Suitable for Growth - All-in for China Page 20

| Suitable for Growth

CASE

Perceived customer quality

One Danish B2B company uses extensive test procedures, which enables
them to secure a high and well-defined quality for their products. In this way,
they can guarantee their customers a product lifetime of 20 years! This du-
rability is highly valued by their Western customers, who use the product as
a component in some of their own high-end consumer products. However, in
China, such a long guarantee is not appreciated by Chinese customers, since
their customers (the end users) use their products for only 5-6 years before
they exchange or scrap them. So the Chinese customers are not willing to pay
a premium for a 20-year lifetime guarantee that they do not need.

The company decided to adapt their product offerings to the needs of the lo-
cal customers in China, reducing the lifetime guarantee (among other things)
and thereby costs. As a consequence, the company had to adapt their brand
architecture and clearly differentiate their market offerings, so customers
understand the value propositions of each product.

Cannibalization threat or opportunity?

A company with an established brand position in the high-end market must consider how
to avoid cannibalization if they want an additional position in the mid-market. Customers,
who would normally buy a high-end offering, may downgrade if they become aware of the
alternative mid-range offering. However, in some cases, a lower priced offering may actu-
ally increase sales of the premium products as the next case exemplifies.

If cannibalization occurs, it may be an indication that there is a misfit between the
high-end offering and what the market needs and/or is willing to pay for. Such a misfit

Potential candi-

dates do not know

our company. We

are too small and in

a niche. Most of the

good people look for

opportunities at the

large multinational

companies, where

the wage packages

are much better.

AGiLiTy OF OrGANizATiON

This is one of the reasons why companies with high-end brands are often afraid of
entering the mid-market with offerings that have lower specifications and prices than
their regular line of products what's known as a "vertical downscaled brand exten-
sion". Companies are typically concerned that this will lead customers to lower their
overall perception of the brand. On the other hand, companies also want to leverage
their established brand equity when introducing a lower level brand to the market. All
told, branding for the mid-market is a dilemma with pros and cons.

In general, there are three brand strategies for positioning a company in both the high-
end market and mid-market:

· Distinct brands two distinct brands with no relation seen from the market perspec-

tive, i.e. customers will not realize there is a connection between the two brands.

· Related brands the new mid-market brand is related to the established high-end

brand with names like "x by y" (x is sub-brand and y is mother brand). Public an-
nouncements may also be used to create awareness of the underlying ownership
relation.

· Same brand only one brand, but the brands are clearly differentiated in specifica-

tions, marketing, service, etc.

Different circumstances in China call for a more nuanced understanding of what "qual-
ity" means to different customers. Quality is about fulfilling the needs and expectations
of the specific customers and therefore, the definition of quality can differ from one
segment of customers to another. The challenges described above are illustrated by the
case example below.