Brazilian Market entry pricing strategy

Entering the Brazilian Market
Problem Statement
Peak must decide on a pricing strategy for entering the Brazilian market. It has narrowed its options down to three: penetration pricing, skim pricing and cost-plus pricing. This report will evaluate the company, the market and each of these three options in order to determine the best choice of pricing strategy when entering the Brazilian market.
Concept/Theory: SWOT Analysis
The SWOT analysis is a tool whereby the company analyzes its internal strengths and weaknesses, and its external threats and opportunities, in order to provide some context for the decision that it is facing. The strategy that the company chooses should in some way reflect either leveraging strengths to take advantage of opportunities or to shore up weaknesses in order to defend against threats. In this case, where the company is determining a strategy for entering a new market, it will probably take into account how it can leverage its strengths to take advantage of this opportunity (Furgison, 2019).
There are a few different strengths that the company has in this situation, each of which adds value. First, Peak has a high quality harness, the Kilimanjaro, which falls into the premium segment in the United States. The quality of climbing harnesses probably does not change much around the world, for a couple of reasons. One is that climbing is an international sport, and two is that the safety standards for climbing gear are critical, and any gear that does not adhere to international-level safety standards simply won’t be purchased by serious climbers, as it would risk their lives to do so. So it is reasonable to assume that gear that is premium in the US would also be considered premium in Brazil.
The second strength for Peak is that they already have a distributor in the country, Amazonas. With a distribution already in place, they have the ability to approach their market entry in a few different ways. This provides built-in flexibility. They can do penetration pricing because they have the distribution to back up a volume sales approach, but they can also do premium pricing with this option.
A third strength is that the Brazilian market appears to be sophisticated, with many international competitions held in the country, and the country’s sizeable middle and upper classes who are able to pay for quality gear and who likely travel around the world to climb. The brand may already be known to many climbers in the country, and this maturity of market gives Peak the opportunity to treat it as any other sophisticated market, and gives the option for skim pricing.
Peak has a weakness is that it doesn’t know the Brazilian market well. It’s distributor in the country, Amazonas, does have some in-market knowledge but because it has a vested interest in what strategy Peak adopts, Amazonas may not be a source of unbiased information. So there is a need to trust Amazonas, or make a decision without sufficient data or market insight. This weakness manifests in particular in the idea of skim pricing – Peak doesn’t really know how this market will respond to skim pricing. It suspects Brazilian climbers are willing to pay a premium, but if they are also well-traveled the question is whether they’ll pay a premium to buy at home and also how much of a premium are they willing to pay.
Another weakness is that Peak only has a little bit of experience in Brazil, but they do seem to be dependent on their distributor, Amazonas.
Peak has a few different opportunities. They are moving into the Brazilian market to take advantage of what is believed to be a sophisticated market with strong growth potential over the next 24 months. The strong growth potential is speculative, but if the hunch is correct then it might guide Peak to penetration pricing. If the hunch about premium pricing is correct, Peak could go with the skim strategy. The good part for Peak is that the Brazilian opportunity is presenting itself in such a way that it has options when entering this market.
Another opportunity for Peak is to use Brazil as a springboard for the rest of South America. It’s the biggest market in the region, but there are other strong markets, in particular the Andean countries, which make up most of the rest of South America. Lessons learned in Brazil can probably be applied to other countries in the region.
There are also threats that Peak has to take into consideration. First is the threat of competition. Even if Peak can successfully differentiate from domestic competitors, there are other international competitors that are likely to enter the market. If the Brazilian market is as promising as it sounds, Peak will not be the only foreign company looking to enter the market. The threat of increased competition could impact any plans to do skim pricing, as it would allow a competitor to undercut the Kilimanjaro with an equivalent quality harness.
