In order to succeed in foreign markets, Cutbacks need to analyses global opportunities such as the consumers ability to buy, to recognize the per capita income (PC) which Is the amounts average income per person for a specific period. Furthermore, an important Indicator of consumer potential Is the Gross National Product as it reflects the generation of wealth in a country and the overall market size due to growing disposable income such as in China where the per capita income amounted to $750 a year. Cutbacks took this opportunity to build their market in China.
Cutbacks intend to target a larger segment of customers in China rather than Just expatriates, tourists and elite Chinese. Therefore, a lower price In Its coffee range, compared to local interiors, is charged so as to make this strategy a success. A grandee latte is priced at $4. 50 In Belong, similar to prices In New York. With this standardized form of pricing, it is relevant to the purchasing-power parity, a theory that states prices of Internationally traded commodities that should be the same In every country and therefore that the true exchange rates is the ratio of these prices in any two countries.
When a local Chinese coffee shop acknowledged that Cutbacks coffee 1 OFF that they would lower their price than their new U. S competitor. However, due to nominative advantage adopted by Cutbacks where they outperformed others in terms of productivity, quality, price of products, superior service, better technology, and higher profit, demand continues to soar, prompting Cutbacks to rapidly expand. Therefore, coffee drinking culture has successfully been incorporated into China.
It is arguable that Cutbacks’ pricing of a grandee latte at $4. 50 is a perfect strategy. While Cutbacks eludes from pricing its coffee range at a lower price than its original price due to the standardized usage of espresso roasts across nations, the company has mom up with an alternate strategy through promotions, such as 10% off from their coffee beans available outside Cutbacks cafes. Due to savvy hedging and customers lining up for expensive lattes in China, lowering down the price of Cutbacks coffee in China is not committed.
Furthermore, China has several lower-income segments from its population which surprisingly has a potential of creating attractive markets for consumer goods. This is due to the informal economy participation which is the totality of economic activity of individuals and businesses that operate without sciences, permits, or reporting procedure required by law. Thus, much of the income earned by the poor in China are not informed to authorities that is to be presented in official statistics.
In addition, if Cutbacks were to set lower prices, it will not emphasize profits although it will strengthen their brand image. There are several reasons if Cutbacks were to raise its price in its coffee ranges and the circumstances that may results from doing so. The market factors that affect pricing are the income level, culture and consumer behavior, buyer power and competition. While carrying Cutbacks coffee cup is believed to portray status that is classy, consumers can experience a recognition of sophistication and the ability to buy luxury goods for the up and coming middle class in China.
With Cutbacks high pricing strategy, it allows each of their store chains in China to be more profitable despite the lower sales volume. Furthermore, in order to offset high operating costs of marketing Cutbacks, a higher price of their coffee range is committed. However, they will still gain market demand which can be proven by their revenue of $214 million as of 2013 which has increased by 28% from the year 2012 due to China’s arbitration rate that has increases up to 52%.
In China, employees of state government often receive lucrative housing benefits, a practice that markedly increases their discretionary income. Discretionary income is the remaining incomes after deducting basic necessities costs such as food, shelter and clothing. Thus, rising living standards denotes to continuing demand for Cutbacks in China despite the high price. It is important to understand that Cutbacks only use their Espresso Roast, special blend of coffees room Asia/Pacific and Latin America, as their core product to make all their coffee based drinks.
However, recently Cutbacks has made an exception is India due to high import tariffs, partnering with Data Coffee to produce a local Cutbacks India Espresso Roast (Melody, Par 2013). Although such possibility is low in the China Market, a major company would not turn down any profitable chance if it ever arises. By purchasing the Chinese local coffee, it is interesting to predict how Cutbacks would arrange the pricing for the beverages sold. Change their pricing strategy. Firstly, transportation costs are effectively waived off.
Instead of importing coffee beans from their facilities in the America and the Netherlands, Cutbacks is able to obtain their core product locally. Purchasing Chinese coffee beans will be cost effective. Cutbacks will not have to pay for import tariffs too. Tariffs are fees charged when products are transported across national borders, and this will no longer be exercised. Cutbacks could also manipulate the local productions costs factor. China’s greatest competitive advantage and the catalyst for its growth is its cheap and highly skilled work force (Bobby Jan).