Business Project -- Final Report

Aalto MBA Business Project

By Shuqin Li-Kokko

Business Project

Pricing Strategy at Doujea Farm Beijing

Final Report

Shuqin Li-Kokko

20.01.2014

Abstract

This project work is done for a real business case – how to price organic food for a small organic firm in Beijing, China. In theory part of this project work, it covers business strategy theories briefly with a focus on pricing aspect and includes pricing concepts and theories in particular. In practicality party of this project work, it develops a pricing strategy framework which is constructed to apply those theories and concepts in business analyses and to base recommendations. Based on the analyses, it recommends a pricing strategy based on a value-based pricing approach along with pricing tactics in the form of guidelines. In the recommendations, it also addresses flaws and weaknesses found in current business and pricing practices and proposes improvements.


By Shuqin Li-Kokko 1

Table of Contents

1. Introduction 1

1.1 Background 1

1.2 Objectives 2

1.3 Scope and limitations 2

2. Doujea Farm Ltd. 2

2.1 Pricing models and strategies 4

2.2 Competitive strategies 4

2.3 Challenges and new business development 5

3 Literature review on strategy models 5

3.1 Porter’s five forces framework 5

3.2 Customer value model 7

3.3 Product portfolio strategy 8

4 Literature review on pricing concepts, approach and tactics 9

4.1 Pricing basics 9

4.2 Value-based pricing approach 9

Roles of cost, willingness to pay and markup 10

Role of differentiation 11

4.3 Tactical pricing 11

Skimming pricing 11

Premium pricing and brand image 11

Bundling pricing 12

Promotional pricing & deals 12

4.4 Psychological factors in pricing 12

5 Outline of framework and analyses 14

5.1 Outlines of framework 14

5.2 Business analysis 15

Food market in China in general 15

Organic food market in particular in China 16

Estimate of organic food market size in Beijing 16

Competitive rivalry of organic food market 18

5.3 Competitor analysis 23

Background of competitors 24



Comparison of product and service offerings 27

Comparison of performance index and breakdowns 27

5.4 Objectives and strategies 29

Doujea’s business objectives and strategies 29

Customer profile 30

Marketing strategy 32

Cost structure 33

Positioning strategy of product segment and product portfolio 33

6 Recommendations 35

6.1 Pricing strategy 36

Basic pricing rules 36

Value-based pricing approach 36

6.2 Tactical pricing 40

Skimming pricing 40

Premium pricing and brand image 41

Bundle pricing 41

Promotional pricing and deals 42

6.3 Psychological considerations 42

6.4 Management of price changes 44

Price cuts 44

Price increases 44

6.5 Pricing for product segmentation and portfolio 45

Segment pricing based on value-based pricing 45

Product line portfolio pricing with tactical pricing 46

6.6 Flaws and weaknesses of current pricing and business practices 47

Subscription business 48

Pricing of specialty products sold individually 49

Procurement vs. outsource 50

Cost structure 50

Development of new products 51

Development of enterprise and gift business 51

7 Concluding thoughts 52

List of Tables 53



Table 1 Organic food market size and potential (Million Kg) in Beijing 53

Table 2 Online B2C organic farms 53

Table 3 Comparison of customer value map 53

Table 4 Performance index and breakdowns 53

List of Figures 54

Figure 1 Doujea’s business model 54

Figure 2 Porter’s five forces framework 54

Figure 3 Customer value map 54

Figure 4 Product portfolio 54

Figure 5 Value-based pricing framework 54

Figure 6 Framework for pricing strategy at Doujea 54

Figure 7 Change of Chinese food consumption structure 54

Figure 8 Agriculture output 2010 (excluding grains) 54

Figure 9 Competition analysis of organic food industry in Beijing 54

Figure 10 Comparison between direct competitors 54

Figure 11 Doujea’s objectives and strategies 54

Figure 12 Doujea’s product segment positioning strategy 54

Figure 13 Doujea’s product line value strategy 54

Figure 14 Doujea’s product portfolio positioning strategy 54

Figure 15 Doujea’s product line portfolio strategy 54

Figure 16 Doujea’s pricing structure 54

Figure 17 Estimate of economic value 54

Figure 18 Economic value vs. market price 54

Figure 19 Final pricing 54

Figure 20 Pricing process 53

Figure 21 Doujea’s value-based segment pricing 54

Figure 22 Doujea’s tactical pricing for product line portfolio 54

Figure 23 Comparison of veggie subscription prices (per 500 gram) 54

List of Exhibits 55

Exhibit 1 Consumer group profile 55

Exhibit 2 Price of veggie subscription packages 56

Exhibit 3 Price of individual products and packages 57

Exhibit 4 Doujea background 58



Exhibit 5 Competitive strategies (importance in a descending order) 59

Exhibit 7 Challenges (difficulty level in descending order) 60

Exhibit 8 Customer profile 61

Exhibit 9 Comparison of online B2C organic firms 62

Exhibit 10 Comparison of product and service offerings in detail 63

References 64



1. Introduction

1.1 Background

Organic agriculture practice started in 1990s in China and has enjoyed magnitude acceleration in recent years. Organic food is becoming more and more popular in Chinese daily diet. Chinese organic food market is expected to grow at an annual rate of double digits over next decade, projecting China one of the largest organic food markets worldwide. In China retail sale of organic food products occurs through six different channels: specialty shops, supermarkets and hypermarkets, direct sales, food services and farmers markets according to ITC report [Emilio Portocarrero, 2011]. Most organic food products are sold in hypermarkets, while premium products are sold in high-end supermarkets and specialty stores. Some traders and growers, especially small- and medium-sized, sell their products exclusively through the Internet, providing consumers with home delivery service. Distributors are normally regional, rather than nation-wide. The major organic food product markets are in Beijing, Shanghai, Guangzhou, and second-tier-emerging cities such as Nanjing and other developed provincial capital cities. According to the OFDC, the organic food consumers occupied less than 3 percent of China’s total population in 2007. In large cities such as Beijing, Shanghai and Guangzhou the average consumption of organic food accounts for 0.8% of the total food consumption [Yin et al., 2009]. With increase in income and consumption expenses in recent years, organic food in China has experienced rapid development. As in many other countries, Chinese consumers who purchase organic food are typically “well-off” families with higher levels of education are increasingly concerned about nutritional value and residual chemicals in food (For details on consumer group profile from ITC report see Exhibit 1 ) [Emilio Portocarrero, 2011]. In China there are many labels or certifications of organic food or safe food, among which the most recognized labels are organic food, green, and pollution-free products [Yin et al., 2009]. Among seven food categories, grain, fruits and vegetable, meat, poultry and egg, aquatic product, milk product and processed food, the willingness to pay (WTP) for fruits and vegetables is relatively high, while that for grain and milk products is lower [Yin et al., 2009]. Consumers tend to exhibit more concern over food safety and are willing to pay more for food with high consumption frequency, high taste requirement and less chemical residue [Yin et al., 2009]. Factors (importance in descending order) that have significant impacts on Chinese’s intent to buy organic food are concern on self-health, degree of trust in organic food, degree of acceptance organic food price and income. The concerns for environmental protection and food safety, knowledge of organic food and convenience of purchase have a weak link to consumer’s willingness to pay for organic food [Yin et al., 2009]. Currently, there are several challenges faced with organic food industry in China such as fickle consumers, tiny market share and profitability etc. Many organic food producers have been struggling to make organic food a profitable business. The most significant challenge for organic producers has two-fold: how to balance production costs and profits for a small scale of economy by effectively controlling cost to make profits, and how to effectively grow market share and sales revenue so as to make profits from a bigger scale of economy, for example, by expanding distribution channels and extending product and service offerings.



1.2 Objectives

Price is the only element of marketing mix 4Ps that generates income and all the rest, product (i.e. in term of producing cost), promotion and place (i.e. distribution channel) cause cost. Effective pricing must take into account all the perspectives of the rest three elements as well [Gabor, 1988]. As a key component of marketing mix, pricing is a pivotal determinant of the profitability for any business. Setting correct prices not only helps a firm achieve steady revenue and make predicable profits but also influences the ability of a firm to sustain and grow a healthy business.

Pricing should serve the business objectives and goals that a firm wants to achieve through pricing strategies [Gabor, 1988]. Conventionally business people believe that lowering the price is the way to gain more sales and grow business. This is not necessarily true. Pricing can be a powerful leverage tool for a firm to acquire more customers and retain them, get customers to buy more and buy more often and thus achieve massive business growth without cutting prices.

It is a challenge for small organic farms like Doujea, which sponsors this business project, to price organic food products profitably for the firm as well as affordably for its customers. Doujea is now at the cross road of a further business development path that needs a sound and robust pricing strategy to support its superfast growing business, and sustain business growth in a long run.

This business project will review literature coving three theoretical models related to business strategies and pricing approach, and tactics. There are two types of objectives are set for this project work: general objectives will analyze organic food business in general, competitors, and product segment and portfolio in particular; specific objectives will propose recommendations for pricing strategy and tactics in the form of practical guidelines and pricing for product segment and products portfolio. In addition, it will shortly discuss how to manage price changes both strategically and tactically and psychological pricing practice as well as explicitly analyze Doujea’s business flaws from pricing perspective of key business areas and suggest possible improvements.

1.3 Scope and limitations

The purpose of this business project has dual roles: to accomplish a subject that is part of MBA study program and to meet needs of a real business case. Thus, it is aimed to balance theoretical and academic perspectives for MBA study and empirical and practical perspectives for the real business case and bridge between these two perspectives.

The scope of the project covers strategy theories and analyses closely related to pricing context of the real business and conclude with recommendations. The majority of theories reviewed and applied in this project are from MBA course books, and other academic research papers.

Business case related data and info referred in this project is mainly sourced from Internet in Chinese, and authenticity and authoritativeness are not verified so they may not be reliable and accurate. In addition, those data and info i.e. market size and potential estimate etc were gathered and studied between January and November 2013. They are subject to changes as China has been in a state of flux in many aspects of economy and business environment and development. Some data i.e. existing major organic food producers in Beijing used in competitors analysis may not be exhaustively listed. In addition, there may be assumptions that are not explicitly explained, except the one that market price always exceeds cost. And also some of the analyses may be subjective to author’s biases.

2. Doujea Farm Ltd.

The company was founded in Beijing in 2009. It provides home delivery service for its food products to customers in Beijing and Tianjin where company operates two farmlands. The company grows tens of varieties of food crops such as various veggies, fruits (strawberry and melons), and other food crops



such as fruit corn, black peanut and purple sweet potatoes etc. It also outsources production for poultry and eggs in Beijing’s sub-urban, and special rice, grape, blue berry etc in Northeast China. The firm has also sideline business such as seedling of produce and ornamental plants. In spring, the company opens farmland tour for customers to experience green farming life and pick fruits. The firm also provides various free cooking tips and recipes, and preservation instructions with food provided.

The company mainly sells via its online e-commerce shop at http://doujea.taobao.com, and markets and promotes its product offerings through social network Weibo (Chinese Twitter). It also uses a high-end food supermarket chain BHG whose consumers are largely expatriates and wealthy local Chinese to resell its premium product i.e. strawberry.

Figure 1 Doujea’s business model

90% customers are females with high-income and high-education background, considerable portion of customers with a baby under three-year or minor child under 14. In addition for children, some of customers also buy food products for their elderly parents. 80% new customers are acquired from promotional offers such as free trial produce package etc, but not so stable. The implication is new customers are relatively price-sensitive. Usually some of new customers buy monthly and quarterly subscriptions for produces for a long while before they turn to buy annual or semi-annual subscriptions. It seems that once new customers buy products from Doujea in relatively a long period they will become price-insensitive as well as loyal to Doujea to a certain degree. This is of an important influence on the strategy how Doujea has built up its 4000 customer base. Figure 1 Doujea business model based on Business Model Canvas created by Alexander Osterwalder et al [Osterwakder & Pigneneur, 2010] briefly describes the nine elements of Doujea’s business model.

http://doujea.taobao.com/?spm=2013.1.0.0.cDJfjD



2.1 Pricing models and strategies

Currently, Doujea has three pricing models to sell its products, subscriptions, one-off price, and gift cards and packages. 30%-40% revenue is always from pre-sales that Doujea receives advanced payment and delivery of products can be a few months later.

Subscriptions Currently, subscription packages are only for veggies that customers can buy and products are delivered free of charge to customer’s door normally one time per week according to customer’s demand in terms of delivery time and address. There are four term types of veggie subscription packages (monthly, quarterly, semi-annual and annual, respectively) with different weights (Refer to Exhibit 2 for detail). With a subscription package, customers can freely select veggie products. Usually, there are at least 10 varieties of veggies that vary with seasons available for customers to select from. Sometimes, there may be a limited amount in term of grams on certain variety of products due to shortage of supply that customers can select. Customers usually subscribe veggie packages after first buying or trying one-off priced individual products or packages. One-off price It is used to price individual products i.e. fruits or product packages i.e. eggs including veggie package with different weight (See Exhibit 3 price of individual products and packages), or a bundling package of two or three products that customers can buy. If a customer buys one-off products with total value more than 200 RMB, home delivery is free of charge. Otherwise, it charges 20 RMB for home delivery service. There is a trial produce package that is special one-off veggie package priced slightly lower than normal one-off produce packages (See Exhibit 3). It is often used as free trail package for promotional activities for i.e. lottery winners from fans who participate in forwarding Doujea promotion activities at Weibo or sponsoring organizations. It also regularly organizes puzzle games relating food crops and farming practices etc for fun and winners all over the country can receive a free gift such as cookbook or calendar. Gift cards and packages Gift cards are pre-paid in E-card or physical cards that customers can use as cash to buy products. Customers usually buy gift cards on seasonal festivals such as Chinese New Year and Mid-Autumn festival. Gift packages are tailored with different product bundling in a range of prices for seasonal festivals as well. Gift cards and packages are designed for enterprise customers that can be tailored according to customer’s specific demand in terms of physical card design and products bundling packages. Currently, Doujea services customers in Beijing and Tianjin with the same product pricing policies. However, market scale and consumer purchase power are different between the two markets; Beijing market has much bigger market size and much more high-earning consumers.

2.2 Competitive strategies

Chinese consumer market basically is very competitive, though market tension of high-end segments is relatively weaker. To avoid price war with direct price cuts or discounts, two strategic measures are mainly resorted at Doujea, product bundling and development of a line of core products. For example, Doujea has established super-premium fruit products i.e. strawberry and blueberry that no competitors are able to provide and are well recognized by Doujea’s long-term customers.



To scale economy, Doujea has selectively outsourced or procured a line of high quality of specialty food products such as specialty grains, fruits, poultry, beef and aquatic food to extend its product lines of its own production so as to cross-sell and up-sell products more effectively.

Doujea has also strategically implemented business vertical integration in an attempt to gain economy efficiency and lift profitability. For example, it has built alliance partnerships with its suppliers and retailer, and established its own logistics for procurement and convenient customer door-delivery. In addition, it has established its own online B2C channel to provide its customers direct access to its wide range of high quality food products of many varieties at a range of competitive prices.

2.3 Challenges and new business development

The most challenges (See Exhibit 5 for details) currently faced with the firm that are directly relevant to this project are how to take into account competitive advantages and other business factors to effectively price different products with appropriate pricing strategy and tactics. Currently, it is very challenging to operate a profitable business.

Recently, the company has implemented new IT support system to reinforce its online E-commerce facility that greatly improves the efficiency of business operations and customer’s satisfaction. With the enhanced online trading system, customers can place and trace orders more conveniently, select products more freely, and update delivery information timely etc. New system also supports versatile membership points system. According to accumulated purchase value, customers receive certain points for coupons or gift cards that can be used to buy products or exchange for certain products i.e. free trial package of produce. The main strategy is to avoid using discount or value of money equivalent for membership benefits and focus promotion effort in profitably selling more products. In addition, customers can also be rewarded points for new customer referral.

For more details such as Doujea’s background and funding etc please see Exhibit 4.

3 Literature review on strategy models

This section will review three strategy analysis tools, porter’s five forces framework for business analysis, customer value map for competitor analysis and value positioning strategy, and product portfolio for product lines analysis. The reviews are done with a specific focus on prices and also contents are highly selective that are relevant to organic food industry in China, and in Beijing in particular.

3.1 Porter’s five forces framework

Figure 2 Porter’s five forces framework was developed by Michael Porter of Harvard Business School. It is widely used as a tool for the analysis of an industry’s attractiveness that the profitability of an industry is determined by five sources of competitive forces. The five forces of competition include three sources (Industry rivalry, Threat of new entrants and Threat of substitutes) from horizontal competition and two sources (Bargaining power of customer and supplier, respectively) from vertical competition.

According to Porter, the strength of each of these five forces is determined by a number of key factors

[Grant, 2010, Page 69]. In the context of organic food industry, factors of each of five forces that are considered major and most relevant will be identified and discussed. Industry rivalry The major determinant of overall competition and the general level of profitability is competition among established rival firms within the industry. Factors that determine the intensity of competition include market concentration, diversity of competitor, cost conditions and product differentiation etc. For example, cost conditions in relation to scale economies have an impact on price competition. Scale



economies may encourage firms to compete aggressively on price cuts to gain cost advantages of greater volume. When a market is highly concentrated and dominated by a few firms, aggressive price cuts are less likely. On the other hand, when a market has many players, competition is likely more intensified and aggressive price cuts are more likely. Diversity of competitors, in terms of similarity, cost and strategy etc, determines the extent to which firms can avoid price competition. Product differentiation determines the extent to which customers tend to switch between alternative offerings and degree of inducement for firms to cut prices to boost revenue. Commodity products are virtually indistinguishable and price is the sole basis for competition. Agriculture products are considered as such commodity.

