Doing Business in India: Price Competitiveness
India is one of the world’s fastest emerging markets and there has never been a better time for new businesses to foray into India. It is teeming with a young and dynamic consumer base with over 65% of its population being under the age of 35. Its retail market is estimated to be an impressive US$600 billion and is likely to hit US$1000 billion by 2020. The unprecedented spurt of international businesses in India suggests that everyone wants a piece of the pie, and rightfully so. Few markets in the world are as large or offer such diverse opportunities for growth as India does. Breaking into the complex Indian market also gives companies the confidence to expand to rest of South Asia.
While the market is large and deep, international players looking to enter India must understand its many nuances. Among the top features that define the Indian market is the fact that it is a highly price competitive market, made up of acutely cost-conscious consumers. In fact, research indicates that consumer behaviour tends to lean towards price over value in most of South Asia.
Price consciousness is the extent to which the cost of a product or service affects the purchasing decision of a buyer. In India, price is a key decision-making criterion that can make or break businesses.
One of the reasons for this price consciousness is the composition of the Indian consumers, which is largely made up of a vast urban middle class of strivers. The middle class is India’s fastest growing segment of consumers; however, it has the lowest threshold for a person to be considered as the middle class, with an annual wealth of US$13,662 or Rs737,748. Earning and saving money in a highly populated and competitive environment isn’t easy and consumers with limited resources scrutinise cost before buying anything.
For a foreign company to gain a foothold here, it is extremely important to understand this. American fast food chain McDonald’s studied the Indian market and made a great entry into India. Its localised global food menu had price options that were competitive with street food. It’s McAloo Tikki Burger made up of mashed potato patty was priced at a mere Rs.20 (US$0.3) . This pricing lured the Indian customer to walk in and give McDonalds a try.
What the Market Looks Like
The Indian market is also a fragmented one with many geographical diversities. Rural consumers are far more price sensitive than urban consumers. Writer Pamkhuila Shaiza in an article on price sensitivity points out that an Indian shopper is more demanding and price sensitive than an international shopper. There are more socio-economic segments and differences among the Indian shopper than in the international shopper segments. She goes on to say that the Indian buyer is layered with many complexities. “This [buying behaviour] is compounded by the urban/rural split among the Indian shopper. These multitudes of segments reflect in different shoppers’ behaviour, e.g. the frequency with which they buy, the seasonality of purchase, the pack sizes that they buy and the multiple retail formats in which they buy,” she says.
Cosmetic companies such as the French brand L’Oréal have understood that their prices might not be palatable to a large segment of consumers. To make its way around such price consciousness, L’Oréal widened its portfolio to include several affordable ‘value products’. Offering small pack sizes of their products at lower costs is another strategy that several cosmetic and FMCG brands use extensively.
A new entrant into the Indian market has to keenly consider various factors before deciding on their pricing. What segment of this market is one targeting, what kind of a product or service is being sold etc. will determine the price range.
In certain sectors such as FMCG which is a crowded marketplace with a large number of competitors, consumers show less involvement and loyalty. Since these items are used and purchased frequently by consumers, their cost greatly influences the purchase decision. Even a small fluctuation in cost can have a huge impact on the sale of these products. However, in a sector such as electronics, consumers are looking for specific product features, after sale services, warranty etc. and price may not be the only measure that influences their buying. In high involvement categories, a new company can show some leeway in its pricing.
Choosing the Right Price
Understanding price sensitivity is important in offering the right price to the consumer. Underestimating price sensitivity, especially in a competitive market can affect the bottom line of a company enormously. Gauging price perception and expectations of customers is extremely important. Pricing in India dictates purchase behaviour and therefore sales. It also influences how a consumer perceives the value and quality of a product. The prices must be ‘India-friendly’ and accessible to consumers here, at the same time, they must be aspirational. Pricing something too low may generate a perception that the product or service offered is of a lesser quality.
India’s car industry is an example of a market in which companies often find pricing a challenge. It has been a series of hits and misses for car companies eyeing India’s vast consumer base. Maruti Suzuki has held a lion’s share of this market, the only other company that has made some headway into this space is the Korean automotive manufacturer, Hyundai. Hyundai entered India in 1998 with the launch of a compact car, Santro, whose design and price (less than Rs. 3 lakhs or US$4,500) were spot on for the Indian market. The company currently holds 17.4% of market share. What worked well as a strategy for it is the fact that it decided to pack its portfolio with a range of small cars. Carmakers continue to be baffled with pricing for the Indian market. Even last year, companies including Maruti Suzuki, Ford, Renault among others changed their minds on the prices of their products. French carmaker Renault slashed the prices on their multi-purpose vehicle Lodgy by almost Rs.1 lakh (US$1,500). “As a marketing strategy you need to correct prices sometime,” Rafael Treguer, vice-president (sales and marketing) at Renault said.
Despite being a very price conscious market India is not without its idiosyncrasies. While in the FMCG segment Indian consumers look for better deals, when it comes to jewellery they do not hesitate to spend lavishly. A steadily rising GDP also means that urban consumers today are willing to pay more for certain services.
A recent survey of Indian consumers by the Boston Consulting Group found that the Indian market offers opportunities at every price point. Companies have to choose between straddling the full spectrum and focussing on select segments.
“There is a shift toward higher-quality, higher-price subsegments within categories, as Indian consumers trade up with greater frequency and enthusiasm. Our survey suggests that 30% of consumers in India are willing to spend more on products that they perceive are “better”—a much higher percentage than is found in more developed markets such as the US, Germany, and the UK,” the BCG report stated.
Its price competitiveness must not be a limiting factor for new or potential businesses looking to enter the Indian market. Instead, it is a pointer that can guide companies to relevant market research, targeting the right segments and evolving good marketing strategies to leverage this endlessly exciting market.
If you are looking at entering the Indian market or collaborating with Indian businesses, we are here to help. Our team of international consultants have years of experience in facilitating foreign companies to do business in India successfully. You can contact us here.
Elizabeth Raj | Blogger