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The China Price. Low, Lower, Lowest And Incredibly High.

By Dan Harris and Steve Dickinson

Excellent blog post on the Harvard Business Review Blog regarding prices in China. The post is written by Max Magni and Yuval Atsmon of McKinsey & Company's consumer practice in Greater China and Atsmon is an "associate principal" in the Shanghai office. The post is entitled, "China's Reverse Price Wars," and though it does not put forth anything earth shatteringly new, it is so clear and to the point, that 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?

Full post as published by China Law Blog on March 18, 2010 (boomark / email).