Figure 2 Porter’s five forces framework

Threat of entry Industries protected by high entry barriers tend to earn higher profits. Factors that determine the strength of entry barriers include capital requirements, economies of scale, cost advantage and product differentiation, access to distribution channels, and retaliation by established producers. When an industry presents high attractiveness in term of profitability, it will almost certainly attract new players outside the industry. A barrier to entry is an advantage that established firms have over new entrants. Threat of entry rather than actual entry may be sufficient to drive established firms to compete on prices. Cost advantage can be obtained through economies of scale or economies of learning. In highly differentiated industry, established firms usually have the advantages of brand recognition and customer loyalty. In industries that are R&D and knowledge intensive, efficiency requires large-scale of operations to cover the high upfront costs. In consumer business, the principal barrier for new entrants is to establish and gain access to distribution channels. Threat of substitutes Substitutes generally depress prices and profits. Factors that determine the strength of competition from substitutes include buyer propensity to substitutes and relative prices and quality of alternative substitutes. When no close substitutes exist, consumers tend to be comparatively price insensitive. Otherwise, consumers are likely to switch to substitutes in response to price increase. Buyer power



Factors that determine the strength of buyer power include price sensitivity and bargaining power -greatly determined by i.e. product differentiation and competition, switching cost and information etc. The less differentiated products in an industry, the more willing the buyers are to switch suppliers on the basis of price and the more likely to lower prices and profits in supplying industry. Supplier power Factors determine power of suppliers relative to producers; same as those determining factors of producer power relative to buyer power. Firms in the industry are buyers and the producers of input are suppliers. Key factors are how easy buyers can switch between suppliers and the relative bargaining power of each party. A firm can use this tool to analyze industry structure and understand the driving forces of competition to frame and capture core competitive competence accordingly to survive and defeat competition and operate profitable business.

3.2 Customer value model

Figure 3 Customer value map is a variant version of customer value map created by Bradley Gale. This customer map will be used as a tool for two purposes: segment and position product and service offerings and manage competitive positions relative to competitors. In customer value map, price and performance represent perceived price and perceived performance. Customer value is the difference between perceived performance and perceived price. This difference determines customer’s willingness to buy; the more perceived surplus (in blue area) of perceived performance to perceived price (sacrifice) the more are customers willing to pay. One of the keys to understand how to use this tool from customer psychological perspective relating pricing is customers use price as an indicator of quality (price-quality framing effect) but then customers also indicate that high price of organic food if prohibitive in their purchasing [Hughner et al., 2007]. This paradox may be understood into two-fold. First, high quality has to cost more and high quality should target right customers who afford. Secondly, high-quality must be right that targeted people really want and value, and are willing to pay.

Figure 3 Customer value map

This customer value map can also be used to analyze and track the respective positioning of competitors and understand the attributes that underpin the customer value and competitive sources. A source of



competitive advantage can take the form of differentiation. This tool can also be used to guide customer value creation with meaningful differentiation advantages in terms of product quality and service quality and brand reputation to acquire and attain customers [Best, 2013, Page 216]. With this customer value map, a company can construct price-quality marketing strategy to differentiate miles ahead of competitors.

3.3 Product portfolio strategy

Figure 4 Product portfolio is a variant version based on GE/McKinsey Portfolio Model. It will be used to analyze product lines portfolio positions in term of their respective market attractiveness and competitive position. For example, the products with high values for both market attractiveness and competitive position have the strongest portfolio position and biggest potential for best profit performance [Best, 2013].

Figure 4 Product portfolio

In this project, two portfolio strategies, offensive and defensive, are considered. An offensive portfolio strategy is more growth oriented and will be used to grow products that present at least medium market attractiveness. A defensive portfolio strategy is used to protect products that present at least neutral competitiveness position in attractive markets.

Offensive strategies:

Entry: It is for new products introduced into an attractive market or underdeveloped market Grow: It is for products that are priced at premiums and have best potential of profit performance. A

firm should grow these products in terms of market share and revenue. Improve: It is for products that need to strengthen competitive positions.

Defensive strategies:

Protect: This is for premium products that have no or very few competitive products or substitutes. Optimize: It is the cash cow product line that needs to be focused for mass markets.

From pricing perspective, portfolio strategy also takes into account the factor of consumer’s willingness to pay for product categories. According to a research on consumer’s willingness to pay (WTP) for organic food [Krystallis et al., 2005], consumers’ stated willingness and the type of products and



magnitude of factors such as food safety and brand names etc that differ across organic food category. WTP is higher for the most frequently purchased conventional food product categories. The most frequently purchased organic products category (in descending order) are fruits, vegetables, poultry and eggs and aqua-food (these are the basic food components of Chinese daily diet). Organic fruits and vegetables also receive higher premiums than meat products. This is also Doujea marketing knowledge from its own products.

4 Literature review on pricing concepts, approach and tactics

This section will briefly review relevant pricing concepts and a pricing approach “value-based pricing framework” and four pricing tactics that will be applied and recommended for this project work.

4.1 Pricing basics

Business objectives are business goals that a business sets to achieve through its business strategies. Business objectives can be overall financial goals, market shares and sales. A pricing strategy should take into account long-term business objectives and align with business strategies. A pricing strategy must support the products intended positions and brand intended image in market. When implementing pricing, a business needs to factor long-term views at strategic level and adapt to short-term dynamics at tactical level.

In this project, a value-based pricing approach will be used to base pricing strategy for segment pricing. Four tactical pricing such as skimming pricing will be used to set optimal prices according to product line portfolio strategies and adapt to short-term economy and market dynamics.

4.2 Value-based pricing approach

The philosophy of value-based pricing is a belief that if you win a customer on price you will lose that customer on price; if you win a customer on value you will keep that customer on value [Best, 2013, Page 291].

Figure 5 Value-based pricing framework was created by Andreas Hinterhuber. In this framework there are three critical elements, economic value analysis from customer perspective, cost volume profit (CVP) from the company perspective and competitive analysis from the competition perspective, are used to determine and implement profitable pricing decisions [Hinterhuber, 2003].

Figure 5 Value-based pricing framework



Economic value analysis relies on the notion of reference value, that is, the price of customer’s best alternative. Economic value is the reference value plus or minus differentiation value (depending on the nature of differentiation value: positive or negative) from the alternatives. Economic value analysis helps to understand sources of customer value and gain the insight from customer consuming habits and requirements, and psychological and emotional needs etc.

In the context of organic food market, there are many ways such as better quality, easy access and convenient to consume, and enhanced services in terms of delivery speed, reliability and flexibility etc to create differentiation value for customers. Customers are less price sensitive the more they value any unique attributes that differentiate from alternatives [Hinterhuber, 2003].

CVP analysis should be used to capture the company-internal perspective such as the implication of price and volume changes on profitability. Competitive analysis can help to gain insight on trend of competition, such as competitive pricing, product offerings and strategies.

In value-based pricing, pricing a product or service is based on the value that the product or service has for the customer. In model of perception of price, quality and value, it suggests that perceived value is derived from perceived quality and perceived monetary sacrifice. How the value is perceived by customers also depends on the alternatives open to the consumers [Zeithaml, 1988]. Therefore, management of customer’s perception of quality and price is of significance to influence customer’s purchase decision.

Extrinsic cues and intrinsic cues have impact on perceived quality. Extrinsic cues involve the physical composition of the product. Extrinsic cues are product-related but outside the product, such as price, brand name and level of ads and packaging etc. Intrinsic cues would include attributes that cannot be changed without altering the nature of the product itself and consumed as the product is consumed.

In context of food products, intrinsic cues can be nutrition, freshness, appearance, color and flavors etc. As customers are familiar with a product, customers are more likely to use intrinsic cues rather than price or other extrinsic cues as indicators of product quality [Monroe, 2003]. This finding highlights the importance in maintaining the intrinsic quality factors of a product to retain customers, in addition to paying effort in building extrinsic quality factors. In context of organic food products, there are also other factors i.e. environmental and health consciousness, safety and quality concerns and exploratory food purchasing behaviors etc that have an impact on consumer’s purchase decision [Krystallis et al., 2005].

Due to the lack of data support, CVP analysis won’t be done in this project. In addition, there will be

modifications to adapt this value-based pricing framework to this project work.

Roles of cost, willingness to pay and markup

When translating economic value to numerical price number, pricing should go beyond economic value

to other factors driving purchasing decision [Hinterhuber, 2003]. A business needs to estimate price

range that targeted customers afford and are willing to pay (price ceiling). In addition, a business needs

to take a special care of cost, company objectives as well as competition.

First of all, cost should act as price floor. Secondly, size of markup percentage on cost as profit margin can

be determined and adjusted according to product values that customers recognize and are willing to pay

for. Thirdly, final pricing should also factor company objectives and competition into a price setting.



Depending on the strength of competiveness of a product, it may add on the top company’s objective for

strong products or reduce company objective for weak products, in light of the estimated price range

that customers are willing to pay.

In short, in value-based pricing approach, to maximize profitability, it needs to trade off among customer

value, competitive position, objectives and cost. The advantages of this extended pricing approach are

achieving optimal prices with guaranteed and predictable profit margins, and flexibility in price change

and simplicity in setting price.

Role of differentiation

In value-based pricing, differentiation based on customer-oriented value creation is the key to stand out from competition. Customer value creation can take in many forms, for example, maintain the same price but with an enhanced quality or added amount, or bundle with attractive products at a discount or creative branding etc. All these value-creation strategies and tactics can be an edge differentiation strategy to create value for customers, capitalize on customer’s loyalty as well as effectively avoid vicious price cuts in competition.

4.3 Tactical pricing

This section will review four pricing tactics that will be mostly used to adapt short-term marketing objectives and dynamics in price settings.

Skimming pricing

Often when a business has considerable differentiation advantage in a quality-sensitive market with few or no competitors, skimming pricing is feasible and viable [Best, 2013]. The product quality and brand image must support the high price at which consumers must want to buy. In addition, costs of producing the product in small volume should not cancel the advantage of higher price [Kotler et al, 2009].

Skimming price is usually used for new products that are sold at high prices (super-premium or premium) to build a high profile of the products in niche market as well as to target "early adopters" who generally have a relatively lower price-sensitivity [Nagle et al, 2006], a greater understanding of value, or simply a high disposable income etc.

Skimming pricing can be highly profitably so long as it delivers superior value to customers. To gain further market share or respond to emerging substitutes or alternatives, a company must gradually lower the price to attract more customers or move to economy product category [Best, 2013].

Premium pricing and brand image

Quality has been found to be positively and significantly related to profitability for almost all kinds of products and market situations. On the other hand, customers not only use price as a measure of cost (sacrifice) but also use price as an indicator of product quality [Monroe, 2003].

Premium pricing for high-quality products can be used by a business for quality conscious customers in a market who are willing to pay price premiums for high quality [Monroe, 2003]. Premium pricing is also commonly referred as prestige pricing, a pricing practice for building an image of upscale brands.

To build and maintain a brand image, a business needs to credibly signal quality-producing attributes with consistent marketing mix and consistent delivery of quality experience with the product and service [Monroe, 2003]. For example, the price must be consistent with the relative quality level of the product



and service. Factors that a business can transform into premium consideration include distribution location such as an up-scale shop, product exclusivity that products are generally not available anywhere else, unique product or custom service etc.

Bundling pricing

Product bundling is used to offer at least two products for sale as one package deal, usually at a discounted price; otherwise consumers would need to pay more if buying bundled products separately [Monroe, 2003]. Bundle pricing should be used wherever it adds value for customers and offers the potential to stimulate sales [Hinterhuber, 2003].

Bundling pricing has a psychological ground relating the Framing Effect – consumers are more price sensitive when the price is paid separately rather than as part of a bundle [Nagle et al, 2006].

There are two types of products bundling, mixed bundling and leader bundling. With mixed bundling, consumers are offered a purchase choice between buying the entire bundle and buy each of products in bundle [Kotler et al, 2009]. In leader bundling, a leader product is offered for discount if purchased with a non-leader product and the lead product should be customer’s preferred product in the bundle [Monroe, 2003].

Promotional pricing & deals

There are many forms of promotional pricing and deals, such as trial offers, discounts and coupons etc, that can be used for different marketing objectives, e.g. to acquire new customers, to get rid of over-capacity, to launch new products or for seasonal or special events etc. Basically, there are several tactics to market promotional offerings:

Trial and free offers: acquire new customers or reward existing customers Discounts: increase sales or to respond competition Special offers (i.e. with bundled products at discount): increase sales Coupons: used as cash or exchange for certain products to increase sales Membership bonus points: stimulate sales and reward loyalty

Promotional pricing and deals with thoughtful policies are effective, for example, when it induces new product trial, without undermining the viability of regular prices [Nagle et al, 2006]. There are many adverse effects of promotional pricing and deals. For example, if a product is offered discount frequently, customers may become deal prone and buy only on deal, and the product may be never or may be rarely sold at a regular price. In addition, sales and brand equity is at risk of reduction as well [Monroe, 2003].

4.4 Psychological factors in pricing

In theory, there are many psychological factors to play into pricing such as framing effects and reference price etc. In this project the most significant psychological factors (in descending order) are price-quality effect, reference price effect, importance of end-benefit and price framing effect [Nagle et al, 2006] in pricing organic food products in China.

o Price-quality effect – buyers are less sensitive to price the more that higher price signals higher quality [Nagle et al, 2006]. This effect is particularly relevant for image products, exclusive products, and products with minimal cues for quality etc. This price-quality cognitive bias is often exploited in premium pricing tactics that consumer’s perception of value and quality must be management.

http://en.wikipedia.org/wiki/Product_(business)



o Reference price effect – buyer’s price sensitivity for a given product increases the higher is the product’s price relative to perceived alternatives [Nagle et al, 2006]. Reference price is the internal price that consumers use to compare the offered prices of a product or service. Consumers don’t respond price absolutely but relatively to reference price [Hinterhuber, 2003]. When consumers encounter frequently low prices for frequently promoted products, the internal reference price also becomes lower for products that are not frequently promoted [Somervuori, 2012]. A common psychological cognitive bias relating reference price is called anchoring pricing. Anchoring refers to the human tendency to rely too heavily on the first piece of information offered when making decisions. Consumers may use reference price as anchor which may influence purchase decision [Somervuori, 2012]. From pricing perspective, the initial price offered can act as an anchor to set the standard price in a consumer’s mind, so that prices lower than the initial price are perceived more reasonable even if they are still higher than what the price is really. o Importance of end-benefit effect – buyers are less price sensitive when the product is a part of cost of a benefit with psychological importance [Nagle et al, 2006]. This effect relates to psychological factors such as concerns of food health value for health conscious customers. Emotion such as worry or fear of food safety (as end-benefit) can also motivate customer to buy pricey products that are regarded as safe. In general, Chinese parents are very willing to buy their children the best that are affordable for them. o Price framing effect – buyers are less price sensitive when they perceive the price as a gain rather than a loss. Customers have greater price sensitivity when the price is paid separately rather than as part of a bundle [Nagle et al, 2006].

There are also other psychological factors that can impact on consumers purchasing decision and behavior, for example, a choice of lifestyle, or a reflection of opinions or attitudes i.e. environmental awareness.

In addition, there are numerical pricing points that consumers psychologically perceive less and affect consumer purchasing decision. For example, consumers commonly perceive $99 psychologically ‘less’ than $100, so $99 is called psychological pricing when the company prices its product at $99.

Psychological factors can be designed and deployed into pricing strategies and tactics. For example, price-quality effect takes a central role in pricing strategy based on value-based pricing approach and psychological pricing points can be used with pricing tactics in price settings.

The significance of deploying psychological pricing in business is a minor distinction in pricing with psychological considerations can make a big difference for a business, according to many research studies [Somervuori, 2012]. A business that succeeds in leveraging pricing with psychological designs has a big potential to take the business to next level.

http://en.wikipedia.org/wiki/Anchoring



5 Outline of framework and analyses

In this project Figure 6 A framework for pricing strategy at Doujea based on value-based pricing approach is constructed. In this framework, formulating a pricing strategy takes into consideration business factors, competitors and company objectives and strategies. Based on the framework, subsequent subsections will analyze business factors with Porter’s five forces and analyze competitors with customer value map, and identify and describe company objectives and strategies. Pricing tactics are designed to optimize the implementation of pricing strategy, adapting to various short-term market dynamics and business objectives. At both strategic and tactical levels, psychological considerations are designed to influence customer’s purchasing decision-making and behaviors. Price change management is also discussed at strategic and tactical level.

5.1 Outlines of framework

Basically pricing strategy must be aligned with business objectives such as profitability and growth etc and reflect company long-term business strategies. Pricing strategy should also take into account business factors at the industry level and competitor factors at company level. Tactical pricing will be used to optimize prices and must comply with the pricing strategy.

