China Business

The China Price is Higher than You Think

The China price

Excellent post on the Harvard Business Review Blog regarding prices in China. The post is China’s Reverse Price Wars, and though it does not put forth anything earth shatteringly new, it is so clear and to the point, I highly recommend it. Since it is from McKinsey, I am assuming it has millions of dollars of surveys and pretty sound analysis behind it.

Its thesis is that though low prices are super-important for China, they are not the only thing driving consumer buying:

That doesn’t mean reducing price is the only way to crack open the Chinese market. In some cases, consumers are willing to pay more than even their counterparts do in the developed world — for three reasons.

1. The Chinese perceive price to be a proxy for quality. The belief that cheaper products are less trustworthy than are expensive ones runs so strong that a cut in price by a multinational immediately awakens consumers’ suspicions. The recent spate of contamination scandals, such as those concerning milk and infant formula, has reinforced this conviction.

2. Consumers, increasingly, buy products that are status symbols. Starbucks has done well in China partly because of its snob appeal. 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 cafe. Similarly, Haagen Dazs has thrived by adding elaborate desserts to its menu and creating an upscale ambience in its stores. In cities like Shanghai, teenagers often take their first dates to a Haagen Dazs parlor and they are willing to pay for the privilege.

3. In a society where “face” matters, the Chinese prefer to give premium brands as gifts. It’s better to trade up than to run the risk of appearing stingy or making the recipient feel unimportant, runs the logic.

It then talks about what it calls reverse price wars and how multinationals have taken advantage of one of the three factors set forth above to boost prices:

China often witnesses reverse price wars, during which rivals compete to increase prices so they can attract shoppers who will only buy the more expensive brands. For example, in 2004, a maker of baijiu — distilled liquor that is a popular gift in China — launched a new brand at almost twice the price of its nearest rival. Its sales soared, leading rivals to hike prices too. This war has sent the cost of premium baiju skyrocketing by around 300% in the last five years.

Some multinationals have succeeded in charging higher prices in China by addressing one of the factors we mentioned earlier. For instance, a 900 gm can of Wyeth Gold S26 infant formula costs as much as $27 (RMB 160-200) in China compared to $22 in the United States; a tall Starbucks latte sells for $4.50 (RMB 30) versus $3.50 in the United States; and a pint of Haagen Dazs ice cream retails for a whopping $11 (RMB 75) in a Chinese supermarket as against $4 in a U.S. supermarket. In the Chinese market, for every rule, there are exceptions.

What do you think?

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9 responses to “The China Price is Higher than You Think”

  1. Dan, great point from McKinsey. there is an incredible vanity and snobbery element in Chinese consumption patterns. From cigarettes, to baijiu, to cars and just about everything else.
    Nonetheless, any foreign company wanting to employ the ‘reverse price war’ strategy had better understand branding in a local context and their market segments incredibly well.
    The risk is the brand never gets off the ground or market penetration minimal.
    While Starbucks is doing well, I often walk past premium clothing brand stores and they are empty. Savvy Chinese shoppers buy these expensive and discretionary items in Hong Kong or the US at well below half the price.

  2. Very good insights! Thanks.
    Although it’s true that product quality is an issue in China,connecting high price with “good quality” is universal human perception bias.The danger is,even a tiny mistake can wreck the whole brand equity. And also your competitor is easy to copy the “marketing differentiation”–process differentiation is difficult to be copied–negating any competitive advantage.

  3. Chris has got a great point there. When it’s all local consumption, like Starbucks and Haagen Dazs, charging a higher price for China could work well. But if it’s a tradable, international brands might have to transfer additional profits from their Paris stores to fund branding in China, haha.

  4. It is for posts like this that I am a regular reader. It got me thinking. Thank you again China Law Blog for all your content.

  5. Chris: While Starbucks is doing well, I often walk past premium clothing brand stores and they are empty. Savvy Chinese shoppers buy these expensive and discretionary items in Hong Kong or the US at well below half the price.
    Which appears to be part of the branding strategy. Some premium brands seem to intentionally create “showrooms” in which no one buys anything to establish brand prestige, and so that people can tell their friends how smart and thrifty they are for getting the item elsewhere at a deep discount.
    Even at half the price, I’m sure that the clothing makers are getting a huge profit margin.

  6. I remember we touched on this topic in the shopping mall thread from a while back. I won’t repeat the many good points that were brought up there. But I just wanted to comment on the example used in the article of the Wyeth Gold baby formula – I’m pretty sure I checked the label and the stuff that’s sold here is manufactured locally. AFAIK it’s not the same as what you get overseas. If it were a true imported product, it would cost at least twice as much.
    Knowing what I do about how things are done here, I cannot place my total trust in any product that is made here, even ones that may be wearing a foreign brand. This is why I balk at paying foreign prices for so-called foreign products that are actually domestic.

  7. If you consider VAT, fees on fapiao, and duties the price differential that you see among China and the USA is easily accounted for.

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