Overcoming regional pricing barriers

"Asian markets and customers are much too price sensitive!" "We are experiencing 20%+ growth. Why do we need to fix pricing? In Asia, it's about growth!" These are common beliefs about the Asian market. However, they are generic and in many cases inaccurate. This article will look at why pricing in Asia is different to the rest of the world, and how to manage those differences. Asia consists of four major regions, China, India, North East Asia (Japan and Korea) and South East Asia (ASEAN). There are significant differences with respect to pricing between these regions. Hong Kong is not only a big regional center but also quickly becoming an important route into China. This article will reflect mainly the perspective of the chemical industry, focusing on each region separately.

Four unique elements of pricing in Asia
There are four unique elements of pricing in Asia: 1. The GTM and channel model makes pricing complex. 2. There is an over-reliance on volume-based rebates as incentives in pricing. 3. FX volatility has an ongoing impact on pricing. 4. Cultural norms influence how price discussions are made. We will evaluate the relevance of these elements in each of the four regions in Asia.

1. GTM and Channel
The GTM and channel model tends to be complex in Asia, especially in China and India. First of all, the number of channel partners is high. In some cases, like in agro-chemicals in China, it's not unusual to have ten channel partners between the supplier and end customers. Each channel partner takes a share of the commercial terms offered by the suppliers, this makes it difficult to estimate the share of each and the price to the final user of the product accordingly. Hong Kong based corporations would be better at managing the operations in China vis-à-vis corporations based in the Europe and US.

Second, the size of Asian channel partners tend to be smaller than in the western hemisphere, and they take on different roles in the value chain. Some are pure channel partners, some double up as wholesalers and agencies, whilst others closely resemble retailers. In addition, they often change their role depending on which supplier they are dealing with.

Finally, the digitalisation of contracts or exchange of transactional information, is lagging behind. Whilst some companies are world-class with regards to data sharing, it is more often the case that they are not sophisticated enough with terms & conditions, policies, transparency or data-driven analytics. All this adds complexity to pricing.
 

2. Overuse of volume rebates
In Asia, volume rebates tend to be overused. Volume rebates assist in growth, but can be ineffective in driving behaviours, such as paying on time, maintaining prices, and being a strategic partner. Volume rebates could encourage channel partners to buy more than needed, and then resell it to other small channel partners, thereby increasing their margins at the expense of the original supplier.

Other performance-based rebates, like growth, strategic, information sharing, financial, technical partnership etc. are underused. Early payment discounts are sometimes offered in high inflation countries, like Indonesia. In Japan, early payment discounts are completely irrelevant, both from cultural and economic standpoint. It is worth noting that due to cultural differences rebates don't drive behaviour in the same way across the different regions in Asia.

3. FX volatility
FX changes have a significant impact on profitability, especially in China and ASEAN given their reliance on exports. China manages this exposure by pegging the business to the US-Dollar. However, now that the Renminbi is free floating, FX fluctuations have exposed all companies through the value chain. Pricing should be dynamic to quickly respond to major FX shifts in order to protect profits. In some cases, the Hong Kong dollar could be the transactional currency used in China, or in dealing with Chinese corporations. In such cases, the transfer pricing between the operations in Hong Kong and China come into play.

4. Cultural aspects
In some Asian countries, saying "no" to customers is frowned upon. Therefore, price discussions with customers can become difficult. Sales and Commercial teams in Asia wish to avoid such conversations. Negotiations in Asia are different, and customers ask for high discounts and rebates and companies reciprocate with setting high list prices as they expect this customer behaviour. Asian-specific list prices are not uncommon in such circumstances. The support of local leaders is critical in making pricing and commercial improvements.

Implications for your pricing
A "one-size-fits-all" pricing strategy is unlikely to work in Asia. Each region is differently affected by the four elements described above. The following implications can be drawn for your pricing in Asia:

• Channel and customer segmentation is imperative, despite the complexity. The parameters for channel segmentation could partly be qualitative in nature in case of underdeveloped quantitative data. The sales teams can be leveraged to gather this information. The richness of data will improve over time, and make segmentations more meaningful. The ownership of commercial activities should be with one central team. A single central team will make pricing more aligned with marketing and sales and help in overcoming the relative dearth of accurate market information.
• Pertinent performance rebates should be evaluated and used. Rebates to reward information sharing, early payments or deal-specific elements etc. are important in Asian markets and will drive customer behaviours. They do not suffer the drawbacks of volume-based rebates.
• A clear and agile pricing process is needed to manage the exposure to FX volatility. The process steps would be identifying the triggers, devising a formula for sharing risk, taking customers into confidence, and/or including FX-based terms in contracts.
• Sales teams need solid negotiation training. Maintaining cultural norms should not be at the expense of margin and profitability. Techniques like masking the real list price even from the sales team could help in ensuring that discounts offered don't lead to long-term price decline.