There is also the threat associated with foreign currency exchange risk. When exchange rates change, the value of the profits earned in a country can change as well. If Peak adopts penetration pricing, for example, that would leave it with slimmer margins. Those slimmer margins could evaporate, should the exchange rate of the Brazilian real fluctuate in the wrong direction. Peak has to consider what the impact of fluctuating exchange rates will be on its pricing strategy. The real is current in a partial float against the dollar, meaning that there will be some exchange rate risk associated with the Brazilian market (Downey, 2019).
Lastly, there is the threat associated with the dependence on Amazonas for distribution. While there is no reason to believe that Amazonas will be a bad partner, the reality is that it could happen, and Amazonas would have an advantage in any dispute, being more familiar with the Brazilian legal system. Recent changes to the legal system have made it more robust for foreign companies, however (Dourado et al, 2019).
All told, the main opportunity here lies with the size and expected growth of the Brazilian economy, and in particular the market for climbing gear. Peak is well-positioned to take advantage of the attractiveness of this market, but that attractiveness will also invite other competitors, which could impact on Peak’s pricing strategy decision. Peak’s relationship with the distributor, Amazonas, can be a source of either strength or weakness, and is a key dependency for whether or not Peak is able to enter the Brazilian market successfully.

PEST
The political environment is Brazil has been variable over the past few decades, but today seems at least favorable to foreign business interests. The previous President, Dilma Rousseff, was impeached in 2016. The country has not historically performed well on the Corruption Perceptions Index, and presently ranks 106th out of 180 countries with a score of 35, considered poor (Transparency International, 2019). The current regime of Jair Bolsinaro is oriented towards business interests, which may help in the short run but is not necessarily a good thing, given concerns about his abilities. But moves to streamline regulations and lower taxes may at least be beneficial for Peak and for Peak’s target market (Riley, 2019).
With a pro-business government in place, the expectation is that Brazil’s economy will be improving, and that may be what is fueling the aggressive growth projections for Brazil’s climbing scene, which relies on a healthy middle and upper class with disposable income. Brazil is the world’s 8th-largest economy. Its inflation rate is at record lows, but GDP growth is sluggish at just 1%. Interest rates have also been lowered (CIA, 2020). These figures are slightly out of date, however, as Brazil’s ability to report on economic metrics is suboptimal, which is a red flag. The 2017 growth rate is expected to hold for the next several years, or be slightly higher, which is in contrast to prior years when the economy was shrinking (Trading Economics, 2020). The coronavirus will have a negative impact on Brazil’s economy, however, as it will on every other country.
The social environment is generally favorable in Brazil. As noted in the case, the climbing market is expected to grow rapidly in the next few years. The sport is attractive to middle and upper class Brazilians. While the country has a GDP per capita of only around $15,000 (CIA, 2020), there is substantial wealth disparity, and the size of the target market is roughly one-third of the company’s population, making Brazil a market around the size of the UK when only the target market is included (World Bank, 2012). The size of this middle class and its interest in rock climbing makes for an attractive social environment, because the sport is viewed favorably, and this interest provides ample distribution infrastructure.
The technological environment is generally favorable in Brazil. Brazil’s middle class have modern access to technology, including apps, that can help the company reach its target market. There are no major barriers to marketing online, for example, would should allow Peak to hire a local agency and create ads for its products, and leverage the refined targeting of popular social media ad platforms. In that sense, marketing in Brazil is not going to be that much different from in the US, except that the company will need a local agency to handle the language and cultural considerations associated with the Brazilian market. Amazonas can probably help with that, but there are options there to do this independent of the distributor. All told, the technological environment is positive.
The PEST analysis shows that the Brazilian market holds significant promise. The economy is not growing quickly, but the target market is quite large and growing, and this is helpful. The business environment is improving, for foreign companies, and that reduces country risk. So all told, there are no major reasons that stand out from the PEST analysis that would challenge the idea of entering the Brazilian market.
