Chapter 10: Pricing Strategy
Case One: Walmart's Price War in Germany
Commentary: Competition between retailers is often triggered by the saturation of retail trade areas; price competition among retailers can manifest both in terms of breadth and in narrow domains; retail price wars are often intense and sustained; to some extent, price wars are irrational competitive behaviors that result in "lose-lose" situations.
Walmart was able to win the price war in Germany for several reasons: firstly, it had relatively low "purchase costs," which were closely related to its "chain operation" model of unified purchasing across its numerous stores worldwide; secondly, it had the right entry point for the price war, with appropriate choices for discounted products; thirdly, it successfully avoided local legal and policy restrictions; fourthly, it thoroughly considered the reactions of competitors.
Since entering the Chinese market, however, Walmart has maintained a low profile. Although it promotes the concept of "everyday low prices," it has not yet launched aggressive price challenges. This is due to the particularities of China's national conditions, leading Walmart to consider certain policy precautions: the underdeveloped logistics system in China makes it difficult to leverage Walmart’s distribution advantages; having just entered the market, it is in the stage of adapting to localization, and mild competition helps secure a favorable development environment; it focuses on medium- to long-term strategic development considerations, with significant potential competitive threats.
However, the strategy Walmart employed in Germany will inevitably be implemented in China, so domestic retailers should prepare to face the threat of price competition. For example, they should strengthen management and improve logistics and operational capabilities; develop strategic alliances to avoid internal conflicts; reinforce business innovation and enhance service levels; and implement differentiated operations to avoid similar competition.
Case Two: How Should 1000X Computers Be Priced?
Commentary: The current status and trends of the company's development are the primary factors influencing Multipolar Electronics' pricing; the company's pricing policy is the second factor affecting Multipolar Electronics' pricing; customer demand is the third factor influencing Multipolar Electronics' pricing; future market demand trends are also important factors affecting Multipolar Electronics' pricing.
The company's pricing should aim at securing the contract with Company Koneg as the basic goal, adopting customer-differential pricing and appropriately sacrificing some profit to lay the foundation for long-term profits. To secure the contract with Koneg, Multipolar Electronics has three options: first, selling high-quality goods at lower-than-average prices, which requires considering whether to break the company's pricing policy; second, lowering the quality of the 1000X product to reduce costs, but this may also affect the brand reputation of the 1000X computer; third, delaying delivery and using computers assembled at the German factory, saving substantial import tariffs and installation costs.
In fact, Multipolar Electronics has two choices for pricing the 1000X computer. First, slightly delaying delivery and using computers assembled in Germany to secure Koneg’s contract at a relatively lower price; if Koneg cannot agree to delay delivery, then the second choice is to persuade the headquarters to adjust the company's pricing policy in the German market and offer discounts to Koneg through preferential pricing, justified by the future growth trend of Koneg and European market demands.
Case Three: Galanz's Price Reduction Strategy
Commentary: Galanz's success is mainly based on the artistry of price warfare. Galanz's price war can be summarized in five words: "accurate, ruthless, frequent, fast, and clever."
"Accurate" refers to the long-term perspective, reflecting Galanz's business philosophy of price warfare and its "thin margin, high volume" business model. It closely follows the "total cost leadership" strategy, adhering to the principle of the highest product-to-price ratio while considering the company's operational safety globally. In the short term, every price reduction has clear and specific goals. In its microwave oven business, Galanz's early price reductions aimed to quickly widen the gap with competitors; later price reductions destroyed industry profits and blocked the advancement of powerful multinational companies.
"Ruthless" manifests in large price reduction margins. Since 1996, each price reduction by Galanz has been over 25%, generally ranging between 30%-40%.
"Frequent" means many price reductions. From 1996 to the present, there have been more than a dozen such instances.
"Fast" reflects Michael Porter's statement: "Total cost leadership is itself an exceptionally preemptive strategy." Galanz's price war fully embodies the "preemptive strike" principle, often seizing opportunities for success.
"Clever" refers to the subtleties of execution. This subtlety lies in correctly understanding and utilizing consumers' sensitivity to price while avoiding direct risks brought by price wars. Effective price reductions must understand consumer price sensitivity, which is crucial for durable consumer goods pricing. Since microwave ovens are highly homogeneous products with inherently high price sensitivity and are non-necessity items, consumers are even more sensitive to price changes.
Facing the possible risks of "low-quality misconception," "fragile market share misconception," and "shallow pocket misconception" from price wars, Galanz avoids these risks based on its total cost leadership strategy and the art of price adjustment.
