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. This article is about PRICING FOLLOW THIS TOPIC Related Topics: EMERGING MARKETS | GLOBAL STRATEGY | CURRENCY Comments Leave a Comment POST 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. 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