Adapt to your customer’s new reality to capture margin and share in 2015

The past two segments of this blog series have identified that emerging markets’ contribution to corporate revenue and margin in 2015 will be neither as stable nor as pervasive as many executives have taken for granted. Indeed, as many companies look into 2016, they assume that stabilizing oil prices will bring more stable growth to their emerging markets portfolio.

This week’s post will focus on how customer preferences are changing as a result of the global macroeconomic environment. Discretionary income differs widely depending on whether countries are energy importers or exporters and on the degree of pass-through to consumers of changing energy prices and depreciating currencies. Companies must adjust their customer segmentation approach, identify where margins can be increased, and challenge their pricing strategies to capture share and margin.

Changing customer preferences in emerging markets

The global economic environment is rapidly changing customer purchasing power and preferences in emerging markets. However, these shifts are taking place at difference paces and to different degrees depending on the market. Changing interest rate expectations between the United States and many other global economies adjust expectations for business borrowing costs. Capital flows entering the United States to take advantage of a likely interest hike by the U.S. Federal Reserve — although increasingly accepted to be later in 2015 or early 2016 — strengthens the dollar. This results in widespread currency depreciation in emerging markets, which makes imported products relatively expensive for local consumers. Therefore consumers face diverging or even contradicting pressures on their budgets. Falling commodity prices reduce costs for importers, but heavy regulation or subsidies mean that not all energy-importing markets gain from falling prices in the end.

Smart multinationals have primed their organizations to identify, understand, and respond to these adjustments in their customers’ realities. The need for strategy localization is particularly acute when many of the changes that customers are experiencing contradict one another.

Actions for multinationals

Adjusting to changing consumer preferences can be easy for companies who incorporate the customer and her changing purchasing power and preferences into their strategic plans. Specifically, multinationals need to understand, identify, and challenge their pricing strategies to capture the opportunity of a rapidly changing economic and competitive environment. FSG identifies three key steps to ensure an adaptive and effective route to market.

1. Adjust your customer segmentation approach. Currency fluctuations, lower inflation in some markets, and other macroeconomic risks can derail normal pricing decisions. Where price levels are sensitive, companies are leaving money on the table by under-managing their customer segmentation strategies, thus failing to maximize the margin that can be gained from individual segments. Many companies do not delegate responsibility to local teams to segment domestic markets in creative ways that respond to customer preferences and purchasing habits. Multinationals should revisit their customer segmentation strategies to determine whether market, behavioral, or profitability segmentation may improve their ability to address changes in their customers’ buying habits.

2. Identify where margin can be increased. For some multinationals, particularly dollar-reporting companies, lower energy prices and a stronger dollar will provide opportunities to increase margin in emerging markets. Compared to the previous half-decade, the next two years will offer lower costs with potentially higher revenues for multinationals. Companies should thus focus on energy-importing markets with limited currency depreciation and avoid raising prices in energy-exporting markets, which will struggle to maintain past subsidies and social services, putting more pressure on customers.

[Note: “limited” depreciation comes in a time of relatively high currency volatility worldwide. For example, most North African markets saw 8-9% depreciation against the USD in January, compared to nearly 18% depreciation for the Turkish lira. Executives should consider markets with low USD-denominated debt holdings and limited exposure to financial markets to have a lower chance of further strong depreciation.]

3. Challenge pricing strategies. Portfolio allocation is one of the most power levers that executives can pull to increase margins. Companies should consider ways to localize products and services to gain market share where low growth is otherwise disrupting consumer behavior. To this end, multinationals can reconsider product mix to attract customers to more expensive or premium products in markets where discretionary income is increasing. In addition, companies can adjust price, package size, channel, and customer service to adapt to your customers’ new reality. 

Shifting global macroeconomics will have different effects for companies’ key markets. Some customers will require additional customer service attention and support as they manage difficult economic circumstances. Others will experience marginal increases in wallet share as their energy costs decline. By priming your organization for changes on both ends of the spectrum, your business will become more adept at identifying major opportunities despite economic chaos.

This entry is the third in a series of three posts outlining how multinational corporations can course-correct strategies and improve profitability where strategic plans have already been disrupted.

For more insights like these, follow Lauren on Twitter @LaurenElGoodwin.

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