Pricing Strategy Theory
There are a number of different pricing strategies, and a variety of factors that go into the choice of pricing strategy. First is the price elasticity of demand (Decker, 2020). The evidence in the case suggests that Brazil’s climbing community has relatively low price elasticity of demand for foreign gear, and this might be because of higher perceived quality and lower competition. Should the market’s attractiveness bring in other competitors, price elasticity of demand would be expected to increase, but at present it is favorable enough that Peak is considering a skim strategy.
Another factor is the nature of the opportunity. Peak is entering the market and the market is expected to grow quickly. If it can establish market share, via a penetration pricing strategy, that will help make the market less favorable for new entrants, and it would allow Peak to earn profits via a high volume of sales. Penetration pricing is specific to market entry and would be used to establish share, whereas skim pricing or other premium approaches would probably need to be sustained, as they would tie into the creation of a brand image (Kokemuller, 2020).
The third major factor is the impact of competition. The market can be assumed to be in a state of monopolistic competition, where there are many competitors and they seek to differentiate themselves from each other in a way where their unique attributes create a market for their products (Chappelow, 2019). In this state, the nature of the competitive landscape can have a significant impact on pricing strategy. In particular, the penetration strategy would imply that Peak offers the Kilimanjaro at a relative low price, where is it priced well compared with its peers, and that will allow it to sell a higher volume. The skim strategy would be more acceptable in a market where there are few high end competitors, and the higher quality of the Kilimanjaro allows it to command a higher price.
Cost-plus pricing, one of the options, the price is determined by the cost to the company. So the cost of the harness, plus markup for the distributor, and costs associated with bringing the product to market, are all built in. The problem with cost-plus is that it fails to take into account competitive dynamics. It locks in a certain profit level per unit sold, but can constrain the number of units sold. Cost-plus is better suited for situations where the market for the good is relatively known and stable, as it allows the company to earn a steady profit. For a mature market, cost-plus makes sense. For market entry, less so. But there is one key advantage of the cost-plus approach, and that is how it builds in currency exchange rate risk. When rates fluctuate, if the company is designing its prices in dollars and then translating to reais, then this particular risk is alleviated, even if it means changing prices in the Brazilian market fairly frequently.
Penetration pricing is a market entry strategy designed to bring the new entrant maximum market share. This strategy means pricing at a point where it offers the best value proposition for the consumer – a high quality good at a medium price, for example. This way, it is the most attractive product on the market and can build share quickly. The upside of penetration pricing is that when it works, it can build market share quickly, something that is especially beneficial when the company can then take advantage of that market share in other ways. For example, getting a better deal out of its distributors, or using the Kilimanjaro as a springboard to bring other products into the market – climbers need all sorts of gear and accessories. The downside of penetration pricing is that there is no guarantee those early low prices will deliver a profit to the company. In many cases, the company might take a slimmer margin, or even lose money, in order to gain the market share.
The third option, skim pricing, is a strategy whereby the company charges a premium price in order to get the high end of the market. Skim pricing works when the product’s perceived quality aligns with the higher price, or if there are no other high end products on the market. The skim strategy would allow the Kilimanjaro to establish itself as the top product in the market, but has the disadvantage of constraining the eventual market share. This isn’t necessarily bad – Apple does just fine with a moderate market share and skim pricing – but there is no guarantee that skim pricing will work. In this case, if the pricing and positioning of the Kilimanjaro are misaligned with the product’s actual quality, that opens up the risk that other competitors can enter the market. Rock climbers can reasonably be assumed to have high knowledge of the products that they use. While there is evidence that suggests Brazilians are willing to pay a premium for high end foreign products, climbers are climbers and they know the goods they use intimately – their lives depend on them. As such, any misalignment between price and quality will immediately be identified by the target market. That said, the argument for skim pricing is that the market has low price elasticity of demand and this can be leveraged for a higher profit. Another consideration with the skim strategy is that if the Kilimanjaro is priced too far above what it sells for in the US, then Brazilian buyers could simply but it online in the US and ship to Brazil – skim pricing done wrong creates the opportunity for arbitrage that would hurt the company’s attempts to establish a foothold in the Brazilian market.
