Surviving the Downturn: Lessons From Emerging Markets

By Martin S. Roth and Richard Ettenson

March 23, 2009

As Western companies struggle to navigate the worst economy in generations, 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, creative ideas, outflank rivals and boost their business.

That means coming up with new ways to price their products. Or scrapping old marketing approaches. Or focusing on figuring out where the economy is heading next—and how to use that information to grab market share.

Here’s a closer look at the lessons companies might do well to follow, if they want to survive—and even thrive—in this crippling recession.

1. When the economy is down, get customers to trade up.

When times are tough, consumers focus on getting the best deal for their money. Often, this means trading down: Instead of buying, say, the “ultra” version of laundry detergent, people opt for the regular, cheaper variety. Even though these basic products have slimmer profit margins, companies figure some sales are better than none.

But in emerging markets, companies have learned that the opposite approach is often the smart one: They get customers to trade up to premium products—even though disposable income is much tighter.

How? They’re very careful about how they set prices on the different tiers of their products. Companies know that they can’t raise prices too much between basic and premium goods, or cash-strapped consumers will get turned off. So, the companies make the price increases much smaller and more consistent—which signals to buyers that premium products are a good value.

That means accepting a lower profit margin on premium products, lower than most Western companies accept. But buyers recognize that the brand is offering them higher value for the money, so they stick with it even in hard times. And they’re more willing to trade up to premium offerings.

Let’s 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 prices rise 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 a lot more money to get the same amount of goods, even higher-quality goods. So, they stick with basic products and don’t trade up—and manufacturers’ profits get dragged down.

Managers in Central and Eastern Europe use a different approach called line symmetry. They keep prices the same across the product line—so, a package of advanced and ultimate batteries would cost the same as a package of regular ones, say, $5. But in the higher tiers, the companies lower the quantity per package, by roughly 15% per tier. You might get 20 batteries 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.

In the Western model, people are paying 25 cents per battery in the basic package, 30 cents in the advanced and 40 cents in the ultimate. Not only does the price go up with every step, so does the percentage increase in price. The advanced tier is 20% more than the basic, and the ultimate is 33% more than the advanced.

In the Eastern European model, consumers are paying 25 cents per basic battery and a bit more than 29 cents for each advanced model. But the ultimate batteries are only about 36 cents apiece. Not only is the price itself lower than otherwise, the percentage increase is also smaller and more consistent. Advanced batteries cost roughly 18% more than basic ones, and ultimate batteries cost about 21% more than advanced. That makes it easier, economically and emotionally, for the customer to trade up to premium products.

This strategy has helped brand managers in a range of categories—from health and beauty aids to confectionary—to gain quick and decisive market leadership, overtaking local competitors as well as multinationals. We know that this approach means sacrificing some profit margin. But we also know that the best way to weather an economic storm is to keep customers loyal to the brand—and, preferably, to the company’s premium products. And when the economy turns around, you don’t have to win them back.

2. Increase product and service visibility.

The economic climate has already 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 a lot easier—and less expensive—than trying to land new ones.

We’ve seen this idea help top companies in Latin America cope with a range of crises. Whether they’re dealing with inflation, hyperinflation or recession, managers in these countries allocate shrinking resources with an unwavering focus on retaining customers. And it pays off.

For consumer-goods companies, this strategy often involves shifting away from traditional marketing such as television ads, which are usually geared toward informing potential customers about your brand. Instead, the 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.

As one manager told us, “Point of purchase becomes the ideal time to maintain the relationship, since it’s the only time when your product, your customer and that customer’s wallet are all in the same place.”

But this strategy doesn’t just involve paying for promotions. It also means maintaining sufficient sales and service staff. For instance, companies must have enough people in the field to stay on top of distributors and ensure their products end up in enough stores. What’s more, they must visit retailers frequently to negotiate for shelf space and provide support, such as facilitating orders.

