, thus, firms adapt there pricing strategy to meet these consumer demands. Lets take Walmart as an example, it is very successful in the US market, however, when it first expanded to China it wasn’t. This was due to many reasons such as having a different culture, labor, infrastructure, demand, suppliers and different competitive dynamics.
Chinese tend to be more selective in there purchasing for groceries than others. They search for lower cost and better quality. They also tend to spend a long time shopping at grocery stores and do not spend much money, while US consumers spend less time and more money. This is because Chinese consumers go to grocery stores on a daily basis, while US consumers go once or twice a week. Retailers’ pricing strategy is generally effected by the selectiveness of Chinese consumers. At start Walmart didn’t offer them what they were looking for, which resulted in losses. In this case, how should Walmart react? They must offer lower prices for a similar quality of goods to Chinese than Americans.
All this said I wonder how come Walmart offer lowest prices and all there marketing campaigns market to this factor, but at the same time Chinese consumers were sensitive to their prices? This is probably because of suppliers in the US, Walmart had a sufficient number of suppliers while in China they didn’t when they first started which made it harder for them to reduce costs, and easier for competitors to offer lower prices. However, after recognizing this, Walmart China managed to solve the issue and build a strong reputation in the Chinese market. Given all the considerations above, we can determine that building a successful competitive advantage in one country doesn’t mean it will succeed in the other. When expanding globally, the firm must add value to what if offer. This is done through understanding and analyzing economic, geographic and cultural systems. And this is what Walmart did, after realizing their mistakes; they managed to engage more in the Chinese culture. They understood the demand and applied cost reduction by having good interaction with retailers, which helped increase their local responsiveness in the Chinese market.
The video below explains differences between Walmart US and China, and how Walmart China managed to overcome some of these differences.
As consumers we believe that German cars are the most expensive and provide the best service among automobiles, and we are willing to pay the highest prices for them. We also believe or expect to have the most innovated products from the US. On the other hand, we expect to have low quality and non-expensive goods from China. But how do pricing strategies affect our outlook? And can we change these observations?
Success for any company is measured by its profit, and profit is restrained by its pricing strategy. Pricing strategies are very critical when entering any market. It is what demonstrates how the product is going to be presented and how consumers are going to recognize this product. It seems like China is approaching an economic to a penetration pricing strategy seeking a bigger market share. That’s why their products are seen as low priced and low quality. There production cost is low, because of low labor cost and the type of products developed. On the other hand, Germany is applying a premium strategy offering high quality and high prices seeking profit and reputation. They charge high prices because of their high labor costs and brand name. Whereas the US is impending a skimming strategy, presenting good quality and high prices for goods and services seeking profit. But how do these factors affect international pricing for goods and services?
In addition to the pricing strategies mentioned we have another important factor, which is the geographical factor. The geographical factor allows companies to implement these pricing strategies in three different ways. First, polycentric meaning the company charges one price for its product all over the world. This is seen mostly by companies that offshore to make sure there production cost is low. Chinese products would be a good example for this strategy. Second, ethnocentric strategy, where the company charges one price for its product, however, the markup is related to the country’s specific data. What affect the price of the product could be taxation, tariffs, price controls, and inflation… Finally, the geocentric strategy allows companies to set up a region price for the company’s products. Income levels, competition and customers’ culture mostly affect this strategy.
Global companies are always exposed to the risk of price changes. Whether this risk is associated with their exports and imports or with the changing prices of commodities. Hedging against foreign exchange risk is one of the most common hedging tools used. This is because companies that mostly deal with exports and imports from different areas around the world are exposed to volatile currency exchange rates. When a company deals with long-term import or export contracts, it becomes risky to make payments in a foreign currency. If the rate of that currency drops before the payment is thru, the corporation may endure a large loss.
Lets take an example of a car dealership that imports cars from Europe, Japan and South Korea. All countries deal with different currencies that rates change daily with the dollar rate. Lets say the US company imports 100 BMW cars every 3 months from Germany at a price of 40,000 euros each. This means the total net wroth of the imported cars is 4,000,000 euros. The dealership must pay the German manufacturer in Euros. However, how much should the dealership exchange dollars to euros? The price depends on euro daily prices. In order for the dealership to maintain a stable price or at least reduce the risk since it is a long term contract, it should hedge. Hedging against foreign exchange can be done through short-term contracts “spot” or long-term contracts “derivatives”, which decreases the exposure to this type of risk.
Another example of hedging against commodity risk is fuel hedging. Fuel is a commodity that is affected generally by supply, demand, gas production levels…etc. Although we as small consumers do not feel this change, airline companies are highly affected. Large fuel consuming companies such as airline companies’, need to hedge as a protection against volatile fuel prices. As explained in the video below, Airline companies’ cost is from fuel itself. Because airlines know how many tickets they will sell in advance depending on the season and holidays they manage price risk in fuel by hedging fuel prices relative to the rates they want to charge clients.
Global prices are affected mostly by labor, taxes, currency exchange, competition costs of goods sold and many other factors. But it differs from industry to another and from country to another. Starbucks, McDonalds, automobile companies, cell phones… for example charge various amounts for the same product in different countries. But I always wondered why don’t they figure out a strategy that ensures consumers the same price for the same product anywhere. Why is it difficult to come up with such a strategy? Aren’t companies shifting to outsourcing these days, then the cost of production should be the same. But why do we still see this difference in prices in different countries? The answer is simple even if they outsource, they still have to deal with many factors other than production cost. In the previous blog we explained how taxes were the main affect on iPhone prices globally, but this is not always the case.
From the video we can see many explanations on the different prices Starbucks charges. In India for example they managed to have prices low because they source there coffee beans locally. The reason companies do that is because some country wages are not high as others so they manage to lower there production cost in order to enter this market and grab a market share.
Another factor that drew my attention and many of us sometimes don’t bare it much attention is competition. Companies often struggle with when dealing with global pricing. Starbucks for example charges a very cheap amount for a cup of coffee in Thailand “42% less than the same cup in the US”; this is due to the high competition on lowering there prices in this industry. On the other hand, Starbucks charges a high amount for the same cup of coffee in Ireland “9% higher than the US”; this is because the company deals with an oligopolistic market. Meaning that the market has small players that set the prices they wish. From all the cases we discussed and seen in the video Starbucks and any global company cannot charge a premium amount globally. This is because if they go higher or lower they might loose their market share and net profit in this market. Although competition is only one factor and is not related to the financials, but from the previous examples we can see how it largely affected Starbucks prices.