Trading in the emerging economies of the third world:
Wining a price competition against lower priced items.

Contents

1. Introduction
2. How some producers are able to reduce prices.
3. Instances where the competitor's lower prices are genuine
4. Conclusion and summary

Introduction.

Many businesses have ceded competition to rivals who offer lower prices for goods and services especially when trading in a market, such as those of the emerging economies of the third world, where demand is deemed to be very elastic in relation to prices judging by the high level of poverty.

The high level of efficiency demanded in todays global competition has necessitated the movement of some labor intensive production offshore, usually to places where labor costs are low in the hope that it would improve efficiency in production and by implication allow for lower prices.

However, in these days of spectacular technology breakthroughs in large scale industrialization, process automation, use of robots in production and the continued availability of information technology tools such as business intelligence, Computer aided product design and manufacture, decision support and other management information systems, it is doubtful that reduced labor costs achieved by such strategy alone, will translate directly to efficiency in production except in very labor intensive industries.
Even then, substantial investment is made into training as competitive wages for both skilled and unskilled workers must be complemented by high productivity to have a positive impact on prices.

Some of those offshore production centers will eventually shut down, if the production cost and by extension, the price advantage fails to materialize, or bring the expected result.

While pricing is very fundamental in marketing strategy, it does not necessarily guarantee success in these price sensitive markets of the third world. This implies that higher priced products can compete effectively with their lower priced alternatives, provided they are free of defects.

This topic therefore tries to suggest measures to adopt when found in competition against lower priced products even in these markets.

How some producers are able to reduce prices.

A very careful appraisal of the competition is required to understand why a competing business is offering lower prices.
Efficient production, which is the usually assumed reason, is not so easily achieved by most establishments as it usually involves considerable investment.

To fashion out an appropriate strategy for competing with lower priced goods therefore, one must understand why the competitors' products are cheaper.

We will deal first with suitable reactions and the opportunities afforded by these other reasons enumerated below, before addressing the issue of competition where the causes for lower prices are real or genuine,

1. Economics of scale in production as a result of a very large market or orders.

   This could genuinely result in low production costs and the consequent low pricing. The opportunity here however is that customization for a specific market would either increase the cost for the large scale producer, or compromise the design for a specific market.

   An example is in vehicle production, where the economics of scale may be reduced by differences in the side of the road on which vehicles move. Countries like Japan and Great Britain drive on the left side of the road, and therefore require right hand drive cars.

   Economics of scale cost advantage might therefore be compromised by the requirement of extra expense or constraints in design to cover these markets as well as those which drive on the right.

   This creates an opportunity for premium pricing for products specifically designed for the local market. The producer must highlight this factor in its marketing campaign.


2. Production in excess of firm orders, which can then be sold in another market at close to marginal costs.

   Agents or branch offices normally submit estimated sales figures of goods for every year as part of a budget.
   The estimated fixed overhead costs is then absorbed on those figures. Surplus production can then be sold without the inclusion of the fixed costs in pricing, which is now lower than earlier ones despatched to the existing agents and branches.

   Some producers will compel the branches or agents to take them at a lower cost, giving them greater latitude in pricing or making year end or a festival sales. Opportunity: The price reduction cannot be sustained. Prices should be restored after the sales. Alternatively, you may organize your own clearance sales at periods that will precede the competitor's own period when the excess production becomes apparent at the head office. You would not have to reduce you own prices as much.


3. Dumping site for production which has failed quality control tests in other markets.

   Make careful notes of the defects observed. This may be carried out by a polling exercise of users, your own marketing research efforts, or by outsourcing the exercise to a reputable marketing firm. It is necessary to know the strengths and weaknesses of the other products in the competition.

   Capitalize on these defects in your next marketing campaign. Let the customers know that such defects are absent (correctly) on your higher priced products.


4. Large scale market discrimination: Selling at premium prices in some markets and using the margins to undercut prices in another market.

   You should find a way of bringing this to the notice of consumers in the higher priced market either by writing an article in a widely read journal, blog, or newspaper in that market or by “innocently” alerting main distributors to the existence of a cheaper offering of the product in another location that may give rise to a grey market, when brought to their domain.

