Can different pricing strategies work in different markets? It's a big issue for companies looking to get into China and India
Posted on Conversation Starter: January 21, 2008 12:02 PM
Close on the unveiling of the Nano, the cheapest car in the world, another Indian Company, HCL Infosystems, has announced a $350 laptop. With the lowest-priced laptop currently retailing for over $700 (excluding the "One Laptop Per Child" laptop effort), let's examine how HCL arrived at this price for India and how other companies might learn from it.
Ironically, the announcement of the $350 laptop coincided with Apple's showcasing of the Air—the thinnest laptop—priced at $1800 US. Obviously, the two products cater to entirely different market segments. However, there is a lesson here for well-known brands wanting to make a foray into large markets such as India and China.
Whenever a global brand enters an emerging economy, there is a tendency to adopt a "skimming strategy." Even at its simplest, the approach is to multiply the home country price by the exchange rate, add the customs duties and taxes, and arrive at the price. This is counter-productive, given the mobility of people and the propensity to ask a colleague or a friend to pick up one of these products and avoid the customs duty and tax component. Almost every week, Indian consumers receive offers of well-known brands from the USA and UK for a price less than half of what we would have to pay if we were to buy the same product through an authorized intermediary in India.
The consequences for both producers and customers are hard to miss. Producers are missing out on huge opportunities, and customers cannot have access to service when they need it, unless they are willing to pay a heavy price. Thus, we have a classic lose-lose situation.
The software industry is currently suffering in India and China in large part as a result of misguided pricing strategies. Software piracy in India is estimated at over 70% - compared to about 25% in the USA. One can take some comfort in the fact that piracy has come down from over 90% a few years back to 70% now, but this is a staggering figure and one that casts a shadow on the credibility of the Indian customer.
Various measures have been suggested to thwart the pirates– educating people, coming down heavily on users of pirated software and so on. But these address the symptom, not the disease. The software industry is just now realizing that price-sensitive markets such as India need to be approached differently than more mature markets. The use of Purchasing Power Parity as a determinant of prices can be a useful option. As an example, if software that is priced at $100 US is priced at INR 800 (just over $20 US) in India, with specific safeguards to prevent reverse exports, piracy could be curbed to a great extent.
Such an arrangement has worked successfully in other intellectual fields. Typically, a management text book in the USA can cost $120 or more. Converted into Indian Rupees at the exchange rate, the price would be beyond the reach of most students and even libraries. The concept of low-cost editions meant for sale only in South Asia has done wonders to the adoption of the latest and the best books by institutions of higher education. Low-priced editions are priced in the range of 300-400 INR (about $10). Going by this argument, Apple's latest offering should be available in India for Rupees 15000 (roughly $350 US) and about 25000 (roughly $630 US) even if one were to add local taxes. If this were to happen, how many customers would HCL's offering have? Probably not too many.
Successful tapping of high-volume markets requires that marketers adopt innovative pricing strategies to suit local conditions, as opposed to a global pricing strategy that many marketers seem to be adopting today.
What do you think? Have you seen other successful examples of different pricing strategies for different markets?