Galanz's success in microwaves has made it synonymous with the product, and its much-discussed price competition has not only transformed microwaves from luxury items to common consumer goods, allowing people to use them ten years earlier, but also made people associate Galanz with "thin margin, high volume" and "price butcher." Only products that are "good quality at low prices" without clear and accurate value communication would make it difficult for Galanz to build a strong brand.
Case Four: Low-Profit Fast-Turnover Business Strategy
Commentary: For the retail industry, if your prices are competitive, it will greatly help the company's sales, which is what people call "thin margin, high volume." However, businesses cannot fail to make money. How to find a balance between ensuring that prices remain competitive within the industry while still earning a certain profit is a practical issue that must be solved. Daiei Co., Ltd. successfully addressed this problem, making it the top Japanese retailer.
From the case, we can see that to find this balance, they focused on two aspects: reducing costs and implementing price combinations.
Their methods of reducing costs are very commendable, especially the practice of developing "private label" products, which stands out. This can be seen as a double gain: one gain is cost reduction, and the other is the utilization of the company's intangible assets, enriching their own corporate intangible assets. This approach is worth emulating by large Chinese retailers.
As for price combinations, it is also very worthy of our learning. Originally, their "thin margin, high volume" strategy did not apply to all operating items; some were thin-margin, some were cost-price, some even incurred losses, but others were profitable, and some were quite profitable. Among them, there were strategic and tactical ones. This constituted a price combination array. Such practices not only gained a good image of low profit, attracting a large number of customers and accelerating capital turnover, but also provided more profit-making opportunities (especially for those higher-priced goods). Overall, the company's expected gross margin remains unchanged. This is indeed a smart approach.
Case Five: Baloqi's Pricing Strategy
Commentary: In fierce and complex market competition, no market strategy is an absolute truth or a universal weapon. Thin-margin, high-volume strategies have their own advantages, but they are only effective in specific fields and under specific circumstances. Similarly, under suitable conditions, if the method is appropriate and the means are sophisticated, a high-price strategy may also be a wise choice. Baloqi's success well illustrates this point.
From Baloqi's successful experience, we can summarize the following conditions for the application of high-price strategies:
The success of a high-price strategy primarily depends on the operator's deep insight and grasp of consumer psychology. If we call Baloqi a consumer psychologist, it is not overly exaggerated. As mentioned in the case, consumers are not purely rational; impulsiveness and blindness often manifest in them. Consumers are not entirely about seeking bargains; their self-esteem and psychological satisfaction are also important factors in determining purchase behavior.
The success of a high-price strategy is also related to the product. For products that consumers are already very familiar with and frequently buy, suddenly introducing an exorbitant price is unacceptable. However, for new products with certain unique features, since consumers do not have prior price references for such goods, a high-price strategy can be applied.
The success of a high-price strategy also requires the cooperation of other relevant means. For instance, advertising promotion is very important. Without a certain quantity and quality of advertising, the product would be hard to sell. Additionally, high-priced products must maintain their identity and should not arbitrarily reduce prices. Any price reductions should only occur in covert ways, such as Baloqi's gift vouchers and commemorative items. Arbitrary price cuts would "lose face" and affect long-term interests.
Chapter 11: Distribution Channels and Logistics
Case One: A Different Interpretation of "Where There Is Reward, There Are Brave Men"
Commentary: This is a typical case of failure due to blindly stimulating retailers with economic incentives. It shows that incentivizing retailers with economic benefits is a double-edged sword. If handled poorly, it not only ruins the market but also harms the company itself!
The fundamental cause of this phenomenon is manufacturers enticing retailers to stock up through cash rewards and promotional gifts. Driven by immediate interests, retailers stockpile large quantities of inventory, tying up significant funds. To quickly resolve inventory issues, they resort to two methods: one is lowering prices to stimulate end consumers, resulting in price wars among distributors with decreasing sales prices; the other is channel diversion. That is, moving goods from their designated region to neighboring regions for cheaper sales, causing conflicts between agents in different regions, disrupting the company's marketing network structure, and creating chaos in overall market prices.
Therefore, when manufacturers plan to stimulate retailers' sales through economic incentives, they should accurately grasp each retailer's sales capability and set an appropriate sales target. This means setting tasks higher but not excessively high. If they lack the ability and want more, it should not be granted to prevent channel diversion. Secondly, a reasonable profit margin should be given, as too high or too low is detrimental. Too high a margin exacerbates competition among retailers because only selling the goods generates profit, leading to price wars to attract consumers, providing conditions for such wars. Moreover, excessive profits reduce manufacturer earnings, leaving them unable to effectively engage consumers (such as advertising on strong media or conducting promotional campaigns), losing flexibility if issues arise at the sales terminal. Conversely, too low a profit margin diminishes retailers' motivation to sell.
