Articles

Survival Lessons from Emerging Markets

Thunderbird Professor Richard Ettenson

By Richard Ettenson, Ph.D.

As Western companies struggle to shake a sluggish economy, here’s one piece of advice: Look at places where volatility is business as usual – emerging markets. In these countries, companies have learned they can’t just hunker down when bad times strike. They have to go on the offensive. In Eastern Europe, South Africa and Latin America, managers look at tumultuous times as a chance to implement bold ideas, outflank rivals and boost their business. Here’s a closer look at three lessons companies might do well to follow if they want to survive – and even thrive – in this crippling recession.

1. Get customers to trade up

When times are tough, consumers focus on getting the best deal for their money. This often means trading down. Instead of buying the “ultra” version of a product, people opt for the regular, cheaper variety. Even though these products have slimmer profit margins, companies figure some sales are better than none. But in emerging markets, companies get customers to trade up to premium products. How? They’re careful about how they set prices on the different tiers of their products.

Consider how Western companies typically price their goods. Say a company makes three types of batteries – regular, advanced and ultimate. Each tier has the same number of batteries per package – 20 – but the price rises with every step up. If a basic package runs $5, the advanced might be $6 and the ultimate $8, with profit margins rising accordingly. Sounds reasonable. But when the economy sours and consumers are strapped for cash, this kind of pricing often doesn’t work. Buyers don’t see the value in paying more money to get the same amount of goods.

Managers in Central and Eastern Europe use a different approach called line symmetry. They keep prices the same across the product line but lower the quantity per package in the higher tiers. A customer might get 20 batteries for $5 in the basic package, 17 in the advanced and 14 in the ultimate. If you’re marketing to buyers who are watching every penny, the advantage of this approach is clear. Not only is the price itself lower in the higher tiers, but the percentage increase per unit is also smaller. That makes it easier, economically and emotionally, for customers to trade up to premium products.

2. Increase product and service visibility

The economic climate already has led to sharp cuts in marketing budgets, and more are inevitable. When figuring out the best way to allocate ever-scarcer resources, there’s one crucial principle to remember: Keeping customers you already have is easier and less expensive than trying to land new ones. This idea helps top companies in Latin America cope with a range of crises. This strategy often involves shifting away from traditional marketing such as television ads, which are geared toward informing potential customers about your brand. Instead, companies focus on making their products more visible and available to customers who already know them – such as ensuring the goods are well-placed on store shelves, or are advertised with in-store displays and other promotions.

Among business-to-business companies, retaining customers means beefing up customer service. One multinational office-equipment company attributes its leadership positions in Argentina, Brazil and Chile to offering good service when times are stable and even better service when the economy tanks. In bad times, for instance, the company might make more follow-up calls after servicing a product.

3. Rethink what customers value

In some cases, rethinking a marketing or pricing strategy might not be enough. The continuing economic fallout in Western economies may mean that customers simply can’t afford certain products or services anymore – and marketers must change their whole business model to match the new reality. Mobile phone companies provide a prominent example of this practice.

In Western markets, the lion’s share of revenue among cell phone service providers comes from locking customers into long-term contracts. But that model becomes less viable as spending power shrinks. So, how do you do it differently? A handful of emerging telecom giants, such as MTN South Africa and Bharti Airtel in India, are beating Western multinationals by letting customers buy just as much service as they need, when they need it, instead of insisting on pricey long-term deals.

To be sure, some Western companies offer plans that let customers pay as they go. But the emerging-market companies have developed the concept much further. They allow people to buy minutes in any number of ways – over their handsets and the Internet, or through ATMs and specialized kiosks. For instance, MTN’s MyChoice TopUp and Umoya marketing campaigns, which emphasize the convenience of recharging airtime at a network of participating retail stores as well as bank ATMs, have helped propel the company to the second-highest market share in South Africa.

Of course, the pay-as-you-go model can’t work in every industry. But the broader point is to be flexible. There’s one theme underlying all of this advice: Stay optimistic. All too often, Western managers assume they must address decreases in demand and declines in revenue only through drastic cutbacks. Managers in emerging markets realize that turbulent times can be a tremendous opportunity to strengthen competitive position and performance – with the right mix of strategy and innovation.

A longer version of this article, “Surviving the Downturn: Lessons From Emerging Markets,” appeared as the lead article March 23 in the Wall Street Journal with co-author Martin S. Roth, Ph.D., a professor of international business and chief innovation and assessment officer at the University of South Carolina’s Moore School of Business.

Richard Ettenson, Ph.D., is an associate professor and Thelma H. Kieckhefer fellow in global marketing and brand strategy at Thunderbird School of Global Management.