   It may also signal a necessity to explore the higher priced market.


5. A strategic move by a producer to eliminate competition.
   Prices may then be restored after the exit of the competitor, or a new model or brand substituted in a cost reduction scheme.

   This should soon evaporate the profits, when the measure is prolonged. Unfortunately, it calls for perseverance as one has to wait until the scheme is over.
   It should depress your sales and/or prices for the period.

   Just make sure your products are still profitably priced as the competitor would have wasted money for that action if you persevere.


6. Sales on liquidation.

   Goods may be sold below cost price in an effort to recover debts or when a business is winding down.
   This is also a temporary measure that must be endured until the liquidation is complete.



7. Intention to dispose of slow moving stock.

   Goods are either sold at cost price, or below cost in the belief that a newer production line would recoup the losses. This is also a temporary measure.

   You should also reduce your slow moving stock from time to time through regular sales in line with the competition.


8. Promotion of a product with a time valid offer after which the price returns to normal.
   This also implies a temporary measure.
   You must also endeavor to carry out promotions from time to time.


9. Offering “stripped down” or “bare bones” versions of a famous product.

   This implies that the luxury is not intended for that market.

   This creates a situation which may seriously tarnish the competitor's image as a producer practicing a double standard. Besides, luxury has several meanings in different markets. To those in the third world for example, a laptop or telephone handset with an extended battery life is a privilege and not luxury.
   An SUV or a four wheel drive car cannot be described as a luxury car as a result of bad roads, even when normal saloon cars are cheaper.

   Well developed roads or adequate infrastructure can be described as assets which make the use of SUVs or four wheel drive cars or an extended battery life for laptops and telephone handsets unnecessary in every day use, as such, may be regarded as luxury.

   The same cannot be said when such is used in countries with poor infrastructure.


10. Incorrect or unrealistic methods of estimating production costs.
    Patience is required for the consequences to manifest.

    A number of producers do not quantify some operations realistically in terms of costs and therefore underestimate their production costs. This is very common among small or self employed operators, where the same person acts as Chairperson, Managing Director, factory and production manager, marketing director and payroll clerk. He/she does not take those salaries into account when computing production costs. Many just dip their hands into the profits for their personal needs.

    This class of producers usually operate in small limited markets and are restricted in terms of market reach. They would find an expansion challenging as it would require a proper management structure.

    You may just explore other markets beyond this competitor's reach and concentrate on your brand development knowing fully well that any attempt to expand to your own turf will definitely disrupt its management system.
    If however, the market held is important to your business, and this rival refuses to embark on an expansion, you may lure them into such by buying, or encouraging someone else to buy their goods for resale at an acceptable margin to bring the prices to a realistic level.

    An awareness of possible higher prices elsewhere for their products should stampede them into the expansion which should bring about the required internal management reforms and a realistic pricing.

There will however be instances where the competitor's lower prices are logical.

This will comprise of four types of operators under two subheadings:

1. Local producers
1. those whose production unit and management is completely local.
2. Those who are local production units of multinational organisations.
2. Imported goods
1. imported from a “low cost” production country with an unknown brand name
2. imported from a “low cost” production country with a known brand name, probably a foreign subsidiary of a well known multinational.

1. Local producers those whose production units and management are completely local.

   
   The existence of the this type indicates that it is possible to attain the low cost while producing locally, provided the reduction is not according to condition 10 above.
   
   You must be able to match the production cost even if you do not intend to reduce prices.
   The higher contribution must be available as surplus income from which advertising campaigns and promotions can be made to sustain brand image.

2. Local producers who are local production units of multinational organisations

   
   . Many of the conditions mentioned above should also be relevant.
   In addition, the local unit must benefit from reduced costs on large purchases by the group due to economics of scale.
   
   You can bundle in a local product or service which incorporates local expertise with your own competing product or service. An example is an extended warrantee or an accessory at a discount.

Some countries are low production cost centers, because of:-

1. Competitive wages for skilled and unskilled workers.
2. Low cost or proximity to raw materials
3. Low cost operating environment
1. Low energy costs
2. Lax environmental standards
3. Lax labor laws
4. Lax taxation
5. Good infrastructure.

