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HBR-Global Companies Need to Adopt Agile Pricing in Emerging Markets

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PRICING
Global Companies Need to Adopt Agile Pricing in Emerging Markets
by Martina Bozadzhieva
SEPTEMBER 19, 2016
Global Companies Need to Adopt Agile Pricing in Emerging Markets
One day in December 2014, Sergey, the Russia general manager for a multinational consumer goods company, was up early in the morning, watching the ruble’s value slide by the minute. As the currency
was crashing, he found himself facing a painful dilemma: either raise prices to recoup the losses and hit his annual target — set in U.S. dollars — or wait it out for another two months and hope that the
ruble recovers, since that would give him a leg up on his competitors.
But with the currency changing every day, how much of a price increase should he consider? The 30% that the ruble had dropped since his last quarterly review? Or should it be more, to compensate for
the likelihood of further depreciation to come? That would make his product unaffordable for most of his core customers, and they would almost certainly switch to his competitors’ cheaper alternative.
There was no good solution.
Over the past 18 months, Sergey’s experience has been echoed in offices in Ukraine, South Africa, Turkey, Brazil, and many other emerging markets that have faced substantial currency depreciation due
to the drop in commodity prices and the flow of capital to the U.S. in anticipation of interest rate hikes by the U.S. Federal Reserve.
In a survey of 77 of my company Frontier Strategy Group’s global clients, 88.3% of those in these markets said that currency volatility posed the greatest material risk to their pricing strategy during 2014
and 2015. Given that we are expecting continued emerging market currency depreciation (and a gradual devaluation of the Chinese yuan as the Central Bank of China seeks to maintain China’s export
competitiveness), this issue is going to be a significant problem for multinational corporations (MNCs) in 2017, and possibly beyond.
The reason currency volatility is so disruptive to multinational pricing strategies is because depreciation of currencies in international markets affects their earnings in their home currency (USD, for
example). Normally, MNCs raise prices in the emerging market, (e.g., Russia) in order to compensate for the depreciation’s effect on their USD earnings, but that means their product can become as much
as 40% more expensive overnight. That can lead to market share loss, as well as drops in revenue. In that situation, companies have to sacrifice either margin, market share, or the ability to hit targets set
in home market currency.
It’s also a massive operational challenge because companies are not set up to make very frequent pricing changes, whereas currencies can move hugely overnight. For example, the Russian ruble
depreciated from being 37 rubles to the dollar in September 2014, to being close to 70 rubles to the dollar in January 2015. MNCs then had to do two, three, or even four rounds of price hikes over the
next 12 months to recoup their losses, while local teams were trying to guess currency movements, which is neither a good use of time, nor something they specialize in.
Russia is just one example. When this issue is happening simultaneously in Ukraine, Kazakhstan, Azerbaijan, South Africa, Turkey, Brazil, and Poland—all within the same year and likely to continue—it
becomes clear that the scale of the problem is much bigger than a one-off disruptive event in a single country. Most MNCs are not equipped to deal with this as a systematic issue. Instead, they treat it ad
hoc, one question at a time, over a short period of time.
Our research shows that there are two main ways in which MNC pricing strategies fail in the highly volatile environments struggling with currency depreciation:
1. Companies’ internal processes for emerging markets are not set up to deal with how constant currency volatility affects their pricing.
2. Companies are approaching pricing as a technical issue, instead of a broader strategic question.
Regarding the first point, we found that many MNCs fall short in four areas:
Their
for determining
changing
prices
are too rigid, which means they are not set up to respond quickly enough to currency and other changes in local conditions. For example, half the
Global processes
Companies Need
to Adopt Agileand
Pricing
in Emerging
Markets
companies we polled make pricing changes once a year, whereas 27% said that changes every six months would be ideal, and 17% said quarterly price changes would be ideal.
