Commentary
MARKETS & INVESTING | Staff Reporter, Singapore
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Kiran Pudi and Andrea Maessen

Overcoming regional pricing barriers

BY KIRAN PUDI AND ANDREA MAESSEN

"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.

With China, India, North East Asia (Japan and Korea) and South East Asia (ASEAN), Asia consists of four major regions. Singapore especially plays a critical role in managing operations in ASEAN. The ASEAN companies with regional HQs in Singapore achieve more consistency of operations across the ASEAN countries. The differences with respect to pricing between the four Asian regions are significant. Hence this article will look into each of these regions separately. It will reflect mainly the perspective of the chemical industry.

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 four 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 customer and user of the product accordingly.

Second, the size of Asian channel partners tends 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 are more in the mold of retailers. In addition, they change their role depending on which supplier they are dealing with.

And third, 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 that sophisticated 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 could be ineffective in driving behaviors, like paying on time, maintaining prices, being a strategic partner etc. Volume rebates could encourage channel partners to buy more volume 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 offered in some 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 behavior in a similar 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 managed 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 needs to be dynamic to quickly respond to major FX shifts in order to protect profits. In some cases, the Singapore dollar could be the transactional currency used in ASEAN.

4. Cultural aspects
In some Asian countries, saying "no" to customers is frowned upon. Therefore, price discussions with customers are difficult per se. Sales and Commercial teams in Asia wish to avoid such difficult conversations. In addition, negotiations in Asia are different in the sense that customers ask for high discounts and rebates and companies reciprocate with setting high list prices as they expect customers to ask for discounts and rebates. Asian-specific list prices are not uncommon in such circumstances. The support of local leaders is critical in making pricing and commercial improvements. Commercial leaders in Singapore have a critical role to play to ensuring the price changes stick in the ASEAN countries.

 

Implications for your pricing
A "one-size-fits-all" pricing strategy will not 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 lagging quantitative data. The sales teams can be leveraged to gather this data. 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 pertinent in Asian markets and will drive customer behaviors. 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. 

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.

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Kiran Pudi and Andrea Maessen

Kiran Pudi and Andrea Maessen

Kiran Pudi is a Senior Director at Simon-Kucher & Partners. Kiran is a core member of the Chemical practice at Simon-Kucher. He is an expert at pricing transformation and pricing strategy implementation, working with clients in the chemicals, industrials, private equity and high tech industries. He has worked extensively in Asia, across all the major countries, like Japan, China, India, Singapore and ASEAN countries. He has led numerous projects on pricing and commercial excellence.

Dr. Andrea Maessen is a Senior Partner and Global Head of the Chemicals and Construction Practice at Simon-Kucher. She specializes in the development of pricing strategies, the optimization of pricing processes and price systems and the improvement of sales efficiency and effectiveness. She has supported various global commercial transformation processes. Her work covers both, specialty and commodity products, in manufacturing and distribution businesses.

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