The consumption power of third- and fourth-tier markets is remarkable, and the chaos in channel pricing is even more so!

Third- and fourth-tier markets are vast, and many newcomers find it difficult to manage them effectively in a short time. Even companies that have done extensive preparation before entering may still find themselves overwhelmed. Prices that are relatively easy to control in first- and second-tier markets go completely haywire here, making "product price chaos" the primary culprit hindering companies' development in these markets.

The Many Factors Behind Price Chaos

The reasons for price chaos in third- and fourth-tier markets are varied.

1. Dealer Dominance, Manufacturer Management Constraints

In third- and fourth-tier markets, deep distribution relies mainly on dealers. Their primary motivation is often "volume and profit," which conflicts with manufacturers' goals of "market share and development." When conflicts escalate, dealers are unlikely to follow unified management, and "price undercutting" becomes a common tactic to pursue short-term gains or resolve disputes.

Price undercutting may cost dealers some money, and at worst, they can switch to another brand, but for manufacturers, the impact is devastating, potentially leading to market chaos or even sudden collapse.

2. Flawed Product Pricing Strategies

Price and profit are closely linked. FMCG products have relatively low unit value, multiple channel levels, and relatively small profit margins at each level. Everyone wants to protect their profit margins, which makes the final consumer prices of FMCG products full of "artistic" nuances, especially in third- and fourth-tier markets.

Profit margins, ex-factory prices, wholesale prices, and retail prices all affect a product's final market performance.

For example, if retail prices are too high, consumers will not buy. A small baijiu company specializing in mid-to-high-end products, with a market concentrated in a prefecture-level city in the north, had good quality and reputation, and was the mainstream choice for local government and business banquets, so the company was doing well. However, the strong entry of Luzhou Laojiao's high-end products impacted the company's original mid-to-high-end offerings, and government and business consumption shifted significantly to Luzhou Laojiao.

It became imperative to enhance the brand image or launch new products. The new product saw significant improvements in packaging and quality, but when setting pricing policies, the company overestimated its brand influence, setting inflated channel and retail prices that even exceeded those of major domestic liquor giants' high-end products.

Worse, there were no other products to support the market. As a result, consumers did not accept it, viewing it as a publicity stunt, and even developed aversion to the company's products. The company ultimately failed, even ceding its existing market.

Another example: when wholesale and retail prices are not well coordinated, or profit distribution is unreasonable, any market fluctuation can trigger dealer chaos.

A regional beer company in a northern province developed a highly differentiated product. However, the company made errors in pricing policy: retail prices were too high, and the wholesale-retail price gap was too large.

After the product hit the market, the huge profit margins attracted many large dealers, who quickly captured the market. But the good times did not last. The company failed to adjust its outdated pricing system in time, and because the market remained hot, it neglected effective channel control. As a result, when large-scale parallel imports and price cuts still yielded high profits, massive malicious parallel importing occurred, spiraling out of control.

Meanwhile, the product was imitated, and dealers, to protect themselves, abandoned the ruined product and switched to other products.

This failed operation was certainly related to the manufacturer's poor management and lack of patent protection awareness, but it is undeniable that unreasonable pricing strategy was one of the most important factors in the failure.

3. Intentional Price Undercutting by Dealers

Most dealers do not deliberately engage in parallel importing when the market is stable, but there are indeed some dealers who rely on price undercutting for survival. They need only a small profit margin and pursue high-volume sales. These dealers are usually large in scale, with unstable networks, but once they start undercutting, the impact is wide-ranging and destructive, easily prompting other law-abiding dealers to engage in parallel importing.

Seven Parts Strategy, Three Parts Management

Since companies are unable to resolve price chaos through management alone, it is worth trying "strategy." Just as "Yu the Great tamed the floods," use guidance rather than blockage. To tackle price chaos, management is like "blocking," while strategy is like "guiding." Relying solely on management to chase and block will not solve the root cause and is costly. "Seven parts strategy, three parts management, focusing on guidance, combining guidance and blockage" is a good remedy.

1. "Marry the Right Person"

Dealers in third- and fourth-tier markets can generally be categorized as:

  • Brand-oriented: Have brand awareness, have already built a brand, recognized by peers, and seen as benchmarks.
  • Marketing-oriented: Medium scale, good awareness, outstanding in both sales and management capabilities, able to quickly and stably operate a good product.
  • Sales-oriented: Strong sales ability but weaker control, high product flow, but less controllable.
  • Potential-oriented: Have operational capability but limited resources, long-term second-tier wholesalers.
  • Closed-oriented: Mainly refer to "sit-down wholesalers" who are content with the status quo.

When selecting dealers, companies should be highly purposeful. If you want to cultivate the market meticulously and operate long-term, choose brand-oriented dealers, leveraging their excellent network coverage and market control capabilities to quickly capture the market. For small and medium-sized enterprises, products are better suited to potential-oriented dealers, achieving market success while driving dealer development through joint manufacturer-dealer cooperation.

If the product launch aims to disrupt competitors' market order, choose those speculative sales-oriented dealers, using their tendency to dump goods and undercut prices to trigger large-scale parallel importing, forcing competitors to exit and reducing resistance for your own operations.

2. "Grasp the Big, Manage the Small"

When large dealers cause price chaos, the damage is uncontrollable and devastating, while smaller dealers are relatively less harmful. Therefore, it is essential to firmly control large dealers through channel policies and management mechanisms. For small dealers, use a combination of strategy and management, paying attention to their product flow and prices. If price chaos or parallel importing occurs, punish them severely to "kill the chicken to scare the monkeys."

3. "Let Merchants Govern Merchants"

To tackle price chaos, manufacturers have limited supervisory capacity. A more effective approach is to establish a "let merchants govern merchants" market strategy, where dealers supervise each other. Those who report violations can receive greater benefits, while the penalties for those who undercut prices or engage in parallel importing must exceed the profits they gained. Mutual supervision among dealers is more efficient than the company managing it alone.

A well-known domestic home appliance company once encountered large-scale parallel importing in Hubei Province, where products were undercutting each other across counties and cities, channel profits shrank drastically, and the market was on the brink of collapse.

The newly appointed regional manager formulated a "let merchants govern merchants" strategy: any dealer who discovered other dealers maliciously undercutting prices or engaging in parallel importing in their region could purchase the products at the undercut price, report to the manufacturer, and after verification, the manufacturer would repurchase all such products at the specified price.

In this way, after reporting price chaos, dealers could earn a price difference between the undercut price and the original price. The more severe the price cut, the larger the price difference for the reporter.

At the same time, after verifying the identity of dealers involved in parallel importing or price chaos, they were fined double the amount of the price undercut. The fines not only compensated reporters for the price difference but also rewarded outstanding dealers.

As a result, dealers in the region quickly saw reporting price chaos as a way to profit, exposing and reporting each other, while the manufacturer sat back and watched, making money without losing. Within less than two months of the new policy, dealers gradually understood the manufacturer's intention and complained bitterly, but the trend of parallel importing and price undercutting came to an abrupt halt, and the market stabilized again.

In addition, product strategy elements such as functional product combinations, product-channel compatibility, product-market adaptability, reasonable price gradient settings in pricing strategy, and linked promotions in promotional strategy are all good methods to control "price chaos" and are worth careful study.

"Seven parts strategy, three parts management" is more suitable for solving price chaos and parallel importing in the domestic market. Strategy is the game rule, while management is the penalty system. When dealing with price chaos, if a good mechanism is established but there are still troublemakers, it is necessary to take up management weapons to rectify the channel. At all times, "rotten pears" must be cut out.

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