Figure 6 Framework for pricing strategy at Doujea

In business analysis, it will discuss food market in general and organic food market in particular and identify Beijing organic market potential in terms of Kg sales and customer numbers etc. In addition, Porter’s five forces framework will be used to analyze Beijing organic food industry structure and competitiveness. Topics cover nature of market including factors of market demand and supply, cost condition and profitability etc.

In competitor analysis, customer value map will be used to analyze the competitive positions that Doujea is relative to its competitors with identified key competitive factors that Doujea must consider in order to create value for targeted customers and differentiate from rivals. This section will also provide comparison of product and service offerings between competitors.



Objectives and strategies will identify and describe Doujea’s long-term business objectives that Doujea has set to achieve through its strategies. This section will also cover analysis of customer, marketing strategy, cost structure and positioning strategies for product segment and portfolio.

5.2 Business analysis

Food market in China in general

With the development and growth of economy and improvement of living standard, Chinese diet habits and food consumption structure have experienced great changes. In Figure 8 Change of Chinese food consumption structure, food consumption structure (ratio of grains to meats and to vegetables and fruits) has evolved from 8:1:1 (grains 80%, meats 10% and vegetables and fruits 10%) 30 years ago to 5:2:3 currently, according to 2010 Chinese market research. With the income growth in low-earning segment of consumers, the structure will move to 4:3:3. The consumption of fruits in big cities such as Beijing and Shanghai has grown rapidly, about even 50% of total food consumption for some young families.

Figure 7 Change of Chinese food consumption structure

This consumption structure change has driven the structure change of Chinese agriculture production. For example, total production of vegetables, fruits, meats and aqua-food in 2010 has grown to two thirds of total agriculture from one sixth of total agriculture output 30 years ago. In Figure 9 Agriculture output 2012 (excluding grains), production in tons was vegetables 43231 tons and fruits 10309 tons, pork 5422 tons, beef and sheep meat 2680, poultry 1952 tons, eggs 2680, milk 4577 tons and aquatic food 6156 tons. Among red meat, pork weighed 65%. Poultry is cheaper than pork but was the least consumed, and sheep and beef meat were at least 30%-50% more expensive and less consumed than pork meat. Aqua-food was about 50% of total of red meat and poultry and eggs. In light of the change of food consumption structure, by estimate meat production will increase 40%, fish and other aqua-food 90%, fruits 107%, milk 159% and eggs 55% in 10 to 20 years. As for vegetables, variety and quality instead of quantity will grow.

0

20

40

60

80

100

30 Years ago Current Future (in 10-20 yrs)

Grains

Meats

Vegetables and fruits



Figure 8 Agriculture output 2012 (excluding grains)

Organic food market in particular in China

The organic agriculture is 0.1% in China while average 2% worldwide. Organic food is about 0.8% of total food products while 10% in developed economies such as the US. There is very huge potential of organic agriculture and organic food market in China. According to research, annual organic consumption in China will increase by 30-50% over the next decade, positioning China as one of the world largest organic food markets by 2020 [Peng, 2010].

There are a number of factors facilitating to build and grow organic food markets in China, including: increasing income, a growing interest in higher quality and safer food as well as the surge in the number of higher-income earners, benefiting from a significant rise in wages significantly, that fuel the growth of demand for organic food products, brands and concepts.

Over thirty years of rapid growth and development in economy China has been evolving into organic markets with greater demand for quality products and convenience. This regards not only the physical quality of products such as freshness, safety and health functionality but also issues such as reliable certification. Trends regarding convenience include easy access to the products i.e. ability to purchase in supermarkets, products that are easy to prepare and consume. Trustworthy is becoming one of key factors that committed organic consumers pay greater attention to product brands and suppliers.

Chinese organic agriculture started in 1990s but has grown rapidly in recent years. Currently, most organic products are food crops such as tea, beans and grains that are the most exported products. Animal food products are considerably short of supply. The most market demand is in vegetables and fruits which constitute major expenses in Chinese daily food purchase. In young families, it says that expense of fruits even weighs 50% of family total food expenditure.

By the end of 2010, there are about 30 certification entities that are officially authorized to certify organic producers. There are 4000 certified organic food producers and 3 Million hectares of farm land. Organic agriculture grows at double-digits (15-20%) and potential is huge. Because organic food are multiple times (300-800%) more expensive than conventional food, biggest organic food market is in tier-one cities such as Beijing, Shanghai and Guangzhou.

Estimate of organic food market size in Beijing

Among tier-one cities, Beijing as Chinese capital city is the leading consumer market in China in term of its size and strength because of its exceptional position in politics, economy and culture. It is the home of Chinese central government with a huge number of high ranking officials and high-earning public servants. About 170 big state owned enterprises including tycoon Banks and Oil firms and hundreds of



foreign multinational firms are headquartered in Beijing. According to official data, there are about 20 Million inhabitants and 7.7 Million families regularly living in Beijing, about 2.5 persons in a family on average.

In 2010, the consumer market in Beijing scaled at 690 Billion RMB (86B Euro) and 63 Billion RMB (7.9 B Euro) was spent on food. It was said that 25 RMB out of 100 RMB consumption expense was spend on food. Food percent of the Engel's coefficient has lowered to 25% from 31.6% in 2006, indicating Beijing has evolved into an affluent consumer market.

According to market data in 2011, in Beijing annual average consumption of meat was 60 Kg (70Kg for 20% high-earners), aqua-food 20 Kg, egg 15 Kg, vegetables 200 Kg and fruits 100 Kg. Total food market size in term of Kg by estimate (20 Million inhabitants times annual average consumption) was 1.22 Billion Kg meat, 400 Million Kg Aqua-food, 300 Million Kg eggs, 4 Billion Kg vegetables and 2 Billion Kg fruits.

In this project, two methods, market share and consumer number, are used to estimate organic food market size and potential in Beijing. Below Table 1 Organic food market size and potential (Million Kg) in Beijing summarizes all those numbers.

By estimate (1% organic food market share in Kg), organic food market is 12.2 Million Kg meat, 4 Million Kg meat, 3 Million Kg eggs, 40 million Kg vegetables and 20 Million Kg.

By estimate, there are 1 Million (top 5 earners) of 20 Million inhabitants (total population in Beijing) who earn annually above 50,000 RMB (Euro 62,500) and are potential organic food consumers. If 10% of top earners (1 Million) actually buy and each family has 2.5 persons with only one top 5 earner, there will be 250,000 organic consumers. According to annual average consumption, organic food market is 17.5 Million Kg meat, 5 Million Aqua-food, 3.75 Kg eggs, and 50 Million Kg vegetables and 25 Million Kg fruits.

Meat Aqua-food Egg Vegetable Fruit

Average consumption per person (Kg) 60 (70) 15 20 100 200

Total food market size (Million Kg) 1220 400 300 4000 2000

Organic market size by market share (Million Kg) 12.2 4 3 40 20

Organic market size by consumer number (Million Kg) 17.5 5 3.75 50 25

Potential market size by consumer number (Million Kg) 64.8 18.5 13.9 180 92.5

Table 1 Organic food market size and potential (Million Kg) in Beijing

Market projection for five years assuming annual growth rate in term of consumer number is 30%, there will be 925, 000 organic consumers (4.6% total population) and demand will stand at 64.8 Million Kg meats, 18,5 Million Kg aqua-food, 13,9 Million Kg eggs, 185 Million Kg vegetables and 92,5 Million Kg fruits.



Competitive rivalry of organic food market

Generally speaking, Chinese consumer market and organic food market in particular are very competitive. The organic food market is close perfect competition. It is buyer’s market where consumers have a relatively high bargaining power over suppliers. Chinese are especially price-sensitive to commodity goods including food etc necessity products. However, there are exceptional market segments like luxurious goods where suppliers may have a relatively dominating power over consumers.

Figure 9 Competition analysis of organic food industry in Beijing

Industry rivalry

Figure 9 Competition analysis of organic food industry in Beijing is based on Porter’s model. Basically, agricultural economies are considered the closest perfect competition in real life, where agriculture commodities are considered to present less differential offerings. Within organic agriculture in certain food categories such as grains, tea, poultry and eggs, products present homogeneity to some extent that may have structural excess capacity. However, there are diversified economies, and it seems that organic producers and suppliers attempt to differentiate their product and service offerings with different business strategies.

There are several big town-owned organic farms in Beijing such as Crab Island and Yuanding Yuan Organic Eco-Agricultural Park that are recreational economy providing various diverse services such as lodgings, catering, conference, commerce, entertainment, and tourism that customers can pick vegetables and fruits and dine organic food. The actual organic farming business is very small. Lohao City (stands for Lifestyle of health and organic) is the earliest and largest organic firm in Beijing. It is also a diversified recreational economy, in addition to owning farmlands and physical organic food chain stores in major cities i.e. Beijing and Shanghai, it also provides health education courses, accommodation, catering, and livestock feeding activities, and sells products online for membership customers. There are also several town-owned big organic farms such as Liu Min Ying Ecological Farm and Kang Shunda Agriculture Science and Technology of which major business is farming organic food crops and supplying to major supermarkets such as Carrefour, Wal-Mart and Hua Lian etc., with additional minor service business in farm tour, catering service, and online B2C E-commerce.

There are a couple of major features in organic industry, in terms of online B2C, cost condition and industry profitability, business focus.



Distribution channels

In Beijing, organic food distribution presents diverse channels. There are tens of high-end stores (Beijing Yansha, Beijing Parkson and Sogo Chongguang etc) and supermarkets such as Carrefour and Wal-mart etc providing organic food. In the specialty stores, 70% or higher percent of products are organic. Some of high-end or specialty stores have online shops as well but they don’t sell or sell very limited variety of fresh food such as fruits, veggies and meats. Carrefour has online B2C shop but only in Shanghai, and it doesn’t provide fresh food. Wal-Mart China has an online shop with distribution centers in several cities including Beijing and Shanghai for high-end customers but it has very limited variety of fresh food products at medium price.

There are about ten online firms that sell various organic products, some of which are also organic producers such as Tootoo and Doujea that operate own farmlands and grow food crops. One of the biggest and earliest organic farms Tony’s Farm from Shanghai recently has started business in Beijing.

By estimate, 75% organic food is sold in food retailers including high-end supermarkets, 10% in specialty stores and restaurants, and 15% on online B2C shops and farmer markets.

Online B2C E-commerce economy

In China, 200 Million people have bought products online. By estimate, Chinese will spend 1000 US$ per year on online shopping by 2015. The popularity of E-commerce business in China has promoted and accelerated economy development of many small and medium businesses and makes it possible for many small businesses to start business and gain economy scale without large capital support. Many considerably small organic producers like Doujea have taken the advantage and benefited from online E-commerce trend.

Recreational trend

The consumer market of organic food has created a recreational economy with a theme of organic life experience and lifestyles. There are several organic farm showcases which not only produce organic food but also provide various versatile value-added services with physical complex facilities to enhance customer experiences such as eco-farm tourism, organic catering and lodging services etc. This trend and strategy have enabled organic business to scale economy growth of organic food industry. Several farms such as Tootoo, Tony’s farm and Kang Shunda also have farmland rent service that customers pay rent for certain size of land and decide what to grow, and company takes care of growing, harvesting and delivering food crops. In china, DIY (do it yourself) has become popular culture and family farming is such a DIY that some Chinese in Beijing rent farmland and do farming work on their own just for fun as well as to cope with the crisis of food scandals.

Doujea has its own unique recreation for its customers that competitors cannot offer. For example, it has established online fan community at Weibo where customers, potential customers and fans have a lot of fun each day about various funny and interesting topics and humors, many directly related to Doujea’s products, farming activities, and cooking tips, skills and equipments etc. Doujea regularly organizes lottery games for its fans who participate in forwarding its promotional activities and winners will receive free gifts. This creative entertainment element helps Doujea build close relationships with its customers and potential customers. Doujea’s COO whose background was an artist and also a veteran entrepreneur is a very special woman. She is very creative and intuitive in business ideas and also very humorous and fashionable in language expressions and has made a heavy effort in establishing and maintaining this marketing advantage that competitors are not able to copy. Another recreation is



the customer involvement in various activities such as testing new food products for free and getting certain products i.e. super-premium strawberry certified by authorized national organic food test lab.

High cost and vertical integration

To gain scale of economy and improve efficiency, many organic producers have implemented tight business vertical integration from producing to harvesting and packaging, and from selling to delivering. They also outsource food production by contract with farms and procure high-quality non-organic products or import high-end food products. This vertical integration trend in organic food market has so far not seen effective and helpful to improve profitability in general. It is said that many organic producers have been losing money, though prices and gross margins are high within the industry. Tony’s Farm founded in Shanghai in 2005 recently claimed it started making profits but at a very sensitive time that a venture capital fund just invested US$20 Million into the firm.

The culprit for poor profitability is mainly attributed to various high costs, such as labor, logistic cost, and marketing cost etc.

Organic farming is labor and knowledge intensive industry. It requires a lot more manual labor work with more hiring than conventional farming and a large knowledge input from food crop specialists who commonly earn a high pay. In recent years, salary has grown steadily in general. So labor wage attributes at large to the high production cost. Organic pesticides and fertilizers etc are also more expensive. Fixed cost such as farmland rent and green houses etc are also high.

Intra-city home-delivery has become a de facto standard for online business in China and there are many intra-city express service companies. But with organic food, to preserve the freshness and keep food from damage during transportation, it has much higher requirements for logistics and delivery. Commonly, organic producers who have their own online B2C sales have established their own cold-chain logistics. The cold-chain logistics ensures the freshness of food in hot seasons and prevents food from freezing in cold seasons. It is said that cold-chain logistics constitutes at least 10-15% of total cost.

Currently, one of the big obstacles for Chinese consumers to accept organic food is the trust in organic food and it requires considerable marketing efforts to market and promote organic food and build a customer base. Marketing cost is high compared to revenues that organic producers receive.

Gift business

Another common feature across organic food market is it is at considerably large a gift business, gift cards or packages for both individual customers and enterprise customers. For example, customers buy for their elderly parents. Enterprise customers buy gift cards or packages for their employees on festival occasion.

Relatively diverse business strategy

Suppliers in organic food market are considerably diverse in term of business strategy and product and service offerings. For example, some firms such as Crab Island focus on recreational business areas. Some firms such as Lohao City focus on retailing with both physical facilities and online E-commerce to offer integrated experience with shopping, catering, education and entertainment etc. Some firms such as Beijing Qing Pu Yuan Vegetable Co., Ltd focus on producing food and supplying to big retailers, as well as renting out farmland. Some firms such as Doujea, Tootoo and Tony’s Farm etc are vertically integrated online B2C producers.



Comany Product category and variety Product and service offerings Business Strategy Promotion Size Competitive

position

Tootoo, www.tootoo.cn

9 food categories with 10 thousand variety of food products and non-food consumer products

Various subscription packages and other packages, larger coverage of delivery in Beijing and 32 city countrywide, lower purchase value for free delivery

A very wide line of food products at different price ranges, various veggie and veggie bundling subscriptions, special offerings for enterprise and VIP customers

Regularly various discounts and coupons, and rebate, forum and TV etc Big

Very close competitior

Tony's Farm, www.tonysfarm.com

A limited variety of food products, veggies as major, poultry & eggs and grains

Various veggie subscription and other veggie bundling packages

High-end individual consumers and enterprise customers, bulk orders

Various promotion activities with luxurious brands and enterprises, and on TV etc Big

Potential close competitor

Beijing Kang Shunda Farm, www.ksdesd.com

Veggies, poultry & eggs, grains, fish, oil, nuts, honey and wine

Annual veggie bundling subscription and various packages and cards

Diverse variety of food products, supply to Tootoo, supermarkets and franchise stores etc as major business Purchase bonus Big

Weak competitor

Beijing Beyong Technology, www.ofood.cn

A wide variety of consumer products across various food , health and nutrition supplement, office, skin care and home appliances etc Single product offering

Diverse consumer product categories, retail and wholesale

Regularly price cuts on some products with different discounts Med

Not direct competitior

Beijing Organic Farm, www.organicfarm.com.cn

Specialty oil, veggies and fruits, poultry and eggs, and red meat, bread and clothes

Single product offering and gift package offering for online sales

Several variety of food products, supply to supermarkets and franchise stores as major business

Membership and promotional prices without clear benefits Med


Organic and Beyond, www.oabc.cc

Diverse variety of food category such as veggies &fruits, meats and aquatic food, , olive oil and wine, various dried food such as wild mushroom, grains, nuts, tea

Various pre-paid cards and product packages, high purchase value for free delivery

Gift products for people living a western lifestyle and enterprise customers

Regular discount for membership Med


Table 2 Online B2C organic food farms

http://www.tootoo.cn/


http://www.tonysfarm.com/


http://www.ksdesd.com/


http://www.ofood.cn/


http://www.organicfarm.com.cn/

http://www.oabc.cc/

http://www.oabc.cc/


By Shuqin Li-Kokko Page 22

Table 2 Online B2C organic food farms has listed some of online B2C organic food firms in Beijing market. The focus of business strategy i.e. offerings of product and service etc present diversification to some extent. A couple of online organic firms such as Tootoo and Tony’s Farm are considered Doujea’s direct competitors. A considerable number of firms i.e. even the big player Tootoo, tend to directly cut prices on certain products with steep discounts to promote its product offerings. The price-cuts have created price pressure to some degree within organic market in Beijing. Threat of entry

In China, organic food products are priced about 300-800% as conventional food products. The high margins are not a secret and have attracted many new players from other industries like Doujea and Tootoo in recent years. However, after over ten years of market and business development and especially fast growth and expansion in recent years, Chinese organic market has established to a degree, in terms of production, supply, distribution, customer base and brand. Nowadays, the barriers of entry for new players are considerably higher than before. It requires a larger capital infusion to start the business as well as considerably a large marketing budget to build brand image to win customers. To compete with established players and gain customers, new players must have a scale of economy to cover high cost for production, marketing and distribution etc. On the other hand, established players such as Tootoo are very aggressive to cut prices with an attempt to gain customers and drive competitors out of business.

