MNCs’ pricing strategies in emerging markets are being rapidly disrupted by a combination of four forces. Three of these are slow-moving and have been advancing for some time. These include slowing emerging markets growth, which is causing customers to become more price-sensitive; rising emerging market competition, which tends to push prices down; and channel partners that are struggling with insufficient capabilities to operate in this more demanding environment, exacerbated by higher cost of credit in many emerging markets. These factors are obscured and intensified by more obvious problems stemming from currency depreciation, which are particularly problematic for MNCs that export into emerging markets, or whose supply chains are heavily dependent on imports even for markets where they manufacture locally. In a survey of 77 of our clients globally, 88.3% of them said that FX volatility had the biggest impact on their pricing in the past 12 months.
These factors are forcing MNCs to make tradeoffs in some markets, where they can pick only two of the three between margin, market share/revenue growth, and translation of earnings back into home currency. While in the past it was possible to deliver on all three objectives, MNCs are increasingly finding that unless they make a trade-off, their entire set of performance can be diluted. This also belies pricing policies which have tended to focus on ad hoc changes intended to restore previous performance indicators (for instance, raising prices to make up for the impact of FX depreciation on margins), instead of looking at pricing questions as questions about a company’s overall objective in a particular country or market segment.
Having analyzed the results of our global pricing survey, and interviewed dozens of experts and executives, we found that MNC pricing processes need to fundamentally adjust to this changed environment. Processes that used to be HQ-centric and exported with limited adaptation to emerging markets are likely to become increasingly ineffective, undermining not only short-term results, but, more importantly, long-term performance.
To address this issue, FSG recommends a three-pronged approach:
Step 1: Create an effective pricing process. MNCs need to ensure their processes for making a decision and implementing a pricing change allow them to respond quickly once a pricing change becomes necessary; involve all the right people in the decision; hit the right balance between global consistency and local adaptation; and incentivize their teams accordingly. Most MNCs fall short in at least one of these aspects of effective pricing processes.
Step 2: Build your pricing framework. This goes back to making clear trade-offs between margin, market share, and translation where that’s necessary and, more generally, clarifying overall strategic objectives before selecting specific pricing tactics. This sounds self-explanatory, but is often skipped as companies try to adjust pricing before building internal consensus about where they want to be in their competitive position in the market, and what their overall strategic objectives are.
Step 3: Select the right pricing tactics. We found that often, depending on strategic objectives, pricing problems can be solved not through price adjustments, but through hedging, sales training, and even changes in distributor management processes. Companies that have a clear vision of the outcome they want may find that no price changes are needed, and instead, a different aspect of their execution needs to change.
With the rise in US interest rates likely to be slower than anticipated, MNCs should be prepared for global currency volatility to remain a problem for the next several years. Companies that build processes that assume this as the new normal and allow them to dynamically shift prices as needed without disrupting the rest of their organization are set to thrive in this environment.
For a detailed discussion of our research on how companies should adjust pricing strategies in emerging markets, please listen to our free podcast here.
FSG clients can access the full report, including case studies, benchmarking data, tools, and frameworks here.