Thus, stable and reasonable profits are the best incentive for retailers. Only consistent sales can ensure retailers' steady profit sources, while excessive promotions and short-term behaviors not only make it difficult to maintain reasonable prices but also lose long-term stable sales. Losing stable long-term profit sources is something retailers do not wish to see.
Case Two: Development and Change of Wei Family Company's Channel
Commentary: Wei Family Company must seek a collaborator who can help Wei Family products smoothly enter retail terminals, strengthen product promotion inside and outside retail terminals. This collaborator must be quite familiar with channel operations, have a good cooperative history with retail terminals, and have a certain systematic cooperation with auxiliary members in the channel such as logistics and promotions. Only in this way can Wei Family Company, a small emerging enterprise lacking brand recognition, allow its excellent products to flow more effectively to consumers through the channel with limited assets, ultimately establishing its brand in fierce competition, surpassing products from many small enterprises of the same scale, or even famous large enterprises.
Such a channel decision undoubtedly falls on dealers with certain experience and status in the industry. Only in this way can the various problems and resource investments facing Wei Family Company's channel be more effectively resolved. At least during the initial stage when Wei Family Company's products enter the market, they must rely on dealers to solve various issues at each link. Otherwise, for such a production-focused small enterprise with no channel experience, solving various matters within the channel would seriously divert the company's resources, bringing very adverse consequences.
To better cooperate with dealers, Wei Family Company must establish a long-term partnership with distributors. Of course, inevitably, Wei Family Company must cede part of its profit margin and might be suppressed by dealers. After all, dealers handle numerous products, and many enterprises hope to smoothly enter the terminal market through cooperation with dealers. For Wei Family Company, the points to note are: first, continuously enhancing its position with dealers, which could be achieved by increasing its own product range or introducing similar products; second, clearly recognizing its channel position and role in the early stages of market entry, quickly learning the handling experience of various affairs within the channel, preparing for future channel reforms, attempting in other regions, accumulating cooperation experience with channel assistants such as logistics and promotion companies, and even after the market matures, if Wei Family hopes to break free from dealer control, it needs a long learning and accumulation process.
Case Three: Dell Online: Zero-Distance Intimate Contact
Commentary: In traditional business models, although intermediaries increase a company's costs, raise the price paid by users, and hinder the information flow between product manufacturers and users by adding intermediary links, the necessity of intermediaries is still evident. In many cases, manufacturers and users cannot directly communicate, and if they were to achieve this dialogue, the cost would be very high. The emergence of e-commerce eliminates this spatiotemporal barrier, enabling real-time conversations across oceans at extremely low costs. As experts, Dell Inc. keenly recognized this and fully understood it, achieving a "win-win solution" for itself and its users through zero-distance intimate contact.
Specifically, the benefits of this zero-distance intimate contact are as follows:
First, it satisfies customers' needs for custom-configured computers, facilitates ordering, and reduces time wastage.
Second, it accelerates customer inquiries, benefits customers, alleviates the pressure on call centers, and reduces company operational costs.
Third, it simplifies computer maintenance for customers, guides them in repairs and maintenance, improves fault diagnosis efficiency, and reduces company maintenance costs.
Fourth, it eliminates the typically necessary paperwork and transaction time involved in group purchases.
Fifth, it significantly reduces inventory, greatly aiding capital turnover and enhancing corporate competitiveness.
Sixth, customers gain the freedom to choose, save procurement costs, and conduct online fault diagnosis and problem-solving.
With the rise of e-commerce and its growing recognition by people, this zero-distance intimate contact business model will become increasingly prevalent. As professionals in the business world, we cannot ignore it.
Case Four: Playing to Strengths and Avoiding Weaknesses When Competing with World Brands
Commentary: Summarizing Wahaha's success, it can be attributed to four words: "playing to strengths and avoiding weaknesses."
In large and medium-sized cities, as well as coastal cities, Coca-Cola and PepsiCo have heavy presences. Wahaha temporarily avoids direct confrontation with them, instead adopting a "letting the main road open and occupying the side lanes" tactic, targeting rural areas in China as their primary regional market. This step can be considered very normal. Honestly speaking, with Wahaha's current strength, it hasn't reached the point where it can directly confront Coca-Cola and PepsiCo in price wars and advertising battles. This is about avoiding its weaknesses.
In playing to its strengths, Wahaha performs even better. As described in the text, Wahaha's marketing network has two most distinctive features. One is using the "production near sales" strategy as an important means to build networks and cover markets; the other is promoting the "joint sales body" system, establishing mechanisms for shared benefits, shared risks, and collaborative security with distributors.
"Production near sales" ensures speed and low cost; "joint sales" gives them a vast alliance. These two aspects are things Coca-Cola and PepsiCo have not yet achieved, and they give Wahaha an advantage in competing with Coca-Cola and PepsiCo despite its disadvantages.