Threat of substitutes Vegetables, fruits, and grains etc are the most consumed food products in Chinese daily diet. There are tremendous supplies with plenty of varieties as alternatives both from conventional food market and organic food market. Switching to substitutes has no cost incurring for consumers. Chinese consumers are in general price sensitive, especially with commodity food products. At present, some categories of organic food products are very competitive such as rice, vegetables, meat and green tea, which has low market potential, unless they have unique quality such as special health benefits or of specialty varieties. Chinese consumers value exotic or unusual foods and are attracted to special nutritional value and health functionality. Specialty rice and grains may find niche markets in China. Markets for organic fruits are more promising, especially tropical fruits (i.e. avocado, lemon and kiwi), which there is little production in China. Temperate fruits (i.e. berry fruits and cherry) with special qualities may be able to penetrate the market. Organic food products that continue to have good prospects include dairy products, food for babies and children, and processed gourmet foods according to ITC report [Emilio Portocarrero, 2011]. In organic food market, consumers are generally high-earners who are relatively less price sensitive and present brand loyalty to some degree. The consistent quality of both products and services is one of key factors to retain customers. Specialty food with apparent advantage of taste or flavor, nutrition value and health functionality is another key factor to deal with threat of substitutes. Developing a line of core specialty products that no other firms can provide is a viable competitive strategy especially for small firms like Doujea. Organic firms without specialty offerings or without scale of economy in general have a hard time to fight competition from substitutes.

Buyer power



Because organic food products are in general very expensive and only a small percentage of Chinese can afford and are willing to buy regularly. This customer group is concentrated in the high-earner (i.e. annual income 50,000 RMB in Beijing) Chinese group. By estimate there are one million high-earners or 5% of 20 Million inhabitants in Beijing. For these 5% customers, there are massive alternatives from different access channels such as many supermarkets and specialty food stores in Beijing, and online stores virtually from anywhere within the country (for non-fragile fresh products that can be transported long distance). There is no switching cost for customers in the sense that it does not count the cost of unsatisfied purchases experience. In theory and reality, organic food market is a buyer’s market that the access to alternatives is considerably large and tendency to switch to alternatives is also considerably high. Buyers have almost absolute power over suppliers because the competition within organic market is high. Supplier power Chinese farmers in organic agriculture in general are one of the beneficiaries from organic food economy. They have a chance to gain from farming more profitable food crops and meat products etc. However, Chinese farmer in general don’t have much bargaining power or their bargaining power is at the mercy of buyers who then sell and distribute their products to end consumers. In this sense, organic farmers are price takers and buyers are price setters.

To draw a conclusion for this section, organic food market in Beijing is challenging, especially for a small firm like Doujea to survive competition from various competitors and grow bigger in such intense competition. Consistent quality and price, a wide variety of high-quality product selections, impressive packaging and design, efficient and reliable logistics and comprehensive customer services are considered key differentiation factors for Doujea to achieve a sustainable successful business.

5.3 Competitor analysis

Figure 10 Comparison between direct competitors

Figure 10 Comparison between direct competitors is based on customer value among four online B2C organic

food firms Doujea, Tootoo, Tony’s Farm and Kang Shunda that are considered as direct competitors. The

criteria to classify a competitor is whether a firm has veggies related subscription packages, gift cards

packages as those are most lucrative business areas that Doujea business focuses in as in general Chinese



consume and buy veggies most in terms of quantity and frequency among food categories (See Exhibit 10

Comparison of product and service offerings between direct competitors).

From the comparison, Tootoo is the closest competitor and Tony’s Farm has potential to become a close

competitor and Kung Shunda is the weakest competitor at current time. Tony’s Farm has highest price index

and Doujea has the best quality index. Among these four firms, all rest three firms, Tony’s Farm, Tootoo and

Kang Shunda have a much stronger financial position than Doujea (Please see Exhibit 8 for more detail on

comparison of online organic firms).

Background of competitors

Tony’s Farm

Tony’s Farm was founded with 60 Million RMB in 2005 in Shanghai by one successful veteran

entrepreneur who owned a chain of 30 restaurants before he started organic farming business. The

founder has also EMBA background from a TOP university in China. It is said that his EMBA background

has helped him a lot develop enterprise customer segment in doing his organic farming business. The

founder was born in countryside and also holds a degree in agriculture education. Nowadays, Tony’s

Farm is backed by one venture capital firm with US$20 Million capital infusion. The firm has planned an

IPO in 3-5 years.

Tony’s Farm has the most modern and efficient organic food production facilities and organic food

farming expertise and experience. The top management of Tony’s Farm all hold an MBA either from

Chinese TOP universities or famous western business schools i.e. Oxford. The costs including production

and marketing cost etc can be very high.

In Shanghai Tony’s Farm has established 6000 regular customers and 20 enterprise customers after 8

years business development. In Beijing organic food market is relatively established that organic food

firms each have their relatively a stable customer base. Tony’s Farm may have a difficulty to attract or

win customers from competitors as Tony’s Farm price is the highest in Beijing, roughly 50%-60% more

expensive than Doujea with comparable products. Tony’s Farm has not any promotion offerings.

The company recently has many major changes in its product packaging and pricing, and business

strategies. From very recent marketing activities, for example, with Porsche and big enterprises, focus of

business strategies has evolved from individual consumers to top-end consumers and enterprise

customers. The company is currently recruiting English-speaking receptionist to respond customers. On

the website, it shows it lately starts bulk order business.

Tony’s Farm’s products are very concentrated in veggies and a limited variety of fruits that are 100%

certified organic from its own production. Its variety of veggies seems limited as well. It seems Tony’s

Farm tries to gain a cost advantage of production in scale of economy by limiting varieties. According to

many sources, Beijing consumers in supermarkets actually don’t care whether the food is certified

organic or not when they pick up products from counters in spite of their high prices. Doujea’s food

products are not certified organic and its customers seem very comfortable with it and accept it. From

online shopping feedback and comments, customers sound to appreciate taste and flavor and freshness

etc most and variety of veggies are an important factor. It is very common there are at least 4 veggies

dishes on dining table each day for a typical Chinese family dinner. So it might be difficult for regular



organic customers to switch to more expensive products with a limited selection of varieties if they

don’t value Tony’s Farm’s fame in organic food so much.

Tootoo

Tootoo was founded with 100 Million RMB in 2008 by an IT Corporate in Beijing that is listed on Nasdaq.

It is said that Tootoo has been making loss tens of Millions RMB in recent years. Besides founding

background, the biggest advantage Tootoo owns is its IT background that it has established the best and

most powerful and versatile online shopping facility. Tootoo also has the most 10 thousand of varieties

of food products available in stock across a very wide nine food and non-food categories. Their product

offerings are very diverse with also very wide range of prices, from low to medium to premium and

super-premium. The sources of products are from Tootoo’s own production, contract farms, as well as

procurement at large.

It seems that Tootoo attempts to play a sweep the deck game and provide customers one-stop shopping

experience. However, from customer feedback and comments from Tootoo’s online shop, it shows the

most sold individual food products are economic or medium priced with excellent appraisals on average

and its premium and super-premium products are rarely sold. In addition, Tootoo also tries to scale

economy with geographical expansion. Very recently, its business starts to cover 32 cities including

those most developed and affluent consumer markets in east-coast China with non-fresh and processed

food and non-food products (i.e. organic tower).

One of major problems with e.g. Tootoo’s product offerings is it has way too many product offerings

that are not complementary but compete with each other. It not only confuses customers with too

many choices but also inevitably causes high cannibalization of high-end offerings. For example, one

food product i.e. pork meat may have over ten offerings at different price points. How could a customer

distinguish and make the choice of a more expensive offering if the more expensive offerings don’t have

a clear quality clue to justify its high price and convince customer to buy. It is likely a prudent Chinese

customer buys a cheaper item just for the sake of safe purchase with hard-earned money. According to

consumer research in general Chinese consumers are prudent in making purchase decision after

comparing prices and performance carefully.

Tootoo regularly offers generous discounts, even at 50%, for many individual products at a low price and

sold with small quantity such as 350g for veggies. Its lowest purchase value threshold (99 RMB) for free

delivery with larger delivery coverage in Beijing clearly attracts low- and medium-end customers.

However, Tootoo seems not to give discounts to more valuable offering such as its veggie and veggie

bundled subscription packages. Its online shop doesn’t have feedback or comment function for this

segment business. It seems it tries to use low prices to attract or win new customers and it does work

but Tootoo seems not able to turn new customers from low and medium segment to high-end segment

or up-sell and cross-sell more lucrative business such as subscription packages and farmland rent

offerings. On Tootoo online shop, it boasts it owns 10,000 register users and everyday 1000 deliveries.

There is no clue about the regular customer base meaning the number of buyers who frequently buy

products including subscription packages.



Tootoo has a clear intention to attract high-end customers to its many high-end offerings in various

veggies related subscription packages, gift packages and cards. It recently also started farmland rent

packages priced on par with Tony’s Farm. It even has a customized package called “Minster Card” for VIP

customers but no clear clue on the concrete benefits. Tootoo’s sales team likely has a hard time to sell

high-end product offerings. The most threatening or competitive products to Doujea are its veggies

subscription business and some individual products. Its comparable veggies subscription package is

about 15-25% more expensive than Doujea. Some of its comparable individual products such as fruits or

veggies are priced on par with Doujea’s, or slightly above or under Doujea’s, depending on the variety.

Kan Shunda

Kang Shunda is a town-owned organic firm founded in 2009 in suburban Beijing, with 120 Million RMB

capital infusion. The firm is about half an hour through high way to Beijing city center. Because Kang

Shunda is backed by town, the biggest advantages of Kang Shunda are its own farmland that it does not

need to pay for rent, and local farmer labor as well as financial support from town government. It plans

to invest total 420 Million RMB over a couple of years.

Currently it supplies food products mainly veggies to supermarkets and Tootoo and maybe other firms

like Beijing Beyond Technology etc, likely with a lower profitability. It also has an intention to develop

more profitable business with individual customers, according to its product offerings such as

subscription packages and gift cards and packages from its online shop. The company also has an office

in city center. However from its outdated online shop, Kang Shunda doesn’t look like having an active

business with individual consumers at all. Many offerings are out of stock and there are very few and

old-dated customer comments or feedback.

The firm originates from suburban Beijing and is likely not skillful enough to compete with Doujea and

Tootoo to develop a business with high-earner city inhabitants. Kang Shunda is considered as a

competitor because of its intention of competitive product offerings to individual customers. In addition,

the firm may find a way to turn the situation of its individual customer business though it doesn’t look

promising at present. As of the writing of this project, the company has started the process to improve

its online shop and update its product offerings.

Compared to three competitors, Doujea does not own any endowment or advantages in financial

support and farmland size and cost and human capital etc. Because of the high operating cost and tight

money, cash flow management is a tough task and top management struggles with cash from time to

time. The business operations of the whole firm in two cities heavily rely on two core persons, CEO and

COO. The CEO has dual education background in computer science and MBA, and a long experience in

business analysis and development which benefits a lot in Doujea’s business development strategy,

especially in innovative and creative product offerings, and clear and focused strategy to acquire and

retain customers. Basically, Doujea doesn’t have advantages to compete on price, though it prices

products relatively lower than Tootoo and Tony’s Farm, but for good reasons. Doujea should avoid

direct price competition at any cost, if possible. Basically, Doujea most commonly uses interesting or

attractive free gifts with byproducts such as food crop seedling or seeds with fertilized soil, free wild

products such as herbs and fruits, and over-production products to promote its product offerings.



Sometimes Doujea offers a moderate discount (20%-25%) usually for bundled packages at a high value

or new products with high margins (at least 60%-80%) at launch.

Comparison of product and service offerings

As for product and service offerings, these four firms have relatively diverse offerings (Please refer to

Exhibit 10 for detailed comparison of product and service offerings), especially veggie related

subscription packages in terms of package Kg, bundled product categories and prices. It seems they have

a tacit agreement to use somewhat differentiated offerings to avoid price competition on most lucrative

subscription business. With the comparable packages, Tony’s Farm is most expensive (100% certified

organic veggies), Tootoo the second (not clear whether 100% certified organic as many varieties from

procurement and import) and Kang Shunda (100% certified organic veggies) is slightly cheaper than

Doujea (not certified organic veggies). From the seasonal selection of veggie varieties, Doujea seems to

have most variety including specialties i.e. purple or wild veggies on average.

Comparison of performance index and breakdowns

Regarding Doujea’s competitive position relative to competitors, following quality attributes are taken

into account for comparison. Basically, quality comprises three components, product (70% weight),

service (20% weight) and brand (10% weight). Attributes of product quality include uniqueness, variety,

freshness, taste and packaging. Attributes of services include efficiency of logistics, quality of delivery

(meaning accuracy of delivery place and delivery speed, and delivery without product damage or with

minimal product damage etc, threshold value for free delivery, frequency of delivery), complaint

handling, guarantee terms and customer satisfaction. Brand includes two factors, customer relationship

and reputation of quality.

In Table 4 Performance index and breakdowns, product factors i.e. uniqueness and variety are the

sources of advantages. Tootoo has most varieties without doubt, at large from external procurement

and import. Tony’s Farm is rated higher than Doujea because it has the potential and motives to provide

a wider variety than Doujea though its current variety in Beijing market looks narrow might because it

just set up business in Beijing. Basically Tootoo, Tony’s Farm and Doujea all have even uniqueness in

selling their respective product offerings and attracting their customers. For example, Tony’s Farm has

highest quality in terms of its organic certification and production facilities. Tootoo has most varieties of

offerings with some specialty products and generous discounts for many individual products. Doujea has

unique various free offerings with different interesting or attractive products and some specialty

products from its own production, or contract farms or import. Compared to the rest three firms, Kang

Shunda provides limited variety of product offerings without its own unique specialty products.

Regarding Doujea’s relative advantage in taste attribute, it refers to Doujea’s well-known fruits products

such as super-premium strawberries and blueberries etc.

As for service and brand factors, basically there is no notable difference in service between competitors

and brand factor has minimal influence to differentiate between competitors. In general all firms have

very similar services such as free door-delivery for subscription products or certain purchase value of

individual product purchase. In brand factor relating customer relationship, Doujea has an advantage

over the rest three competitors. Doujea has built an intimate online community at Weibo where



Quality category Relative

importance Quality Attributes Relative

importance Doujea Competitor

Tootoo Competitor Tony's Farm

Competitor Kang Shunda

Product 70 % Variety 30 8 9 6 4

Uniqueness 20 6 6 6 4

Freshness 20 9 9 9 8

Taste 20 8 7 7 6

Packaging 10 9 9 9 8

Sub-total Index

94 89 82 30

Service 20 % Logistics 30 8 9 9 9

Delivery 30 8 9 8 7

Complaint 20 8 7 8 7

Satisfaction 20 9 8 8 7

Sub-total Index

21 22 20 17

Brand 10 % Customer relationship 60 8 7 7 6

Reputation of quality 40 8 8 9 7

Sub-total Index

12 10 11 7

Total performance

127 121 113 54

Price Index

115 120 140 110

Customer value

12 1 -27 -56

Competitors Product performance Service performance Brand performance Overal performance

Doujea 94 21 12 127

Tootoo 89 22 10 121

Tony's Farm 82 20 11 113

Kang Shunda 30 17 7 54

Table 4 Performance index and breakdowns



Doujea’s customers, potential customers and fans together have a lot of fun in addition to sharing

cooking experience and tips and showing their cooking art work etc. Every time when Doujea has

an activity or a post, it receives a lot of responses from customers and fans. Compared to Doujea,

Tootoo at Weibo is quite lonely that no so many responses. Tony’s Farm has just started business in

Beijing and doesn’t have an established community at level of Doujea’s yet. Kang Shunda does not

have activities at Weibo.

5.4 Objectives and strategies

Doujea’s business objectives and strategies

In Figure 11 Doujea’s objectives and strategies, left two boxes represent two business objectives that the firm strives to achieve through its long-term strategies described in right two arrows. The business endeavor is focused to achieve organic growth in both sales and profits and build a brand image.

Organic growth and brand image

Figure 11 Doujea’s objectives and strategies

Organic growth means grow a business steadily and profitably, a true growth achieved through operating expertise of management such as effective management and efficient resources utilization. It is a good indicator of how well management has used its internal resources and management skills to improve business and expand profits.

