Companies operating in emerging markets are struggling to meet top-and-bottom-line forecasts, in no small part due to heightened exchange rate and inflation volatility. With competition from low-cost local companies from other multinationals at the higher end, margins have been squeezed by pricing pressure. Not only has increased competition made pricing a particularly difficult challenge to manage, but local consumers also often have different price sensitivities within countries, compounding the difficulty across a diverse portfolio of countries.
FSG profiled six pricing strategies that companies have taken to protect performance in a volatile environment:
- Escalating contracts – One FSG client in the chemicals industry signs contracts with many of its customers that have built-in price increases based on key variables such as exchange rates and inflation to account for potential market volatility effects on margins. In situations where exchange rate-controls are built into contract, they shift sales from local production to dollar-based exports
- Leverage objective indices to negotiate prices – Companies that sell to governments or businesses, can pre-negotiate price increases based on trusted, third-party indices. This strategy is, particularly effective in markets like Venezuela and Argentina, where government statistics alone are not be fully trusted. This strategy allows for greater confidence in discussions about price increases
- Reach more consumers with a credit program that eases the burden of large purchases – Many emerging market consumers do not have the ability or willingness to make large outlays, so extending credit or creating purchasing plans can help customers purchase products. Customers do not receive a discount, just the perception of a discount with the purchase price broken up in multiple payments, sometimes with additional margin built in to offset the float
- Pricing scorecard with built-in disruptors – One FSG agricultural client uses pricing scorecards that take into account changes in variables such as raw materials, exchange rates, and inflation when making pricing decisions. They are developing scenarios involving certain disruptors, including macro and industry-specific factors, that may affect the current cost structures of their products over the medium term
- Implement price sensitivity research on a highly localized level – Understanding local market nuances is key in enabling prices to be changed effectively, and by elevating the importance of local consumer insights one FSG consumer goods client was able to better incorporate pricing recommendations into their strategies.
- Perfect operational hedging – By aligning their costs and revenues in local currencies, one FSG client minimizes the effects of currency fluctuations on their pricing decisions by developing over time a near-perfectly-hedged operational footprint across their regions.
Pricing will always remain an evergreen issue, and as our clients consider the various costs and benefits of pricing strategies FSG will remain with them every step of the way.