1. Imported goods from a “low cost” production country with an unknown brand name

   
   These goods come under various brand names, have common components and are usually very cheap,. Experience shows that they are not very reliable and suffer from a number of defects.
   Their attraction comes as a result of their low affordable prices.

   Market strategy to be adopted should focus on a well articulated campaign highlighting the higher longer term costs associated with such goods in comparison to the ones you are promoting, provided you own does not have such defects.

   These issues are well appreciated by many consumers in the third world markets especially when it pertains to automobile parts, electrical household items and electronic goods.



2. Imported goods from a “low cost” production country with a known brand name, probably a foreign subsidiary of a well known multinational.

   
   These present goods with the highest value for money although they come at premium prices.

   Goods produced under the well known brand names are subject to rigorous quality control standards and do not usually exhibit defects associated with less known brands from the low cost countries, as brand owners make conscious effort and care to protect their brand names.

   They are however targets for fake imitations and piracy especially where the brand owners have not established an official presence or representation in the local market.
   Consumers in these markets will naturally avoid such products when presented with alternatives, whenever suspicions arise about the authenticity of the brand name.

   Conclusion and summary.

   Pricing has been abused an can be used as a smoke screen to sell substandard products to unwary customers at the expense of genuine and quality conscious producers.

   They can fight back if they employ the methods stated, some of which will be summarized below.

   If you produce good quality goods and your competitors adopt a low price strategy, then you should follow these suggestions:
   
   1. You must register a unique brand name. Some use similar brand names to that of the industry leader only to change a letter with an intention to confuse consumers. These producers are simply hurting themselves as they:
      1. Will not be able to build on their own brand names with unique design.
      2. May have their fortunes tied to those of the copied brand names.
      3. They will also be victims of fake imitations of the market leader.
   2. There must also be a unique design for your own products. This will differentiate your product/service.
   
   
   3. Emphasize the weaknesses of the competition, while stressing your own strengths. You may incorporate this into your product design and advertisement slogan or wherever practicable
   
   
   4. Flaunt your country of origin if it has a positive reputation, such as institutionalized standards enforcement, strong consumer rights, export quality assurance etc., stress such. (Please make sure your product or service doesn't wreck it). If your country has a negative reputation for whatever reason, lay considerable emphasis on why your product is different.
   
   
   5. Let the consumer know why your product is more expensive:
      1. Extra cost of mandatory quality control and the implications as regards safe and longer use of product. For machinery, implications for durability and infrequent maintenance. For software or service, less irritation for users, less requirements for customer service (which however, should still be available).
      2. Low servicing costs and/or efforts for machinery or automobiles. Requirements for replacing some expendable parts in some vehicles, for example, may involve so much in time and effort to frustrate customers.
      3. Expressing technical jargon in simple terminology, thereby encouraging comparison by consumers.
   
   
   6. Use of subtle warnings to underscore advantages. An advert for cars may read “the pleasure you derive from driving our cars is not an excuse for reckless driving. Please remember that the other cars on the road may not be similarly endowed” and one for software may read “while we acknowledge the adequacy of our software in managing your business, please take note that inviting an external auditor for an annual audit is a statutory obligation”.
   
   
   7. Establish a local presence or representation. This is important for customer feedback, correcting uniqueness for a market, and good after sales service. This will also be very crucial for brand protection against imitations, piracy and knock offs.
   
   
   8. Design your products to reduce or completely eliminate irritations during use. A consumer may be easily repelled without caring to know if your product fulfills other expectations.
   
   
   9. Eliminate lapses that can increase production costs as this will give you better latitude for pricing and free more resources for advertisements.
   
   
   10. Polling must precede brand slogan, marketing strategy and, if possible, the product design. This is essential as the consumer's thinking and expectations must be understood. Smaller companies can outsource such tasks.
   
   
   11. Ensure high quality standards for raw material or component purchases. There must be verification by effective internal quality control procedures where costs may be shared with supplier. Good quality components reduce production costs.
   
   
   12. Ensure competition among suppliers with regard to value and quality. Value can be monitored regularly with the help of the internet.