Brand image determines how customers perceive the products and services provided by a business. Brand loyalty implies exclusive relationships with customers to competitors. To sustain business development and retain profitable customers in a long run, a business must develop a branding image to distinguish itself, gain competitive advantage, and drive sustained growth through products or services delivered to customers, value communications and marketing promotions etc.

Strategies

To support business grow organically, it needs

to increase market share and revenue, and improve profitability to improve customer retention and grow customer base to reinforce competitiveness in product and service innovation

To build a brand image of a trusted best safe food provider, it needs

to develop quality leadership



to provide the greatest variety of products to establish the most excellent delivery service to build a socially responsible and environmentally friendly enterprise image

In Doujea enterprise culture, quality is regarded as the lifeline for its high-priced business. Quality management has two focuses. One focus is the assurance of the tangible quality of its products and customer services. It guarantees unconditional return or exchange of products if customers are not satisfied with the delivered products. The other one is manage price and quality relationship with the most appropriate pricing strategy and tactics, that is, to position the quality leadership, price has to be high enough to signify thigh quality; and to price at premiums, quality of product and service offerings must render firm support.

Currently, customers who have purchased products from Doujea for relatively a long period have recognized the high quality of its products and are relatively loyal and price-insensitive to adopt new products priced high.

Customer profile

There are abundant researches and studies regarding the socio-demographic profiles of organic food

product consumers in west. Basically they all agree that mainly women, skewed to younger age group

(i.e. 35-44), who buy organic food in larger quantities and more frequently than men [Krystallis et al.,

2005]. In particular, those female consumers commonly have children as well as higher education

background and higher income levels [Davies et al., 1995 and Hughner et al., 2007 etc]. Many families

start changing food consumption to organic food with the birth of a baby [Yin et al., 2009]. This socio-

demographic profile also fits well to Chinese organic consumers, according to Doujea’s marketing

knowledge and experience (See Exhibit 8 Customer profile).

In China in general, most organic food consumers are foreigners and emerging high-income local

people living a healthy lifestyle according to ITC [Emilio Portocarrero, 2011]. According to research on

Chinese organic market, the most significant motives that consumers buy organic food are health factor

and food safety concerns, and freshness and taste are important to all consumers [Yin et al., 2009].

Many research studies also suggest that organic food consumption is part of a way of life [Hughner et

al., 2007]. Environmental considerations also affect customer’s purchase behavior [Yin et al., 2009 and

Davies et al., 1995].

In recent years in China, there has been a series of notorious scandals relating abuses of harmful additives, chemical fertilizers and pesticides, and growth hormones involving disease ridden food that have scared Chinese consumers and caused collapse of the confidence and trust in the safety of food. The reputation of food safety and quality thus has become a critical factor for food retailers and suppliers to achieve success in China. In addition to food safety concern, Chinese diet habits also influence purchasing behavior. It is a long custom in China that people prefer to eating fresh food especially veggies and fruits, and preparing or cooking food often. Given that most Chinese have relatively small homes and limited storage space, Chinese go shopping also frequently for fresh food. The market for fresh foods is dominant and freshness is critical. In addition, Chinese consumers appreciate taste and flavor most, and color and



appearance the second. The specialty food of exceptional taste and flavor has an advantage to be more easily accepted by Chinese. According to feedback or comments from online shops i.e. Doujea and Tootoo (very few of them has or shows customer feedback or comments) and Weibo, attributes such as taste and flavor are mostly referred and attributes such as freshness and hygiene take the second place. Attributes such as health and nutrition values are also mentioned sometimes. Services such as delivery and complaint handling are referred more than are health and nutrition values. Some consumers even express the disappointment in flavor and sound like they buy organic food for flavors while quite often customers also acknowledge difference in flavors compared to conventional food counterpart. Safety is rarely mentioned and quite many comments point or hint that customers buy for their children, for their elderly parents as well as for themselves who are expecting mothers. In China, parents are especially sensitive about food safety and are willing to pay premiums for food for their children if they believe the food is healthy and safe for their children. It might be safety as well as health and nutrition is such intangible attributes that common consumers have no way to verify and gauge, but actually they all play a role in purchase decision-making.

With the increase of income and improvement of living standard, growing affluent Chinese consumers have become more quality-conscious in terms of freshness, hygiene and packaging etc., more health- and nutrition-conscious and are attracted to food products that emphasize special health or nutrition values. In addition, there are growing Chinese consumers who are also community-conscious and environment-conscious. They buy certain products to support disadvantage people who produce the products and to support environmental efforts. The trend of these purchasing motives also indicates the shift of lifestyle of Chinese consumers. Nowadays it is not unusual some Chinese customers claim they buy expensive organic product i.e. organic tower (about 50-60 Euro) to support effort in environmental protection etc.

In addition, high-end Chinese consumers tend to be price insensitive and more brand loyal to some extent that they are more willing to pay premiums for branded products or services. However, brand is not the only attribute that concerns Chinese consumers. There are also other attributes that Chinese value such as close customer service, entertainment, and community involvement.

In short, the top reasons why Chinese consumers purchase organic products from Doujea and who are those customers? Attributes by priority that motivate Chinese customers to buy organic food are the following: Taste and flavor Freshness and hygiene Nutrition and health Safety – emotional need Services

Organic food is perceived as luxurious products, and in reality it is, for most of people in China. Price is the biggest obstacle for most of Chinese, who don’t have affluent disposal income. In big cities such as Beijing and Shanghai, the upper-middle class or high-earners with at least annual income 50,000 RMB are considered target customer group that can afford and are most willing to pay for high priced



organic food. In tier-2 cities, the threshold of annual income may be 30,000. For more details about Doujea’s customers please refer to Exhibit 8 customer profile.

Marketing strategy

Briefly, customer-oriented value creation is at the core of marketing strategy at Doujea. The key factors that Doujea differentiates from competitors are:

Unique product mix with core products such as some variety of premium fruits that customers value and cannot buy from competitors or elsewhere

Intimate customer relationship within on-line branded community where Doujea and customers

have regular close interactions by sharing lifestyle and life knowledge and skills i.e. cooking tips

and recipes for its product and service offerings

Creative marketing in recreational and promotional activities with careful planning and clear

intentions, not just price discounts or free offers

Excellent and flexible customer-door delivery services

Humanization and individuation design that products are sold in bulk or bundled packages, but

packed in smaller packages with cooking seasoning and instruction to make it convenient for

customers to cook and consume. This way helps Doujea to increase sales volume with per

purchase.

Distribution

Doujea has established two distribution channels:

Direct sales via on-line B2C E-commerce platform and utility, where customers can purchase

online. Basically Doujea services only two markets in Beijing and Tianjin with fresh food

products such as fruits, veggies and meats etc. Its dry food products such as specialty grains

have been sold to customers from other regions in China. It is planning to also sell meat

products in winter time to customers outside Beijing to satisfy a strong demand from those

customers in other regions in China.

Indirect sales via high-end food supermarket chain BHG and some clubs and kiosks in high-end

residential areas, where resell Doujea’s super-premium fruit products, with the condition that

Doujea’s business trademark and logo on the package of products. Reseller’s price is usually

higher than Doujea.

Development and production

Since the founding time, Doujea has made significant efforts and heavy investment in developing

new variety of products. It has got snacks to grow super-premium products such as strawberry two

seasons and cherry tomatoes for seasons and so on. Every year it develops and produces at least 5-

10 new products. In recent time, it started outsourcing development and production of new

products with specialty varieties in other regions of China or other farms in suburban Beijing.

Management of product development and production at an optimal level is challenging. There are

often some over-production veggies or fruits from time to time that cannot be sold in time. Sunk

cost is one f big problems of operating the business.



Cost structure

Doujea has a very high operating cost, partly due to salary hikes at a broad level in Chinese labor market in recent year and partly due to sub-optimal business operations. The sub-optimal operating efficiency is mainly attributed to the complexity of Doujea’s flexible and innovative business model. One business practice that all products are priced in grams also accounts for high operating cost. Even though Doujea has roughly 60% - 80% gross margin and 30-40% gross margin after promotions, it is still difficult to make stable profits. For some products such as poultry, fruits and veggies, Doujea regularly delivers more in grams than the actual weight that customers pay for. For example, its poultry is priced for 1400KG with two chickens. It is impossible to delivery exactly two chickens in 1400 grams in reality as well as to adjust price afterwards according to actual weight delivered because of the complexity and inconvenience for both Doujea and customers. Therefore Doujea always delivers more in grams if possible and compensates with other products and customers don’t lose anything. Compared to Doujea, Tootoo and Tony’s Farm both sell poultry priced per quantity. Tootoo sells veggies in small weight i.e. 350g and valuable fruits in quantity instead of in grams. Doujea’s pricing practice apparently causes extra cost for Doujea. From customer’s feedback and comments, many new customers are surprised and pleased with this Doujea’s practice. This business practice has also helped Doujea turn multiple-times buyers to loyal long-term customers once they buy products from Doujea for a long while. Thus, Doujea has established relatively a stable customer base of over 4000 customers in a pretty short time period. Doujea’s over-delivery practice so far is unique in organic food market. Reducing cost and improving profitability is the No.1 task in short-term business agenda. Currently, Doujea is under a process to streamline its operations unit by unit to cut cost and improve efficiency and productivity. In medium and long run, the company needs to establish a stable cost structure to control its cost predictably well below its revenue under normal business operating conditions.

Positioning strategy of product segment and product portfolio

In light of above identified customer preference for organic food, the value that Doujea promises to

deliver to its customers is the choice of safe, healthy and convenient lifestyle through its high

performance products and comprehensive services with environmental awareness business practice.

As both a producer and distributor, Doujea has built a strong competitive position in organic food

home-delivery business in Beijing market. Efficient logistics is one of the key competitive factors to

support Doujea to compete with bigger and smaller competitors, by in line with big players and

being superior to small ones.

Product segment strategy

Doujea has three product segments positioning strategy: super-premium, premium and semi-

premium in terms of customer value. In Figure 12 Doujea’s Product segment positioning strategy,

three red circles stand Doujea’s three product segment positioning and size of circles stands for the

size in terms of sales revenue of the segment business.

The key advantages for Doujea in top-end premium segment are exceptional products with unique

variety and superior quality, some of which are also brand image products such as its strawberry

product which is also sold in high-end BHG supermarkets etc. There are three sources of super-

premium products: self production, import and contract. These super-premium products usually



don’t require much market efforts once they are sold in market for a long while. The key advantages

in premium and semi-premium segment are high quality with competitive prices, and products of

semi-premium segment need considerable marketing efforts such as promotions.

Doujea has established product lines cross seven broad food categories that constitute and

complement full food components in Chinese daily diets. Within each food category, there are

carefully selected varieties of products for different segment positioning that addition of new

products won’t cannibalize established products. Currently, there are following seven broad product

lines as follows:

Veggie: tens of varieties and 15-20 specialties

Fruit: over 10 varieties and 5 specialties

Meat: 3 specialties (beef and poultry) currently

Eggs: 1 specialty

Aqua-food: two specialties (shrimp and crab)

Grain: 2 varieties and 1 specialty

Nut, bean and other delicacies (sweet potato, fruit corn etc): about 20 specialties

Figure 13 Doujea’s product line value strategy illustrates the mapping of value positions of each food

product line in customer value model. These product line positions are aligned with Doujea’s

product segment positioning strategy.

More specifically, positions of Doujea’s varying product lines fall into four value groups representing

Doujea’s super-premium, premium, semi-premium and high value. Basically, most competitive

specialty varieties represent a premium value. Super-premium value is Doujea’s unique specialty

fruit products such as strawberries and blue berries. Premium value is other specialty products such

as veggies, fruits and grains etc. Semi-premium value is regular variety of veggies and grains for mass

organic food market. High value is those specialty products when offered with i.e. generous

promotions by bundling or discounts or free gift etc to enhance customer value experience, for



example, aqua-food and beef meat priced as high value temporarily and less attractive specialties

such as nut and other delicacies often offered as high value.

Product portfolio strategy

Figure 14 Doujea’s product portfolio positioning strategy illustrates Doujea’s positioning strategy (in

green area) of its product portfolio in general. Basically, Doujea is highly selective in developing and

producing products that represent at least medium and higher market attractiveness and at least

neutral and stronger competitiveness, in principal.

Figure 15 Doujea’s Product line portfolio illustrates positions of each Doujea’s product lines. In this

map, two specialties aqua-food (imported) and meat (procured from a Chinese exporter in Inner

Mongolia) are new products launched very recently. The strategy for these two new products is to

move to right “Strong competitiveness” territory. Most variety of specialty foods has strong

competitiveness and high market attractiveness except egg and delicacy. Doujea must protect or

grow revenue and improve profitability with those specialty products.

The varieties with medium market attractiveness and neutral competitiveness are usually very basic Chinese food components such as veggies, fruits and rice of regular varieties that have the most market demand in Kg as well as are most competitive products in market. Doujea’s veggie subscription products fall into this position.

6 Recommendations

Based on constructed framework and analyses of the framework in section 5, this section will conclude with recommendations for this project. Figure 16 Doujea’s pricing structure illustrates the recommended pricing structure that comprises pricing strategy and tactics and other two components such as psychological pricing and price change management. This section will also discuss details with guidelines or examples on how to manage this pricing structure and each pricing component.



Figure 16 Doujea’s pricing structure

First, it will elaborate pricing strategy based on value-based pricing approach as well as basic pricing rules that complement value-based pricing in the form of guidelines. In pricing tactics, it will use some examples which can be applied to set optimal prices for specific products in specific business context or for specific short-term marketing objectives and financial goals. It will also discuss psychological factors for pricing in general at both strategic and tactical level as well as management of price changes. It will recommend value-based segment pricing and tactical pricing for product line portfolio. This section will as well address flaws and weaknesses in current pricing and business practices and propose possible improvements. Finally, the project work comes to an end with concluding thoughts.

6.1 Pricing strategy

The pricing strategy is recommended to be based on value-based pricing approach and on its top are basic

pricing rules aimed to complement value-based pricing.

Basic pricing rules

Basic pricing rule should comply with value-based pricing. They include:

All prices must cover costs and make profits.

Prices must be established to assure targeted sales.

Consistently use value-based pricing strategy for segment pricing and to target long-term

business objectives.

Use tactical pricing to deal with short- and medium-term objectives, for example, promotional

pricing and deals to adapt to short-term market dynamics.

Psychological factors in pricing should be taken into account at both strategic and tactical

levels.

Price changes must be managed at both strategic and tactical levels.

Value-based pricing approach

Basically value-based pricing approach is used for product segment pricing according to their value

position in customer value map (See Figure 12 &13). To apply value-based pricing approach in practice,

it requires insights into customer and competition, as well as knowledge of cost etc. In addition, it

needs modifications to make it practical to adapt to real pricing practice and need for Doujea’s organic

food business.



To estimate economic value, first, competitor’s price of the best alternative (i.e. Tootoo’s comparable

product as it is the closest competitor) will be used as reference price. Secondly, estimate differentiation

value. According to product segment positioning, Doujea has established different value creation

strategies. There are two cases of differentiation value shown in Figure 17 Estimate of economic value,

applicable to Doujea’s product segments:

Positive differentiation value: The differentiation value of Doujea’s super-premium products is

clearly positive (green area in left box) and there is no close alternative so far. Doujea’s

strawberries etc are the most expensive and well-known in Beijing market.

Negative differentiation value: The differentiation value of Doujea’s premium and semi-

premium products such as veggies subscription packages is marginally negative (red area in

right box) compared with Tootoo, because Doujea’s veggies are not certified organic but

negative effect is compensated by its advantage in varieties and taste etc.

Figure 17 Estimate of economic value

The third case of differentiation value is approximately zero. It means there is no major or significant

differentiation in products. For example, Doujea’s beef meat and aqua-food products are priced at

premium in line with Tootoo’s comparable products and the differences in prices are tiny and

ignorable.

Regarding differentiation value creation in practice, there are many ways that Doujea can create value

for its customers. For example, Doujea’s poultry product outsourced from a farm in suburban Beijing.

There are basically plenty of potential alternatives i.e. from Tootoo and Tony’s Farm etc. Doujea uses

multiple differentiation factors to create value. First, it is sold in grams and customers always get more

than they have paid for (already discussed earlier). Secondly, it is well-prepared ready package with

cooking ingredient and instruction. There are also several options or ways how to cook the poultry and

they are often discussed or shared within the online fan community. Some fans also like to show its

cooking art to get praise just for fun. All these things meaningfully create values. Thirdly, the poultry

product is provided with specialty variety of two pheasant chickens, growing in pollution free wild

mountainous area, packed in two separate packages. Many of our customers hint they buy food from

Doujea for their young child. This packaging design is perfect and convenient for parents to cook meals

http://www.iciba.com/pheasant



for a child. It also benefits young families with few family members. Compared to Doujea, competitors

offer adult chickens in quantity with a picture of a living adult chicken and text additionally telling it is

of a special variety and it grows in a wild environment.

Figure 18 Economic value vs. market price

To convert an economic value to a numeric price level, market price can be set above (overvalued) or

below (undervalued), depending on market demand or predatory marketing objective etc. In addition,

market price should not exceed what target customers are willing to pay. Figure 18 Economic value

vs. market price shows relationship between economic value and market price.

To set final price, cost, company objective and competition must be taken into consideration. Basically,

cost acts as price floor and market price acts as price ceiling that targeted customers are willing to pay.