Their decisions are too centralized. Pricing decisions tend to be made in regional or global headquarters in order to achieve global or at least regional consistency, but this can undermine business
objectives when they do not consider local economic conditions and the prices offered by competitors. For example, one MNC we interviewed would give all local teams price lists fixed in USD and
determined by U.S. HQ without consulting them. The firm’s Latin American clients, who had seen substantial local currency depreciation hit their own performance, consequently faced substantially
higher prices for the same product. The company’s local team was thus compelled to offer non-monetary incentives to avoid losing customers, including marketing support, consulting services, and
others.
Price-setting processes do not involve all the right people. Often, local country teams are informed about the prices they must use, instead of being consulted about what the prices should be. In addition,
pricing conversations held at HQ also rarely involve representatives from R&D and supply chain, who can offer creative ways of maintaining profitability while minimizing price increases. One of our
clients discovered this when their margins came under pressure from local competitors who did not raise prices following a currency depreciation in APAC. Their supply chain team offered to reformulate
products using a different and cheaper technology, so that they could cut down on costs instead of having to raise prices substantially. That enabled them to maintain market share against cheaper Asian
players.
They incentivize the wrong priorities. If the priority for the business is margin, but sales targets locally are still set around volume of sales, the execution of a pricing change can be compromised. For
instance, one of our B2B clients raised prices by 15-20% following a currency depreciation. However, its sales people, who were incentivized on revenues, not profitability, were worried about losing
customers who may refuse to take the price increase and instead switch suppliers. As a result, a substantial number of the sales people did not negotiate price increases with customers, but instead
offered clients discounts and lower price increases to keep their business, undermining the consistency of the company’s pricing strategy, and hurting bottom line performance.
The second reason why MNCs are struggling in this period of currency volatility is because pricing is often considered a technical and tactical issue, rather than a strategic one. That can have disastrous
consequences. One of our clients learned this as its business in Ukraine was facing rapid currency depreciation, and its finance department, whose ultimate priority was revenue collection, switched to
USD pricing. This left the company’s distributors, who could not access U.S. dollars, unable to pay them. Instead of improving financial performance, the switch to USD invoicing caused loss of revenue
and market share, because some of the company’s distributors stopped selling its products. A more strategic approach would have been to minimize price increases, invoice in local currency, and take
market share away from competitors, even if the short-term cost was higher.
Because many of these problems are likely not going away soon, companies have to start adapting.
MNCs should approach pricing as part of a broader set of strategic questions they need to resolve. Country and regional leadership teams should ask: 1) What is our broad objective in this market? Is it
market share? Is it profitability? If we have to put more emphasis on one over the other, which one is it? 2) Whom exactly do we want to serve in this market? Is it middle-class consumers? Small and
medium-sized businesses? Large state-owned corporations? Knowing your target segment, how it is changing, and how it will react to price changes can provide clear guidance on what the right pricing
strategies may be.
MNCs
need to make
decisions
regularly
and clearly,
Global Companies
Needthese
to Adopt
Agile Pricing
in Emerging
Markets making sure that their processes for determining prices are adapted to the unique conditions in emerging markets. Only then can local team
leaders like Sergey know what they should prioritize as they react to changing conditions on the ground. This clarity will help them make the best decisions for the business, no matter where the ruble
goes.
Martina Bozadzhieva is Head of Europe, Middle East & Africa Research at Frontier Strategy Group (FSG), the leading information and advisory services partner to senior executives in emerging markets. Download her recent white paper,
Adapting Pricing for Emerging Markets.
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Related Topics: EMERGING MARKETS |
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2 COMMENTS
Vikram Khanna 2 months ago
This has been an issue for MNCs for a long time. Remember if a currency devalues by 30% another probably goes up by 30%. For e.g. if the rouble devalued by 30% against the USD and the business had a major manufacturing unit in
Russia - which also supplied product to the US. The Russian units USD revenue would decline and so would profitability, while the american units profitability from product sourced from Russia would go up. Dependent on geo-mix the
smarter companies manage this well and hedge based on mix to achieve target profits. The weaker ones don't get it and continue to remain exposed and vulnerable to currency risks.
For consumer products, try getting a 30% price increase with a major supermarket chain. Not easy.
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