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Commentary: Unraveling the value mystique

By Shen Lei  (China Daily)

15:41, October 06, 2012

On Sept 1, Estee Lauder Shanghai reduced the prices of its Clinique's four-star products in China. Following the announcement, prices of the 125 ml Clinique Dramatically Different Moisturizing Lotion declined by 26 percent to 340 yuan ($53.97, 41.56 euros) from 460 yuan, while the 50 ml Moisture Surge Intense was nearly 31 percent cheaper at 340 yuan from the 490 yuan earlier.

The price cut was indeed surprising as the company had increased the prices of most of its products in overseas markets by 5-25 percent on Aug 1. The price reduction in the Chinese market was contrary to the existing norm of companies pricing imported cosmetic products in the Chinese market at least 10 percent higher every year.

Not surprisingly the move received widespread attention with some customers indicating that they would now prefer to purchase Estee Lauder products in China rather than abroad.

For Estee Lauder, the price cuts were done more with a view to narrow the price gap between China and other markets, as well as to encourage local consumption and enhance market competitiveness.

Commodity prices are often determined by cost and corporate pricing strategy. First of all, the price must cover the cost of raw materials, processing, sales channels, marketing, tariffs and taxes. Then based on its competitor's pricing strategies and consumers' purchasing habits, the company decides if its pricing strategy is oriented to cost, demand or competition.

In China, relatively high marketing and distribution costs are racking up the prices of foreign cosmetic products. In the absence of strong Chinese competitors, many foreign brands normally adopt a "high quality, high price" strategy based on customer perceptions. This is also the main reason why foreign brands are more expensive in China.

In China, consumption of highly priced foreign brands is considered a symbol of social status and lifestyle, and an indicator of individual wealth. Thus big discounts are common in overseas markets, but rare in China. Some brands even have a fixed quota of price increases every year to maintain their high-end image.

While the difference in costs and tariff is the normal base for companies to fix prices, they may also consider the same based on consumer opinion.

According to discriminative pricing theory, companies can use differential pricing to maximize its profits if they satisfy the following criteria:

Consumers do not know that they are being treated differently when buying a product or in other words, the so-called "back to back" purchase.

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