Within price range, which is between price floor and price ceiling, final price can be determined or

optimized according to company objectives and competition in term of markup percentage,

respectively. Figure 19 Final pricing shows the relationship among these pricing elements (assuming

that market price always exceeds cost or equals to cost).

Figure 19 Final pricing

According to company objectives, target markup percentage on cost as profit is determined. In light of

competitiveness, final markup is determined by adding up a certain percentage on the top of target

markup or subtracting a certain percentage from target markup. Final price is arrived at the sum of cost

and final markup.



In practice, basically Doujea targets 60-80% markup on cost as profits. The competitiveness will be

factored into final markup on the top of target markup, according to its segment in customer value

map. For example,

Super-premium products (i.e. fruits): final mark-up is about 100% (60-80%+20-40%).

Premium products (i.e. beef meat and shrimp): final mark-up is about 50-60% and 30-40%

after promotion (high value).

Semi-premium products (i.e. veggies subscriptions): final mark-up is about 30-40% and a

slightly lower final mark-up if subsidized with premium product or other interesting product

(high value).

High value: final mark-up is about 30-40% for other specialty food product such as egg, nut

and other delicacies basically fall into this value category.

These are many ways that Doujea can add values to make its product and service offerings more

competitive in a highly competitive segment like veggie subscription business, which is one of Doujea’s

core businesses. Veggies subscription business is also very sensitive though all competitors try to

differentiate with each other somewhat to avoid direct competitions on price. Doujea’s veggie products

are not certified organic but the price is compensated by more selections of varieties and specialty

varieties and over-delivery in grams etc, so it subtracts a moderate rate 30% (negative competition

markup) from target margin 60-80%. So the final markup is arrived at 30%-50%. Compared with

competitors, Doujea’s veggie subscription packages are priced on average only 15-20% cheaper than

Tootoo’s comparable packages but still roughly at 300-400% premium than conventional products in

neat condition e.g. from supermarkets. In addition, sometimes Doujea offers free gift with its attractive

premium fruits for certain veggies subscription products to make them more competitive and

attractive.

The process of pricing

In final pricing, a final price in the form of final markup on cost is arrived from two directions, depicted

in Figure 20:

One direction starting from reference price, i.e. of a competitor’s comparable product, to

economic value (Figure 17) to market price (Figure 18) which determines price ceiling (Figure

19), which is the estimated maximum that customers are willing to pay

One direction starting from cost, which is price floor(Figure 19)

The price range is determined between price ceiling and price floor using cost markup. This markup

percentage is determined dynamically according to the product position of value segment, in terms of

company’s objectives and competition in terms of target markup percentage.

This modified pricing strategy should effectively help Doujea not only assure profits but also increase

sales in its biggest business area without sacrificing price and profit margin. The use of cost-plus in final

pricing should assure Doujea to cover its cost and the use of value-based estimate of economic value

should help Doujea reserve pricing capability to maximizing profit.



Figure 20 Pricing process

6.2 Tactical pricing

This section will discuss on how to apply four pricing tactics that will be mostly exploited to set optimal price points for specific products according their respective positions in product portfolio map. In promotional pricing and deals section, it will particularly discuss various promotional tactics in general to stimulate sales or improve profits in different pricing context etc.

Tactical pricing is used to achieve short-tem business objectives as well as adapt to short-term market dynamics. Currently, Doujea does not have a stable cost model to control costs due to various reasons (Refer to Exhibit 7 for detail) and the cost is very high so it is challenging for the company makes stable and ideal profits. Profit maximization is the top task in business agenda in short-term. Effective pricing is very critical for the company to grow sales profitably.

To maximize profits Doujea must have its own unique product and service offerings that customers are not able to purchase from elsewhere, customers must perceive the product and service offerings as an idiosyncratic preference. Doujea also needs to have better pricing strategy and tactics to cope with excess capacity occurring for certain food crop products from time to time.

Skimming pricing

Basically, Doujea selectively develops new products of high quality – targeted as premium products-

which represent high market attractiveness and has potential to become a strong competitive product.

In addition, new products should complement not cannibalize existing product offerings. Skimming

price is purposed as setting anchor prices for potential customers and for such new products that

should be priced at a high-premium.

For example, recently imported tiger shrimp is priced using skimming pricing (240 RMB/800g, 37.5

Euro/Kg). However, to effectively launch new products and gain traction in sales quickly, it needs



marketing efforts with a suitable promotional tactics, especially for pre-orders, which will be discussed

in more details later in this section.

Premium pricing and brand image

Basically, premium pricing is used for products in super-premium and premium segments. For example,

Doujea uses this tactical pricing for its core products, usually in high attractive market segment such as

specialty fruits and meat and aqua-food etc that no competitors are able to provide or have no very

competitive alternatives from competitors. The price can be set as high as targeted customers can

accept and prices do not become a bottle neck for market demand that Doujea targets to sell into.

Doujea has developed several such super-premium products that Doujea has a monopoly position such

as strawberries (240 RMB/2Kg, 15 Euro/Kg) and blueberries (240 RMB/500G, 60 Euro/Kg) Doujea needs

to protect those super-premium products by controlling supply to the right level to keep high-premium

and by controlling promotional offers very carefully. Direct discounts should be avoided or minimized

at most 10-15%.

In addition, those super-premium products that are produced by Doujea itself are also brand image

products. Doujea sells only its well-known premium products such as strawberries via indirect channels

i.e. upscale BHG supermarket to build its premium brand image. Because those products are most

profitable with high margins, reseller should set the retail prices not below Doujea and should be

supplied with a limit so that Doujea can maximize its profits from its most profitable products.

For other premium and semi-premium products typically veggies and non-basic food components that

are relatively competitive in market, the prices can be set in line with competitors, but can be bundled

with correlated products, for example, meat bundled with rice or veggies, or offered with bigger

volume (beef fillet package is 3x500g) with convenient separate small packages (3 packages for each

500g) with a slightly discount to make deals more attractive.

Bundle pricing

This pricing is used to add more value as one of the key promotional tactics, for example, for veggies

subscription products. It will be of help if there is statistics data about customer product preferences

from customer purchases and orders data so that Doujea can offer more attractive product bundling

packages to extend and strengthen its veggie subscription offerings.

For instance, veggies bundled with meat and/or aqua-food, meat bundled with aqua-food and eggs to

up-sell and cross-sell more expensive products with veggie packages to increase both revenue and

profits. To stimulate veggie sales, veggies can be also bundled with specialty grains and fruits.

In addition, Doujea can have a regular 4+1 offering as a regular promotional offer, meaning customers

pay for 4 products but get 5 products. Doujea can make about 10 selections with a wide variety

including veggies, fruits, meat and grains and other delicacies available with at least one seasonal

popular specialty product included. Using this strategy can also help deal with over-production

products that often occur with regular veggies. To succeed in this strategy, Doujea must develop a line

of specialty products coving all sales seasons as well as a more versatile online E-commerce system.



Promotional pricing and deals

In section 4.3 theory of tactical pricing, it has discussed how to use various promotional pricing and

deals for different marketing objectives etc. This section will discuss more specific promotional tactics

and principles.

Super-premium and premium products should not be promoted with discounts, especially avoid a large

discount (i.e. >25%) and avoid discounts too often because it is really a bad thing if customers become

deal-prone to super-premium and premium products and it will deter customer to purchase those high-

margin products at regular prices. So it is important to make the promotions regular but less often with

moderate favorable offerings and with limited supplies.

In general, random and frequent discounts have a danger and tendency to trap a business into low

quality and price war, and cultivate discount-prone customers. If possible, try to avoid discounts but

instead use a double bonus point system, for example, a purchase of 500 RMB is valued as a 1000 RMB

purchase to reward customers or reward a coupon with a higher value so that customers can use to

buy whatever or exchange for certain products. Anyway, the idea is the benefits that customers receive

from their purchases will be transferred in the end as more purchase back to the business.

To attract new customers, Doujea can also use a loss leader product offering on special events such as

traditional festivals or holidays, because it is the best time to stimulate purchases. The offering can be

from certain products of attractive specialty variety. New customer can buy only after first purchase at

a regular price or the deal can be offered with regularly priced products. This tactics can also be used to

reward new customer referral at the same time.

To deal with over-production, there are several measures to take. First, try to make attractive product

bundling in bulk or big packages. Secondly, use a moderate discount i.e. at most 30% to cover cost as

much as possible. These two measures suit over-production caused by temporary short-term market

demand shift. Thirdly, cut the production if it is structural. Lastly, build relationships with charity

organizations or some communities and donate the over-production products to disadvantaged people

to build Doujea’s enterprise social image. Or just simply give away to those enterprises customers who

purchase products from Doujea to strengthen business relationships with those enterprise customers.

6.3 Psychological considerations

Psychological factors and designs in pricing should be taken into consideration at both strategic level

(i.e. quality-price effect for segment positioning in super-premium, premium and semi-premium in

customer value map) and tactical level with tactical pricing (i.e. skimming and bundle pricing etc).

For example, as for perception of price-quality relationship, discussed in section 4.4 theory of

psychological pricing part, should be specially taken a good care for super-premium and premium

products that represent the brand image of Doujea by employing prestige or premium pricing to boost

the brand image. In practice, first, their high price should keep stable and high. Secondly, Doujea should

avoid or limit using direct discount if possible. Thirdly, proactively deal with any complaints or

dissatisfaction sourced at product quality i.e. flaws in appearance or freshness due to damage during

transportation. Doujea should generously compensate in time and in word, especially for those long-

term customers. Last but not the least, Doujea can build a VIP service for long-term customers



according to their purchase history of more expensive purchases and reward with more valuable bonus

points or coupons, and regularly make attractive promotional offerings with those points or coupons

for such VIP customers.

Another example is related to framing effect “reference price”, more specifically, setting anchor prices

as mental reference price where skimming price comes into play in this project. This pricing tactics can

be applied to new products with highest market attractiveness (i.e. imported tiger shrimp from

Southeast Asia), due to their special variety or whatever unique quality. These new product should also

have a potential to grow the strongest competitiveness. According to the intended segment of super-

premium or premium positioning, the initial price at launch must start at a high enough level to reserve

room for its later development into the targeted segment position.

The original or regular price of tiger shrimp is labeled 240 RMB/800g. In promotions, Doujea offers a

permanent 20% discount for pre-orders and the discount will be valid on market price of the product,

meaning price is not fixed. This skimming pricing tactics has helped to attract customers to try new

products with considerable a good scale of traction. Doujea has also used this permanent discount to

promote some other attractive individual premium products. This bundling tactics has also helped

Doujea to cross sell multiple other premium products such as cherry tomatoes and pearl onion. The

design and implementation of this tactical pricing actually has many factors on the ground of

psychology in pricing i.e. price framing effect for bundling, anchoring pricing for skimming and

promotional pricing effect to stimulate customers to purchase when they believe they are saving

money.

Regarding Chinese specific psychological factors and design, there are several related examples i.e.

poultry pricing mentioned in previous section, some of which may be typical Chinese culture. Chinese

prefer free offerings to discounts, equivalent in value, in general. Actually “the power of free” has been

discussed in a case study of book Predictably Irrational written by behavioral economist Dan Ariely.

Chinese organic food industry has psychological groundings. Many customers buy food products from

Doujea for their young kid because they are commonly highly concerned and sensitive about food

safety. Doujea’s commitment to quality and excellence in safe food producing practice by stressing

safety as the highest priority also addresses the psychological and emotional needs that motivate and

influence customers to purchase food products from Doujea.

Psychological pricing numbers are uniquely rooted in Chinese culture and custom. In Chinese tradition,

certain numbers are commonly believed to be auspicious based on the Chinese word that the number

sounds similar to. Numbers 6, 8, and 9 are believed to have good auspicious meanings because

they sound similar to words that have positive meanings such as 6 standing for smooth, 8 standing for

good luck with fortune (business people especially like this number) and 9 standing for everlasting.

Number 2, 3, and 5 are also commonly considered as lucky numbers and are usually used with number

6, 8 and 9 to convey certain good meanings.

For instance, the Chinese psychological pricing can be 228 or 238 for price 250, and 298 or 288 for price

300. Gift cards or packages are commonly priced at 268, 368, 568, 668 and 888 etc. In Doujea’s pricing,

psychological pricing points are sometimes also applied i.e. 28 RMB (pricing for 30 RMB) per package

http://www.amazon.com/Predictably-Irrational-Hidden-Forces-Decisions/dp/006135323X

http://en.wikipedia.org/wiki/Chinese_tradition

http://en.wikipedia.org/wiki/Chinese_language

http://en.wikipedia.org/wiki/6_(number)



http://en.wikipedia.org/wiki/Homophone



(in a dozen) of eggs and delivery requires an order of 6 packages at 168 RMB (pricing for 170 RMB).

Doujea’s regular gift card is priced 8000 RMB and tiger shrimp priced 236 RMB for price 240 RMB.

However, those psychological pricing numbers don’t seem to have a significant influence on customer’s

perception and purchase behavior.

6.4 Management of price changes Normally Doujea reviews its product offerings, mainly subscription packages, and adjusts prices, product bundling including free gifts etc at year beginning. In practice, Doujea can review and adjust offerings and prices, i.e. especially individual products and packages, when needed so as to avoid loses because of delayed price increase. Management of price change has two subthemes: price increase and price cut, both of which should be

managed at strategic and tactical levels and use price changes as an effective tool to achieve sales

growth and improve profitability. In addition, price changes should be handled and communicated with

customers very carefully so that price increases are justified and don’t hurt sales significantly. On the

other hand, price cuts don’t erode the image and perception of quality. It is also very important to

evaluate reactions of competitors such as Tootoo and minimize adverse impact on profitability.

Price cuts

As a principle, to deal with price pressure from competitors, the best approach is always to strategically

use value-creation to tame price competition. For whatever reason, direct price cuts i.e. especially on

products from core business, to increase sales are not a good approach for a brand image, and

especially for a business like Doujea that doesn’t have a cost advantage sourced in scale of economy.

If price cuts are not avoidable, strategically design and tactically implement price cuts with other

sophisticated approaches. For instance, keep the price intact but increase volume or size in grams or

use bundling or whatever creative means to cut price tactfully, or cut those low-valued and non-core

products generously to make them more attractive to sell to customers.

Price increases

In case of price increases, it especially needs to communicate well with customer for them to justify

and accept. For whatever reason, a direct increase does not sound good for customers. As the same

principle, it should use value creation to strategically guide price increase. As a rule of thumb, the price

increase should be incremental and not bigger than 15%. In addition, alternative approaches can be

bundling with extras or premium product or remain the same price but reduce size or volume in grams

or change to cheaper substitutes.

If a direct increase is not avoidable, increase the prices of the products with lower margins so that

customers are encouraged to purchase products with higher-margin. The idea is to use price increase

to guide customer towards the most profitable products. This works when difference between high-

margin and low-margin was perceived big enough and the shrink of price difference can skew

customers to purchasing more expensive alternatives.



6.5 Pricing for product segmentation and portfolio

Segment pricing based on value-based pricing

In Figure 21 Value-based segment pricing, left figure illustrates what segments will be applied with

value-based pricing at a high level and right figure illustrates pricing strategy for four value segments,

super-premium, premium, semi-premium and high value, marked with different colored triangles

respectively. The size of triangles also indicates the size in terms of sales revenues of the segment

business.

Figure 21 Value-based segment pricing

In the top-end premium segment, price is in general at least 10 times, and even can be 16-20 times

depending on variety and source i.e. import of the products, as the regular price, for example, in

French Carrefour supermarkets (regarded as one of strong indirect competitors for relevant high-end

food products). Doujea has a line of super-premium specialty fruit, meat and aqua-food products such

as strawberry, blueberry and tiger shrimp and beef etc which contribute to about 20-30% of total

revenue. Doujea’s price is roughly 150-200% price of products from competitors within the same

segment. There are two sources of super-premium products: own production as major (strawberry),

outsource (blueberry) and procurement (beef and aqua-food etc).

In premium segment, price can be 8-10 times price, only on par with price, i.e. of packed fresh food

such as veggies in Carrefour. In this segment, Doujea has established a line of specialty products such

as rice, veggies and poultry etc which contribute 30% of total revenue. In this segment, Doujea’s price

is slightly (30-50%) higher and lower than competitors, depending on variety. There are two sources

of premium segment products: own production (fruits and veggies) and outsource (grains, poultry and

egg).



In the semi-premium segment, price can be 3-9 times as regular price, depending on the variety,

quality and brand of products. The regular price means average person pays on mass market. Doujea’s

business in semi-premium contributes about 40-50% of total revenue. Products of this segment is

mainly from own production at large (regular veggies and fruits) and outsource (regular rice etc)

High value is strategically used to convince and enhance customer value experience delivered through

product offerings from medium- or low-value specialty products. For example, sweet potatoes are

commonly recognized as healthy and delicacy food in China. Doujea produces three varieties of sweet

potatoes, purple, red and white. Doujea’s price is noticeably higher than competitors i.e. Tootoo.

However, sweet potatoes are one of Doujea’s most sold among non-basic food component products.

Customers receive, along with commercially sold sweet potatoes, in a large amount small ones which

are not big enough to be sold as commercial products and thus have no economical value at all. Many

customers are very pleased with this free by-product. Many of those customers have acknowledged

small ones taste even better than commercial big ones and have praised a lot enjoyable value

experience.

