Marketers
often wonder at the size of the luxury goods market in China and the
extraordinary ardor and passion with which the Chinese consumers have embraced
this product category. While many factors contribute to China’s status as the
largest luxury consumer in the world, the “anchoring effect” from behavioral
economics also provides an important explanation.
It
is well established by behavioral economists, that when the consumers are
challenged with the task of estimating an unknown quantity or assessing the
monetary value of a new product or service, they clutch at any straw they can
get their hands on. Daniel Kahneman, in Thinking Fast and Slow, describes
experiments where people take their cues from totally unrelated and absurd
anchors in order to make some guesses about the quantities they are asked to
estimate or prices they are willing to pay. One such experiment shows that the number
arrived at after spinning a wheel of fortune, significantly influences people’s
estimate about the number of African nations in the United Nations! Dan Ariely,
who refers to this phenomenon as arbitrary coherence, proved that the last two
digits of the participants’ social security number can influence how much they
are willing to bid for a bottle of wine.
China
is a unique market, which experienced a long and severe discontinuity of
consumption and marketing. After the cultural revolution once the economy
started growing and more and more products started to appear, there were very
few anchors for the consumers to compare the prices with. This served to the
advantage of premium and luxury products, as there were no similar products in
the market, and hence no unfavorable price comparison with existing products
could be made. Luxury products, were therefore, free to establish their own
price anchor, which was the same as their international price or often even
higher. Despite the much lower income levels in China as compared to the
developed markets (in 2015 per capita GDP in China was $8,028 as compared to
the US figure of $56,155 - Source: World Bank), the high price did not serve as
a major deterrent, and in fact served as a credibility enhancer by priming high
quality. This factor has definitely been one of the key contributors to the
growth of luxury brands in China.
Not
only luxury brands, but even premium brands like Starbucks were able to charge
the same price in China as did in the US, despite a much poorer target group -
simply because there was no established anchor of what a reasonably good cup of
coffee consumed in a comfortable and trendy ambience should cost. In fact in
its home market Starbucks had a more uphill task of de-anchoring itself from
the two dollar coffee lapped up by the American consumers from Dunkin Dounuts
and other similar outlets (which they managed very cleverly by establishing a
totally new aura and image around the brand and the product - including
referring to the sizes of the cups as tall, grande and venti, rather than
small, medium and large).
McDonald’s on the other hand maintains a significant difference in the prices between the US and China - a Big Mac costs $5.06 in America and only $2.83 in China (Source : The Economist January 14, 2017). When McDonald’s and KFC entered China, did they have an option to charge the same or comparable dollar price in China as in the US? Perhaps yes, and while it could be argued that it would have restricted their penetration and volume, it would definitely have made them more profitable. Clearly they did have an opportunity to establish their own anchor, with practically no burgers and Western fast food chains in the market (if you ignore the local roujiabing, which even today remains a much more delectable alternative to the Big Mac).