Choosing between pricing strategies requires an understanding of what each strategy is deigned to do, and making sure that the choice of strategy has the best overall outcomes. If Peak is deciding between penetration pricing and skim pricing, then it seems that Peak does not really know what its strategic objectives are for the Brazilian market. But that decision can be made with simple arithmetic. Peak can estimate the size of the market with skim pricing and the size of the market with penetration pricing, knowing that as the market overall grows, the market for premium might not grow at the same rate. Peak can then calculate the per-unit profit at each price point and multiple that by the number of units it expects to sell at that price point. The math will probably show that penetration pricing makes more sense and delivers more profits in the long run. This is especially true because one of the market impacts of penetration pricing is that it increases the barrier to entry for other foreign companies, as they would have to compete with the same pricing strategy in order to match what Peak is doing.
Cost-plus in this situation makes little sense, largely because cost-plus is more suited for a mature industry with predictable demand, than for market entry. A market entry pricing strategy simply cannot ignore the impact of the competitive landscape. In that sense, cost-plus should be ruled out quite quickly. The other strategies leave Peak more vulnerable to foreign exchange rate risk but there are other ways to hedge that risk besides using a cost-plus strategy. Besides, cost-plus would also result in prices that change with exchange rates, which could also create confusion in the market with respect to positioning of the Kilimanjaro.
Overall, it seems that the best option for market entry is penetration pricing, which would create some risk financially. However, establishing market share is important strategically, given that much of the opportunity in the Brazilian market is tied to the expected growth of that market over the next couple of years. Percentage share in a rapidly growing market is the best pathway to profit.
References
Chappelow, J. (2019) Monopolistic competition. Investopedia. Retrieved March 28, 2020 from https://www.investopedia.com/terms/m/monopolisticmarket.asp
CIA World Factbook. (2020) Brazil. Central Intelligence Agency. Retrieved March 28, 2020 from https://www.cia.gov/library/publications/the-world-factbook/geos/br.html
Decker, A. (2020) The ultimate guide to pricing strategies HubSpot. Retrieved March 28, 2020 from https://blog.hubspot.com/sales/pricing-strategy
Dourado, A., Canabrava, L, Spadano, L, Alvarenga, P., Salles, R., Advogados, F., Lourencao, M. & Trung, T. (2019) Doing business in Brazil: An overview. Thomson Reuters Practical Law. Retrieved March 28, 2020 from https://uk.practicallaw.thomsonreuters.com/0-503-8385?__lrTS=20180603124715781&transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1#co_anchor_a102539
Downey, L. (2019) Brazilian real. Investopedia. Retrieved March 28, 2020 from https://www.investopedia.com/terms/forex/a/brl-brazilian-real.asp
Furgison, L. (2019) SWOT analysis, step 5: developing actionable strategies. BPlans.com. Retrieved March 28, 2020 from https://articles.bplans.com/swot-analysis-challenge-day-5-turning-swot-analysis-actionable-strategies/
Kokemuller, N. (2020) Entry pricing strategy. Houston Chronicle. Retrieved March 28, 2020 from https://smallbusiness.chron.com/entry-pricing-strategy-61428.html
Riley, C. (2019) Jair Bolsinaro says Brazil is open for business. CNN Business. Retrieved March 28, 2020 from https://www.cnn.com/2019/01/22/business/bolsonaro-brazil-davos-foreign-investment/index.html
Trading Economics (2020) Brazil GDP. Trading Economics.com. Retrieved March 28, 2020 from https://tradingeconomics.com/brazil/gdp
Transparency International (2019) Corruption perceptions index: Brazil. Transparency International. Retrieved March 28, 2020 from https://www.transparency.org/country/BRA/P50
World Bank (2012) In Brazil, an emergent middle class takes off. World Bank. Retrieved March 28, 2020 from https://www.worldbank.org/en/news/feature/2012/11/13/middle-class-in-Brazil-Latin-America-report