Recently, Doujea has developed a new specialty fruit candy Fuji apple procured from Northwest China.

This product has attracted many new customers although the price is 68RMB/3kg (10RMB per Kg) and

Tootoo’s price is 58RMB/2.5Kg, 400-500% as regular apples. Tootoo offers even 50% discount and sells

to 32 cities. In addition, Tootoo also has a page full of information on its on-line shop about this

product and health value etc. Doujea only sells to certain areas of Beijing and Tianjin where its delivery

service covers. However, Doujea seems to sell more in terms of deals and Kg. Doujea has done two

things that Tootoo doesn’t do. First of all, Doujea has, with its exceptional capability of interactive

digital marketing, made the experience of purchasing and eating this apple big fun for customers

within its online community. Secondly, Doujea gives a small package of veggies. Because many of

Doujea’s new customers start buying fruits only and it is a strategy to convert fruit customers to its

veggies business to cross sell other products.

Product line portfolio pricing with tactical pricing

Figure 22 Doujea’s tactical pricing for product line portfolio illustrates how pricing tactics are used to price product lines according to their corresponding market’s attractiveness and competitiveness in product portfolio map (detailed explanation for portfolio positioning strategy in section 5.4).

Doujea is very selective to develop new products that represent high market attractiveness and have

potential to grow strong competitiveness (targeted at least 60%-80% margin). Specialty aqua-food and

beef fillet that are newly launched products fall into this criteria. They are targeted as premium

products and skimming pricing is used at product launch. Because competitors i.e. Tootoo has multiple

comparable product offerings, Doujea needs a promotional pricing i.e. discounts (e.g. 20%-25%

discount) for pre-orders to encourage customers to buy in and gain customer traction quickly.

Most variety of specialty food products such as specialty fruits, poultry and specialty rice etc represent

strong competitiveness and high market attractiveness and Doujea must protect and grow revenue

profitably. Some products such as super-premium strawberry are also brand image products. These

high-value products can be priced with premium pricing with high margins. Doujea should avoid direct



price cuts on these products and promotions should use bulk deals or product bundling or free gift

instead.

Figure 22 Doujea’s tactical pricing for product line portfolio

Medium- and low-value non-basic food of specialty i.e. nuts and other delicacies etc usually have

competitiveness between neutral and strong and market attractiveness close to high. Those products

are usually priced with bulk deals or bundling price and can be promoted with a discount i.e. 20-30%

which are also used to deliver high-value experience to customers.

The varieties with at least upper medium market attractiveness are usually very basic Chinese food

components such as regular veggies, fruits and rice that Doujea needs to improve competitiveness.

Those products have the most market demand in Kg. Most products of this portfolio thus need more

aggressive promotional pricing at a competitive level with competitors.

Doujea’s veggie subscription products fall into this position. So far no any firms have been seen offer

discounts and Doujea must avoid discounts as well. To promote veggie subscription products, Doujea

has used its premium fruit product to subsidize veggies subscription packages, for example, 4 pack of

strawberries (240 RMB for 2 Kg) for semi-annual veggie subscriptions (1556 RMB for 2Kg, 2059 RMB

for 3 Kg and 2929 RMB for 4.5 Kg, see Exhibit 2 Price of veggie subscription packages) and equivalent

discounts are between 8%-15%. These promotional offerings actually work better than the direct

discounts at the same level and seem to be perceived more valuable and attractive to customers.

There are psychological factors in this interesting result. Free gift is perceived more valuable and attractive especially when it is a prestigious product. Chinese like a gift because it is free. In market, it is common that philistine Chinese sometimes bargain for something small for free other than a price cut during a deal negotiation.

6.6 Flaws and weaknesses of current pricing and business practices

This section will discuss flaws and weaknesses, general in business and particular in pricing, which are

identified in this project work and suggest possible improvements.



Subscription business

Regarding veggies subscription business which is one of Doujea’s core business areas, major flaws in

pricing have been found and several suggestions for possible improvements will be discussed in this

subsection.

In Figure 23 Comparison of veggies subscription prices, it shows that Doujea’s prices of longer term

subscriptions (quarterly and so on) are priced very close to Tootoo’s comparable ones. However,

monthly subscription prices don’t seem to make sense and logical for two reasons. Price of 4.5Kg

package is almost doubled the price of 2Kg package. Price difference between three monthly packages

is extraordinarily larger than competitors’. The prices for short-term subscription don’t seem

attractive for new customers who usually start buying veggies packages of a short-term subscription.

Moreover, all the prices in terms of subscription term and weight start converging at quarterly

subscriptions and become flat afterward. The problem of this price trend is there is no incentive to

encourage customers to purchase more valuable packages i.e. longer term or bigger weight packages.

Among these three competitors, Tony’s Farm’s pricing looks most reasonable and logical.

Figure 23 Comparison of veggie subscription prices (per 500g)

Following two measures, increase price of less valuable subscriptions, add new packages and stimulate

subscription consumption, are suggested as possible improvements. These improvements are designed

to incentivized customers to buy i.e. more valuable packages in term of subscription weight and term

and buy more etc. If these changes are planned carefully and implemented systematically, they should

help Doujea increase both sales and profits effectively and thus keep the business in a healthy shape at

the same time Doujea enjoys a rapid business growth and expansion in its veggie subscription business.

Increase price differences between different subscriptions in terms of weight Kg, but increase the

price of smaller packages in Kg. And increase the price differences between different subscriptions in

terms of subscription term but increase the price of the short-term subscriptions.

Price change must be planned carefully i.e. with complete research and analysis on major

competitors’ comparable offerings and implemented systematically in subtle ways that customers



don’t perceive changes so much or so easily. For example, repackage all subscription packages and

add some new features, for example, by adding some seasonal fruits in certain time period for free

selections at the customer’s will.

Add new subscription packages, such as bundled with its new premium products beef meats and

aqua-food and popular seasonal fruits. But be careful to design new packages that should compete

with competitors not cannibalize its own established product offerings. In principal, at least price

range should be higher enough than current ones but look more attractive than competitors with

some creative bundling tactics.

It might be also a good idea to make a market survey if customers are interested to have some sort

of fruit subscription packages. Input data for package design should include size in Kg, number of

varieties and acceptable price range etc. Pricing design should be very careful as fruits may be more

valuable for some specialties.

One major weakness of current veggies subscription business is the valid times of subscriptions.

Doujea’s valid times are way too lax (See Exhibit 2 Price of veggie subscription packages) and Tootoo

has shorter valid times. It is an advantage compared to Tootoo from customer’s perspective but it is

also at a cost that it may potentially postpone customers from purchasing and consuming and may

consequently lower sales.

Doujea can keep valid time policy intact but should make an effort to stimulate quicker consumption

with promotional tactics. For example, using the name of consumption bonus points if an annual

subscription is consumed within a year, reward customer by doubling its bonus received when a

customer subscribes the package. Or if an annual subscription can be consumed 6 months earlier

before its expiration time, the customer will be rewarded a free gift or some bonus points in

equivalent value to exchange for certain products.

This feature also requires IT support in online shopping utilities as well as make delivery more flexible

for all subscription packages.

Pricing of specialty products sold individually

Doujea sell some of specialty veggies such as purple cauliflower and pink celery, and white asparagus etc individually and some of them has the same price (See Exhibit 3 for some specialty veggies). And it would make the offerings more attractive, competitive as well as fun if customers are offered a choice to bundle those products they like to explore. For example, those specialty veggies are sold usually in a bulk package of 1500g. Why do not let customer to freely select three different varieties of each 500g, until the product(s) is(are) out of stock, at the same price instead of buying one variety in bulk. Doujea’s has many customers who are exploratory consumers are fond of exploring specialty food products and some customers actually grumble a bit about the size of bulk order.

This tactics could potentially boost sales but may be error-prone with pure manual work so IT support

in online shopping facility can reduce complexity and mistakes. This tactics also require develop and

produce a line of attractive specialty products regularly, at least at business peak times such as Chinese

New Year and Mid-Autumn festival etc.



Procurement vs. outsource

If Doujea can procure a product at a lower cost, provided quality is assured, it should not make a long term outsourcing contract with a farm so as to avoid regular payment expense, unless there are other compiling considerations. Or Doujea should try to make a long term contract but based on actual performance or production. Lacking of a standard for payment in line with quantifiable performance may be one of the reasons for high operating cost and relatively low efficiency.

When Doujea outsources a product, the cost must be lower than the cost of Doujea’s own production or the product can be sold profitably that the product should somehow represent differentiation values with a potential of a high margin at least 60-80%. Otherwise don’t outsource, because the various cost incurring such as transportation, quality control, outsourcing management and safety risk etc are high.

With procured and outsourced products, try to use credit trade or pre-sell or whatever legal means as much as possible to delay payment and receive advanced payment to improve cash flow position.

Cost structure

In Doujea’s pricing strategy based on value-based pricing approach, cost plays a role of price floor. On the top of cost markup percentage for profit determines the price, taking into account price ceiling that customers are willing to pay maximum. The level of cost determines the level of profitability and the capability to maximize profit, to a large extent. In addition, competitiveness of price is one of key factors to determine revenues as well. Price competitiveness can be improved by lowering costs and increasing customer’s perception of value. It is very critical to build a reliable cost structure to control cost for profitable pricing. To lower cost, the best and most effective way is to reduce various wastes, not resources, in operations and improve efficiency of operations, such as production, sales, customer service, logistics so on. There is a lot of work to optimize and improve current business operations of many units. For instance, there are many fans from other regions of China or some areas in Beijing and Tianjin not

covered by Doujea. Those fans are very keen to buy products from Doujea and are willing to pay for

postage. But this scarce customer resource is just wasted so far as Doujea’s doesn’t have logistics

capability to expand its business coverage areas. There are a few strategies that Doujea can capitalize

on those potential customers, for example, by expending a line of attractive non-fresh and non-fragile

food products that can be delivered in the distance i.e. other developed regions of China. Doujea can

also build partnerships with i.e. express service companies for special good delivery and study how

Tootoo now is able to deliver even fruit products to 32 cities. In addition, Doujea can also develop

delivery service agent network who can deliver Doujea’s products in areas of Beijing and Tianjin that

Doujea is not able to cover if density of customers is not high enough. Also customers in those un-

covered areas in Beijing and Tianjin can also go to agent to pick up their products. Currently, there is

one agent who also orders and resells Doujea’s products in farmer’s market in Tianjin.

On the other hand, Doujea could consider outsourcing low-value products i.e. regular variety of veggies

and fruits with reliable quality i.e. from Kang Shunda, if the cost is lower than Doujea. Doujea then can

focus to produce high-value products with high margins i.e. strawberry and specialty veggies etc on its

farm. In addition, Doujea can also research and develop varieties of high-value specialty food products

that can be produced in multiple seasons. For example, Doujea is able to grow strawberry in two

seasons and cherry tomatoes in four seasons. Doujea should extend this multi-season production



strategy. If this strategy can be implemented and executed effectively, it will greatly improve

profitability.

To lower the cost of medium- or low-valued food products, Doujea can build a strategic alliance

relationship with the weakest competitor Kang Shunda by outsourcing the production or just simply

renting its farmland and hiring local farmers in planned production time periods. This strategy can be

also used to produce most profitable products priced at high margin such as strawberries and control

the cost effectively.

The biggest advantage of this alliance strategy is increase or control production with variable cost as

much as possible according to market demand, instead of increasing fixed cost by enlarging its own

farmland and hiring more regular workers. Of course, this requires management efforts and essential

skills to negotiate and build such a business relationship with competitors. In general, to effectively

control cost, the best way for Doujea is to use this kind of variable cost model of production and divert

cost pressure to partners.

Development of new products

From sales revenue of Doujea's products, especially those newly launched products, specialty products

i.e. fruits and aqua-food are particularly sold well. According to Chinese food market data (in section

5.2), fruit category has the biggest growth potential (107%) and aqua-food the second (90%).

Doujea should develop a new line of high quality fruits (such as tropical kiwi, avocado, and litchi etc)

and aqua-food (i.e. salmon fish and crab etc) with medium- or high- value to complement current fruits

and aqua-food product offerings. Organic milk can be also a good product to develop.

In addition, Doujea can also try to get a license to sell processed food products and process own food

products or outsource to food processors so that those fresh products that cannot be sold in time can

be processed and sold later anytime.

Development of enterprise and gift business

Enterprise and gift are the two weakest business areas in which Doujea’s potential is not developed and

explored well. If Doujea makes an intense effort in developing these two segment businesses, it has a

potential to take Doujea’s business to next level, in terms of revenues and profits.

A few things are worth trying. First of all, hire skillful sales people with attractive incentives based on

performance i.e. profitable sales. The best candidate may have relationships with big enterprises,

especially with labor union, that are profitable and generous in employees’ welfare and benefits.

Specialty fruit packages can be very good candidate for enterprise customers and also for gift business.

Doujea can also offer fruit packages regularly and extend its gift offerings including gift cards and

packages with varying specialty fruit products bundling in a range of prices. So far, fruit packages are an

undeveloped niche market that no one has paid attention to and developed. If Doujea is able to

develop it quickly and effectively, Doujea may have a good chance and position to succeed.



7 Concluding thoughts

There are four levers, fixed cost, variable costs, sales and price, which a business can use to increase profitability [Raju et al., 2010]. Cutting cost is a passive inward lever and there is always a limit that a company can reduce overhead and cut costs. Increasing sales is an active outward lever but needs more input in term of budget pumping into marketing efforts such as promotional advertisement. It is found that although price is the most effective lever to increase profitability, price is in particular neglected and rarely used, according to studies [Raju et al., 2010]. Price has a multiplier role in increasing profitability that a small incremental change in price can yield a significant result. There are plenty of research studies with evidence that have revealed the power of pricing for profit and growth.

For small businesses like Doujea with limited financial resources in marketing expenditure, using price to improve profitability and grow sales becomes critical and effective. An effective pricing strategy can have multiple-dimensional effects on rapid business growth: get more profitable customers to buy; get those customers to buy more in frequency and quantity; achieve more profitable sales to sustain business growth. In Chinese saying, it is like achieving great with little effort.

Pricing strategies are a key determinant factor for a business to survive competition and prosper in a long run. It is worthy of significant efforts that every serious business should make to build and maintain sound and effective pricing strategies. To support an effective pricing strategy, customer-focused innovation and quality is always the powerful tool to create strong values, which is the clout behind every successful business.

Direction of further work suggested for this project is Doujea should strengthen its IT system to build and collect business data from finance, sales and customer etc, to support more precise and particular quantitative analyses, for example, customer analysis to determine factors that influence price sensitivity and cost volume profit analysis to optimize production and sales etc, to make better business decisions in pricing.



List of Tables

Table 1 Organic food market size and potential (Million Kg) in Beijing

Table 2 Online B2C organic farms

Table 3 Comparison of customer value map

Table 4 Performance index and breakdowns



List of Figures

Figure 1 Doujea’s business model

Figure 2 Porter’s five forces framework

Figure 3 Customer value map

Figure 4 Product portfolio

Figure 5 Value-based pricing framework

Figure 6 Framework for pricing strategy at Doujea

Figure 7 Change of Chinese food consumption structure

Figure 8 Agriculture output 2010 (excluding grains)

Figure 9 Competition analysis of organic food industry in Beijing

Figure 10 Comparison between direct competitors

Figure 11 Doujea’s objectives and strategies

Figure 12 Doujea’s product segment positioning strategy

Figure 13 Doujea’s product line value strategy

Figure 14 Doujea’s product portfolio positioning strategy

Figure 15 Doujea’s product line portfolio strategy

Figure 16 Doujea’s pricing structure

Figure 17 Estimate of economic value

Figure 18 Economic value vs. market price

Figure 19 Final pricing

Figure 20 Pricing process

Figure 21 Doujea’s value-based segment pricing

Figure 22 Doujea’s tactical pricing for product line portfolio

Figure 23 Comparison of veggie subscription prices (per 500 gram)



List of Exhibits

Exhibit 1 Consumer group profile

Group Characteristics 1. White collar families A major group of organic consumers in China representing about 40% of organic

consumers. Have increasing concern about their own health and some are interested in environmental protection and conservation

2. Families with Young Children Group has about a 10% market share. Increased number of “one child” families. In these families, as many as six adults – father, mother, two grandfathers and two grandmothers – look after only one child resulting in more resources available for food purchasing. Highly educated, Young Parents tent to be more knowledgeable about potential benefits of organic food. They may only be temporary consumers of organic food (such as baby food) as their children grow up.

3. Families with health issues This group includes families with members, often elderly, who have health issues such as high levels of cholesterol, blood pressure, or blood sugar. They typically prefer to purchase organic food at specialty shops or natural foods shops. They comprise about 10% share of the organic food market.

4. Overseas returnees Between 1990 and 2009 about 500,000 young people who studied or worked abroad returned to China. During their stay abroad, they were exposed to western lifestyles, including knowledge of organic food.

5. Consumers from Taiwan and Hong Kong There were about 1 million people from Chinese Taipei and Hong Kong (China) working in mainland China in 2009. Most worked for private companies owned by people from Taipei or Hong Kong. This group is concerned about recent food scandals in China and is keen to purchase safe food products.



