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Developing Nations: Pure Price Buyers or Not?

August 2011 Pricing

Last year, a Malaysian executive told me that she must compete on price because Malaysians only buy on price.  This year, an Indian executive told me that he only sells commodities because that’s what his nation buys.  On both occasions, I countered with a strong push to find ways of meeting their customer’s needs better to reduce downward price pressures associated with selling commodities.  They reluctantly allowed me to continue but I don’t think they believed me.  Was I wrong?

In this article, I present case studies on Cummins, Gorgeous Look, and Zambeef based on The Wall Street’s Journal Africa Rising series as evidence that even in developing nations, not all customers are pure price buyers.

Zambeef

Zambeef Products PLC expanded into Nigeria to provide meat to consumers and recorded about $90,000 a week in sales as of February 2011.  They were expecting sales to double in Nigeria by year-end.  At roughly $4.75 per pound, Zambeef is priced about 16% higher than competing meat.

Why might Zambeef attack a relatively poor market and expect to grow and yet avoid direct price competition?  Because they offer a better whole product experience.

Zambeef offers clean, packaged meat in contrast to that sold in open-air markets in Lagos.  It also sells its meat in Western-style stores run by Shoprite and Zambeef’s own outlets, as well as through restaurants and hotels.

In total, some Nigerians consumers view the whole product experience of Zambeef worth more than the 16% premium they pay for their meat.  And, while “middle class” in Nigeria might mean making between $2 and $20 per day, even at this level of poverty, people will make rational tradeoffs between price and benefits.

Gorgeous Look

Also in Nigeria, Gorgeous Look sells embroidered dresses, blouses, and shirts, known as lace to the locals.  Lace products are common in Lagos, from night-club goers to motorcycle-taxi passengers.

Gorgeous Look sources their lace from Austria, Europe.  While Gorgeous Look sells $200,000 – $300,000 of Austrian lace per year, Austria as a whole is sells an estimated $37 million in lace to Nigerian shopkeepers like Gorgeous Look.

Austrian manufacturers do not have the Nigerian market to itself.  Chinese manufacturers, noticing the popularity of lace in Nigeria, entered the market roughly a decade ago and are now doing roughly $200 million in lace trade with Nigeria.

In a price comparison, typical Chinese lace costs about $45 per 15 yards while typical Austrian lace costs about $250 to $1,000 per 15 yards, at 450% to 2000% price premium.

Ask why a Nigerian lace trader might choose to source lace from expensive Austria rather than cheap China and they will state that Austrian lace is better.  When it comes to quality fashion, even a relatively impoverished middle-class Nigerian will often choose to pay a premium for a premium look.

Cummins

Although Cummins has a long history in Africa, it has treated Africa like most global firms:  tucked into the EMEA (Europe, Middle East, Africa) market and holding a relatively unimportant position at that.  In 2010, Cummins’ Africa strategy changed.  They installed a South African executive to drive African growth to $1 billion within five years, or to roughly 6% of global revenues.

Power generators are one of Cummins key products.  Power, along with other basic infrastructure, is a notorious challenge in developing nations.  To address power shortages, many businesses and homeowners will purchase a backup generator.

Cummins sells high-end generators that are perhaps more appropriate for businesses or large housing complexes.  Priced at $9,000, a diesel-powered Cummins generator is far more expensive than the typical $500 gasoline powered Chinese generator.

Even with their higher prices, Cummins is marching forward in Africa.  They plan to open a retail outlet in Lagos in conjunction with a training program that will convert salespeople from “hawkers” towards value-adding solution selling.

There is Always Room for Differentiation

From beef to electricity, firms are successfully selling higher quality and higher priced goods than their “commodity” competitors in Africa. Some American and European firms are even competing successfully with China in Africa.  They are doing so because they meet the needs of a segment of the market better than their competitors.

People, even those with only a modicum of income and living in a relatively poor market, will make rational tradeoffs between price and benefits.  Even when most of the population is impoverished, those with a little income will pay for better quality.

Developing nations are not just for selling cheap stuff and commodity goods.  Some people in developing nations are willing to pay for quality.  They, like the rest of the world, will pay a price commensurate with the value a product delivers in relation to its nearest competing alternative.  In other words, they are not pure price buyers – they are value seekers.

(Much appreciation to the Wall Street Journal for providing the raw material for this case study.)

References

 

Note of Interest and Holdings: At the time of writing, the author is not currently a direct consultant to nor investor in any of the firms listed in this article.

 



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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