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 relatively 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. And it might not try to sell new products in its sales calls, but rather talk about how best to maintain current products.

To make this strategy work, the company constantly surveys customers to see what level of service they expect in good times—and then exceed that in bad times. The company also keeps an eye on its rivals to see whether they’re ramping up service as well, and then makes sure to offer even higher levels in response.

3. Rethink what customers value.

In some cases, rethinking a marketing or pricing strategy may 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.

Once again, Western companies could learn a lesson from their counterparts in emerging markets, which routinely are forced to rethink their business models to match market conditions. The most prominent example of this practice comes in mobile phones.

In Western markets, providers of mobile-phone services offer customers a wide range of high-tech products bundled with a dizzying array of service options. While the choices are vast, there is one constant: The lion’s share of revenue comes from locking customers in to long-term contracts. But that model may not be viable anymore as spending power shrinks.

So, how do you do it differently? A handful of emerging telecom giants—such as MTN Group Ltd.’s MTN South Africa and Bharti Enterprises’ Bharti Airtel Ltd. 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. It’s a perfect match for markets where customers have extremely low disposable incomes that can fluctuate widely.

To be sure, some Western companies offer plans that let customers buy cellular minutes as they go. But the emerging-markets companies have developed the concept much further. They emphasize flexibility and convenience, allowing 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. Companies have to be willing to rethink models that make sense in a strong economy but don’t click with consumers when things start to tank.

4. Look at new metrics.

So far, we’ve examined strategies that companies can implement. Our final lesson is different: It’s not a particular plan for a company to follow in the marketplace, but a way of looking at the marketplace.

In our experience, emerging-market companies that excel in turbulent times typically take a very broad view. They closely monitor economic data and then use the information to figure out where the market is headed. That helps them decide when it’s time to switch from one strategy to another—and thus outflank competitors.

Consider the leading telecom provider in the Dominican Republic. In 2004, the country’s economy was in turmoil, due in large part to major bank fraud and severe currency devaluation. So, senior management at the company devised a three-pronged approach to sustain growth as the economy spiraled downward.

First, instead of just looking at typical company performance indicators, such as revenue and churn rate, they began monitoring key macroeconomic measures, such as inflation, unemployment, the exchange rate and gross domestic product per capita. Then, based on that information, they came up with different scenarios about where the market was going—best case, worst case and most likely case. Finally, they crafted strategies for each one.

This approach helped the company get ahead of competitors during the 18-month crisis. For instance, as the market sank and customers had less spending power, the company swiftly revised pricing and service-bundle packages, and shifted focus from customer acquisition to customer retention. Its competitors, meanwhile, kept pushing high-end and high-priced services such as call-forwarding and voice mail to a dwindling customer base.

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 financial times can be a tremendous opportunity to strengthen competitive position and financial performance—with the right mix of strategy and innovations.

One Response to “Surviving the Downturn: Lessons From Emerging Markets”

1. marioferreira Says:
   March 23rd, 2009 at 12:42 pm

   Dr. Roth,

   I would like to thank you this wonderful and broad vision on how to deal in emerging markets. It is a perspective that I share and lived with it in the last 25 years of doing business in Brazil, but not only in Brazil.

   I already tried to pass this vision of a different approach to develop business in emerging countries, but it is not easy when the mental models of “doing business” are constrained to pramatic frameworks of rules and methods that may work in the Northern countries but at the South of the equator line will not.

   The strategic approach is different, the cultural dimensions (using Hoftede reference) are different and the confusion made with Ethics, that, here, they are more “flexible”, it is an error! Because there aren’t different values of conduct from North and South, what exists, it is the excuse to develop “easy business”. Several years ago, in an interview, when someone asked Peter Drucker what he would teach about Ethics, he answered: “If you can’t look yourself in the mirror for something you’re about to do, don’t do it.” That answers all questions and I think that the mirrors are the same in any place of the world.

   Kind regards,
   Mario Luis Tavares Ferreira

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