6. Government Officials There are about 10.5 million government officials in various levels of administrative or party offices. If all employees paid by the public budget including teachers, professors and those working in research institutes, are taken into account, the number could reach 40 million. These officials receive various benefits and bonuses. In some government offices, employees receive organic food as a bonus. Although this is not very popular yet, the large number of government officials makes the market share an estimated 10%.

7. Young people Young, trendy Chinese people are quick to adopt healthy and environmentally friendly lifestyles such as buying and consuming organic food. The organic share of this group is estimated at 3%

8. Foreigners Living in China This group of consumers is mainly from Europe, the U.S., Japan and the Republic of Korea. There are about 2 million foreign people working in China and concentrated in major cities, with more than 300,000 foreigners working in Shanghai. They comprise around 7% of the market, primarily shopping in specialty shops and supermarkets.

Source: ITC report 2011 [Emilio Portocarrero, 2011]

Exhibit 2 Price of veggie subscription packages (1 Euro: 8 RMB)

White asparagus

Cherry tomato

purple cauliflower

Baby carrot

Purple carrot

Pink celery

Purple pepper

Mush-room

Price 80 100 80 80 60 80 80 9

Weight 500 2000 1500 2000 1500 2000 1500 150

Price per Kg 160 50 53 40 40 40 53 60

Price per Kg (Euro) 20 6.3 6.7 5 5 5 6.7 7.5

Price of specialty veggies products


By Shuqin Li-Kokko

Weight (g) Monthly Quarterly Semi-annual Annual

2000 264 822 1556 3006

3000 349 1088 2059 3978

4500 467 1548 2929 5658

Delivery times 4 13 26 52

Valid time (month) 2 6 12 24

Price per Kilo 33-29-26 31-27-26 29-26-25 28-25-24

Price per Kilo (Euro) 4,1-3,6-3.2 3,8-3,4-3,3 3,6-3,2-3,1 3,5-3,1-3,0

Exhibit 3 Price of individual products and packages (1 Euro: 8 RMB)

Strawberry Blue berry Water melon

Price 240 60 144

Weight 2000 125 8000

Price per Kg 120 480 18

Price per Kg (Euro) 15 60 2.3

Price of fruit packages

Normal package Trial package

Price 68 90 128 50

Weight (g) 2000 3000 4500 2000

AVg. Price per Kilo 34 30 28 25

Avg. Price per Kilo (Euro) 4,3 3,8 3,5 3,1

Price of veggie packages

Beef fillet Beef ground meat Tiger shrimp Poultry Eggs

Price 360 218 240 148 168

Weight 1500 1500 1000 1400 6 dozens

Price per Kg 240 145.3 240 105.7 Price per Kg (Euro) 30 18.2 30 13.2

Price of meats and aquatic food etc products



Exhibit 4 Doujea background Doujea Farm Ltd. (http://doujea.taobao.com) was co-founded in Beijing in 2009 by several enthusiastic

Chinese mothers from China, Finland and the US who got to know each other through voluntary activities on a

Chinese parenting social network. The initial venture capital was sourced from co-founders. In 2011, there

was a business expansion through funds by angel investors. Currently, the firm also has a bank loan to

finance its business operations.

Doujea firm is engaged in farming and distributing safe food, such as produce, fruits, eggs and grains etc. The

aims of firm are to address food safety concern, promote safe and healthy lifestyle for growing mid-class

Chinese people and increase awareness of environmental issues at the same time provide job opportunities

for local farmers to improve their living standard.

Doujea has a home-delivery prepaid-subscription based business model and products are presold before they

are available for delivery or ripe for harvest. Company has two payment methods, prepaid, and pay-at-

delivery mainly for one-off products. The prepaid system used at E-Shop is similar to popular PayPal system.

Currently Doujea has 4000 regular customers, who are mainly middle- and upper- class Chinese in Beijing and

Tianjin. 30% customers place orders with Mobile device applications. Doujea mainly uses free marketing

channels such as Weibo (Chinese version of Twitter, 500 Million users) and Wechat (fast growing mobile

group communication application, 300 Million users) and Mobile msg. Doujea advertises products and

promotes offers regularly at two peak user online times, 11am and 7pm.

Doujea has two farm lands with totaling 58 green houses in Beijing and Tianjin. Its direct sales channel is

through E-shop at Taobao (http://doujea.taobao.com/) and it also supplies high-end products such as

strawberries to upscale food supermarkets i.e. BHG Market Place. The firm has about 70 employees working

in units of farming, logistics, packaging, sales and administration.

Doujea is committed to offer local people access to healthy and worry-free lifestyles. To ensure safety of food

products, Doujea has carefully studied farmland's surrounding environment and follows organic farming

practices that are technically feasible in China. For instance, to avoid water pollution, no surface water but

underground water 120 meters below surface is used. Over 95% of organic fertilizers used, of which 80% are

composted on farm. No synthetic pesticides, antibiotics or growth hormones are used. To ensure the

freshness, all produce is cropped harvested within 36 hours. Doujea guarantees customers satisfaction on all

products. If a customer is not satisfied with any product, a replacement or money return is arranged

unconditionally.

This year the company is able to break even. The short-term goal is to develop market and break even. The

mid-term goal is to develop a line of core products for premium market. The long-term goal is to develop a

platform for safe food production and distribution in first-tier cities such as Beijing, Shanghai and Guangzhou

in China.

http://doujea.taobao.com/

http://doujea.taobao.com/



Exhibit 5 Competitive strategies (importance in a descending order)

Avoid commoditizing products by using price cut very carefully and selectively (for example, 15%

discount for annual subscriptions and 12% for semi-annual subscriptions), and mainly using free gift

(i.e. a package of seasonal produce or fruits) for promotions, and by providing a wide variety of

veggies and fruits and other food products. For example, there are almost always about 20 varieties of

veggies weekly for customers to select for subscription package.

Develop core competence in product innovation such as new varieties of premium products and

design of package etc

Focus on niche market with high quality of products in freshness and packaging terms and of logistics,

and special fruits in terms of taste such as strawberries, blueberries and melons, produce of special

color (i.e. purple cauliflower and pepper, and white asparagus etc

Supply top premium product (i.e. strawberries) to high-end supermarket i.e. BHG, where major

customers are expatriates and other upper-class consumers, for brand image building

Very selectively contract with farms for special products such as organic grains and chickens and eggs

etc to complement existing products and expand offering range.

Sponsor activities for i.e. Early Childhood Education Centers and popular gastronomy center and forum

(i.e. http://www.wenyikitchen.com) to attract and educate potential target customer

Recycle packaging material to increase environment protection awareness. Doujea uses recyclable

packaging materials and periodically collects them from customers with exchange of food products as

reward.

Open Farm Tour to customer to entertain and educate customer with safe food farming life

experience

Selectively get some products such as strawberries, with the participation or involvement of

customers, certified by national organic food certification body.



Exhibit 7 Challenges (Impact of significance in descending order)

Cost control

Doujea so far has not established a stable and reliable cost structure or model to control cost. There

are several factors causing the complexity of cost control, i.e. innovative business model in terms of

pre-selling nature, free selection of products and free change of delivery times and locations etc, too

many varieties of veggies each of which cannot be produced in a large quantity, heavy efforts in

developing new varieties of products for learning market etc.

Picky and demanding customers

Some of Doujea’s regular customers only buy fruits i.e. strawberries which are even the most

expensive in Beijing market. New customers tend to complain for price, quality and delivery etc.

It is essentially important to have good qualities, in term of good appearance (i.e. attractive colors,

freshness and cleanness, image of packaging), fragrance and good taste and flavors, with reasonable

price. They also like more varieties of product selections for veggie subscription packages.

Difficulties in supply and demand fluctuation

There are a few problems in this area. The biggest problem is frequent over-production of some

varieties of products especially veggies. This is also one of the reasons we usually offer free gifts or

bundling packages with those products.

Difficulties or problems with pricing in particular

There are a few key reasons, lack of talented market researchers in China in general, no reliable data

source i.e. price data for safe food market in china, and company has not resources to do market

research etc.

Roughly speaking, in tier-one cities such as Beijing and Shanghai, the premium price of safe food

products can be about 200-400% of the price of conventional food products. Sometimes the premium

can be 8-10 times mainly for imported high-end products. The premium of Doujea veggies is about

300%. Top premium products such as strawberries are priced at much more premiums.

One problem of same pricing policy for two different markets is it causes difficulties to grow revenue

and customers in Tianjin market

Lack of talented junior and middle managers

This is a common problem for mid- and small-sized private enterprises in China. This shortage of

human capital is one of biggest obstacle for medium and small private firms to fairly develop and grow

bigger to compete with state-owned enterprises.



Exhibit 8 Customer profile

Geographically concentrated customers, >98% from Beijing (as majority)and Tianjin

90% B2C individual consumers, 5% enterprise customers (usually holiday season gift products), 5% B-

B: upscale food supermarkets

Upper- and upper-middle- class living a busy but high quality lifestyle

90% customers are females and at least 50-60% customers have a baby under 3 or a minor kid under

14

Well-educated golden- and white- collars (aged 29-45)

Annual family income Euro 500K RMB (62.5 K Euro), price insensitive to some extent

Reasons of purchase: good taste, high quality, health & safety, and convenience

Frequency of Purchase: 1-2 times per week

80% B2C customers are social network savvy

Kind of close supplier-customer relationship that 40% B2C customers need communication via such as

E-shop online, social media and telephone for product selection and delivery etc



Exhibit 9 Comparison of online B2C organic firms

Comany Product category and

variety Product and service

offerings Origin of product Organic Farmland Size Business Strategy Promotion

Competitive position

Tootoo, founded in 2008 (120 Million EURO investment), www.tootoo.cn

9 food categories with 10,000 varieties including veggies, fruits, red meat and aquatic food, processed frozen food, sauces and edible oil and various milk products and baby care non-food products etc

Various subscription packages, other product packages, larger coverage of delivery, lower purchase value for free delivery,

70 % procurement, 20% self-production and 10% import

20-30% mainly veggies and fruits, meat Yes Big

A very wide line of food products at different price ranges from super-premium to premium to medium, special offerings for enterprise and VIP customers

Discounts on many products, some products even at deep discount 50%, regular discounts for enterprise and VIP customers, promotional activities on forums and TV

Very close competitor with many comparable products and offerings

Tony's Farm, founded in 2005 (tens of Millions RMB, US$20 Million infusion recently), www.tonysfarm.com

Veggies as major, poultry & eggs and oil and grains

Veggie subscription packages and Veggies bundling packages with grain and egg, gift packages and experience packages

90% self production and 10% import and procurement

100% Veggies Yes Big

Location differentiated business that Shanghai and Beijing have different product and service offerings

No clue about discounts etc., promotional activities with luxurious brands and TV series

Potential close competitor

Beijing Kang Shunda Farm, founded in 2009 (15 Million Euro), www.ksdesd.com

Veggies, poultry & eggs and oil, grains and fish, nuts , honey and wine

Two annual subscription (veggie, fish, poultry and eggs ) and various gift packages and cards

80% self-production, 15% procurement and 5% import

100% Veggies, poultry and fish Yes Big

Diverse variety of food products, supply to Tootoo, supermarkets and franchise stores as major business Purchase bonus

Weak competitor









Beijing Beyong Technology, founded in 2003, www.ofood.cn

A wide variety of consumer products across food (veggies, fruits, grains, meat, health and nutrition supplement), office, skin care and home appliances

individual product offerings

100% procurement

95% products No

Medium

A very wide varieties of consumer products across different consumer product categories, retail and wholesale

Discounts on many products, some products even at deep discount 50%, regular discount 10% for membership


Beijing Organic Farm, www.organicfarm.com.cn

specialty oil, veggies and fruits, poultry and eggs, and red meat, bread and clothes

individual product offerings and gift package offerings for online sales

90% self-production, 10% procurement

95% products Yes

Medium

Diverse but limited variety of food products, supply to supermarkets and franchise stores as major business

special price for membership and promotional prices for some products but without any clues on the discounts or savings


Organic and Beyond, founded in 2006, www.oabc.cc

A wide variety of food products including vegetables &fruits, meats &aquatic food, various dried food such as wild mushroom, grains and tea, coffee, nuts, wine, milk, olive oil

Various pre-paid cards and product packages, high purchase value for free delivery

40% self-production, 40% procurement and 20% import

80% products Maybe

Medium

Gift products for people living a western lifestyle and enterprise customers

Regular discount 10-12% for membership





http://www.oabc.cc/



Exhibit 10 Comparison of product and service offerings in detail

Offering Doujea Tootoo Tony's Farm Kang Shunda

Veggie subscriptions

monthly, quarterly, semi-annual, and annual

monthly, quarterly, semi-annual, and annual

monthly, quarterly, semi-annual, and annual no

Veggie bundled subscriptions eggs only

eggs, grain, imported fruits, organic milk, and pork

eggs, pork , grains and mushroom

eggs, poultry, fish and fruits, annual subscription only

Package weight of subscriptions 2 Kg, 3 Kg and 4.5 Kg 3Kg and 5Kg 3Kg and 6Kg

3Kg for two deliveries and 6Kg for one delivery

Delivery per week 1 regularly 1 regularly 1 or 2 1 regularly

Gift cards 8000 RMB value card

500, 1000, and customer defined value cards, 300-2000 package cards

a range of price 300-3000 for certain bundling packages

various value cards between 500-10000

Gift packages holiday season design & supply

seasonal veggie and fruit packages

Seasonal and regular, various with grains, eggs and dried mushroom

three packages veggie, fruit and wine

Regular bundling packages

eggs, fruits and grains no

eggs, pork, mushroom, grains no

Individual products

about 10-20 variety of specialty products such as fruits, veggies and meats etc

thousands of variety from a wide categories with a wide range of prices from economy to super-premium no

at least 20 varieties from different food categories such as veggies, fruits, honey, wine, fish, poultry and eggs

Trial packages 2Kg veggie at cheaper price no

veggies, eggs and poultry and bundle at regular price no

Certified organic products

No, AA grade Green (safe for i.e. baby) for some super-premium varieties 20-30% organic 100% veggies

organic veggies, fruits and fishes with limited variety

Customer mainly individual consumers

individual consumers, enterprise customers, and VIP customers

enterprise customers and individual consumers

supermarkets, Tootoo and other traders

Recreation

only farm tour in spring, online fan community & customer involvement activities

farmland rent, self-service catering, farm tour whole year

farmland rent, farm tour, catering

farmland rent, fishing and self-service catering



References

[Best, 2013] Market-based Management, Strategies for Growing Customer Value and Profitability, Sixth Edition, Roger J. Best, Emeritus Professor of Marketing, University of Oregon 2013

[Davies et al., 1995] Who buys organic food? A profile of organic food in Northern Ireland, Anne Davies, Albert J. Titterington and Clive Cochrane, British Food Journal, 1995

[Emilio Portocarrero, 2011] Organic food product in China: Market Overview 2011, International Trade Centre (ITC)

[Gabor, 1988] Pricing Concepts and Methods for Effective Marketing, Nottingham University Consumer Study Group, Andre Gabor, 1988

[Grant, 2010] Contemporary Strategy Analysis, Seventh Edition, Robert M. Grant, 2010

[Hinterhuber, 2003] Towards value-based pricing – An integrative framework for decision framework, Andreas Hinterhuber, Industrial Marketing Management, 2003

[Hughner et al., 2007] Who are organic food consumers? A compilation and review of why people purchase organic food, Renee Shaw Hughner, Pierre McDonagh, Andrea Prothero et al, Journal of Consumer Behavior, 2007

[Krystallis et al., 2005] Consumers’ willingness to pay for organic food, Factors that affect it and variation per organic product type, Athanasions Krystallis and George Chryssohoidis, Agribusiness Laboratory, Agricultural University of Athens, Athens, Greece, 2005

[Monroe, 2003] Pricing, Making Profitable Decisions, Third Edition, University of Illinois, Kent B Monroe, 2003

[Nagle et al, 2006] The strategy and Tactics of Pricing: A Guide to Growing More Profitably, Fourth Edition, Thomas T. Nagle and John E. Hogan, 2006

[Osterwalder et al., 2010] Business Model Generation, A Handbook for Visionaries, Game Changers, and Challengers, 2010

[Peng, 2010] ORGANIC FOOD MARKET SEGMENTATION IN CHINA, Fang Peng Bachelor’s Thesis, School of Business Administration International Business, JAMK University of Applied Science

[Raju et al., 2010] Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability, Jagmohan Raju, Z. John Zhang, 2010

[Somervuori, 2012] Profiling behavioral pricing research in marketing, dissertation, Outi Somervuori, Aalto University Business School

[Yin et al., 2009] Consumers’ purchase intention of organic food in China, Shijiu Yin, Linhai Wu, Lili Du et al, Wiley Interscience, 2009

[Zeithaml, 1988] Consumer Perceptions of Price, Quality, and Value: A Means-End Model and Synthesis of Evidence, Valarie A. Zeithaml, 1988

http://www.ftpress.com/authors/bio.aspx?a=3e0b19f8-4eb9-45bb-bd72-b250013aabd6

http://www.ftpress.com/authors/bio.aspx?a=704731db-7e47-4afd-8424-ba6cf20845bc

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Business Project -- Final Report