Finally, I want to add one more point: regarding the Very Cola's international market expansion, I cannot fully agree. Because, in any aspect you look at, there is no advantage to speak of there. We need to enter international markets, but not every product needs to enter the international market. Instead, we should push our most competitive products into international markets.
Case Five: The Development of Dalian Golden Triangle Wholesale Market
Commentary: In the overall future development of the Golden Triangle Market, attention should be paid to the following aspects:
1. Achieving a commodity structure dominated by mid-to-low-end goods with high-end goods as supplements. The commodity structure, quality, technical content, and price of the Golden Triangle Market should be positioned at a low-to-mid-range level to meet the needs of a large number of salaried workers. However, with the improvement of living standards and diversified demands, a small amount of high-end goods should also be operated to meet the needs of high-income groups. Thus, a commodity structure dominated by low-to-mid-range goods with high-end goods as supplements is formed. This is particularly true in professional markets with conditions, such as home decoration markets, where the entry of the B&Q brand store can promote high-end operations.
2. Utilizing existing facilities to establish a logistics distribution center. As the scale of some retail enterprises rapidly expands and manufacturers build electronic logistics systems, they all need to improve their logistics allocation capabilities to serve end consumers. Wholesale enterprises usually have good storage and transportation capabilities, so wholesale enterprises can integrate into manufacturing and retail enterprises, becoming their distribution or procurement systems. The Golden Triangle Group takes this opportunity to deliver agricultural products to chain supermarkets. Distribution involves fulfilling user orders by sorting goods at logistics points, performing distribution work, and delivering the sorted goods to the consignee. A distribution center is an important form of distribution. Distribution centers are large-scale, storing various goods according to collection and delivery needs, with large storage capacities. Distribution centers have strong professionalism and fixed distribution relationships with users. Generally, planned distribution is implemented, requiring a certain inventory of goods for distribution, rarely exceeding their scope of operations. The facilities and processes of a distribution center are specifically designed according to distribution needs, so they have strong distribution capabilities, covering longer distances, offering more varieties, and larger quantities. Establishing a distribution center allows the wholesale market's service functions to extend in both directions, forming a new business format and seeking new growth points for the wholesale market.
3. Developing chain supermarkets and expanding retail operations. This is mainly done through investment attraction, finding partners, and developing chain supermarkets. Supermarkets are the product of social production reaching a certain stage and represent the third revolution in retail formats. But this is the direction of future retail development in China. Therefore, the Golden Triangle Market should prepare in advance and upgrade its business format before the traditional shed-style trading is completely replaced.
4. Conducting agency sales and exploring multiple business paths. The main business of the Golden Triangle Market is market leasing centered around the grain wholesale market. On this basis, it should also carry out agency procurement and sales, or even self-operated businesses. Initially, conditions can be appropriately relaxed to encourage market personnel to分流into different positions, venture into commerce, and hire experienced and capable managers to operate under contract.
5. Creating conditions to gradually implement a new wholesaler business model. Under the conditions of e-commerce, producers and consumers can transact directly, and large retail enterprises can procure directly from production enterprises. Internet transactions are developing rapidly, posing a huge threat to traditional wholesalers. Therefore, while consolidating existing markets, wholesalers must actively participate in new forms of transactions and implement a new wholesale economic model under e-commerce conditions. This new wholesaler refers to a system established on the electronic information network that serves as a bridge connecting producers and consumers. The new wholesaler realizes all the functions of traditional wholesalers through internet sites, while also possessing some new functions that traditional wholesalers do not have. Mainly supported by servers, workstations, and various network devices. The realization form of the new wholesaler can adopt traditional intermediaries using e-commerce to realize the functions of intermediaries, further reducing transaction costs and improving transaction efficiency, or it can adopt the creation of a new wholesaler on the internet.
Like traditional wholesalers, new wholesalers serve as bridges connecting producers and consumers. New wholesalers can achieve a virtuous cycle in market operations. New wholesalers can realize faster capital turnover through electronic payment systems like credit cards, electronic money, smart cards, etc., saving transaction costs for both buyers and sellers and improving capital turnover efficiency. New wholesalers can achieve more efficient logistics and commercial flows, utilizing e-commerce, where some digitalizable goods and services can complete the entire transaction process, including supply, settlement, and receipt, entirely on the electronic information network. At this point, the commercial flow and logistics occur simultaneously. Implementing the new wholesaler model allows the Golden Triangle Group to prepare in advance and meet the challenges of e-commerce.
In summary, the grain wholesale market is the main business of the Golden Triangle Market and should explore new wholesale economic models to highlight and strengthen its main business. However, to hedge against risks, seek new growth points, leverage the