Cartier outlet in downtown Chengdu (Photo by Maria Trombly)

August 2, 2007 -- Until recently, marketing campaigns have focussed on the most affluent coastal cities. But now, the focus is shifting to smaller cities.

Rejoice, for instance, a shampoo brand of Procter and Gamble, used to be a middle class brand with an average price of 18 yuan (US$2.30) per 200ml bottle. Three years ago, the company started to aim at lower tier cities, by launching a new "9.9 Rejoice" series which was sold for 9.9 yuan (US$1.30) per 200 ml bottle.

"Before rolling it out to the nation, it took us six months to do test sales in six different lower-tier cities, and the amount sold was surprisingly satisfying," said Heidi Wang, Manager of Rejoice at Procter and Gamble.

"After we officially launched it in 2004, the sales have kept on rising at a rate of double digits every year. Now I can tell you our 9.9 Rejoice is the number one brand in the middle level market of 8 to 12 yuan," she added.

"There is a general belief that foreign brands are more expensive," said Kunal Sinha, executive director at Discovery Ogilvy China.

Last year, he and his team conducted market research in over 65 lower-tier cities from the north to the south of the country including Mudanjiang, Zhangjiakou and Nanjing, culminating in a report called "The Real China Revealed", which was released in June.

Only 16.3 percent of people in third-tier cities said 'yes' to foreign brands even though the prices are higher, compared with 24.1% in tier-one cities, according to the report.

But that doesn't mean people in lower tier cities don't care about brands at all. When being asked if they are willing to spend more money on well-known brands, the percentage is 38.4 percent in first-tier cities, 34.7 percent in second-tier cities and 31.6 percent in third-tier cities.

"You can see there is not a big difference between first-tier and third-tier cities," said Sinha.

In addition, he said the idea that people in lower-tier cities don't care about trends is mistaken.

Take fashion as an example. 35.8 percent of people in first-tier cities said they like to keep up the latest fashion trends presented by fashion magazines, the percentage is slightly down to 34.1 percent in second-tier cities and in third-tier cities, it's a surprise that 37.7 percent of people want to stay IN.

"Though, it's true that they are not familiar with big names as people in first-tier cities are, but then again, it's a firm's job to build their brands in those areas," said Sinha.

According to the report, out of the ten favorite brands, well-known international brands take eight in first-tier cities, in contrast with four in lower-tier cities.

He suggests international brands needn't emphasize their origin when moving to lower tier cities because for people there, "such associations immediately create the perception of unaffordability. For them, cultural assimilation might work better."

Could it be a huge expenditure for firms to penetrate their brands into lower-tier cities? Not necessarily.

"Companies should invest on understanding the relationship that people have with their brands and the product itself, it doesn't necessarily mean investing a huge amount of money, something which Samsung, Nokia and Procter and Gamble are doing very well," said Sinha. "For example, in first-tier cities you do have to spend a lot of money on campaigns, such as inviting super stars because people there are very sophisticated.

"While in second and third-tier cities, where people are less aware, you can just use local stars to make it, which costs you much less," he added.

There are still many challenges to go lower.

According to the report, consumers in the lower tier cities are looking for novelty and differentiation just as much as in the big cities.

"Innovation is absolutely important for companies surviving in China," said Sinha. "The Chinese market is changing very fast and it's important to keep up to speed."

The typical example is Bird mobile phones and Lenovo. The former was very popular in the mobile phone market five years ago but now it's completely dead because it lacked attractive technology, which is the most important driver in the market. However, Lenovo, the Beijing-based PC Company is still investing a lot of money in innovation even after purchasing IBM's personal computer section.

Sinha also warns of underestimating the diversity of Chinese market.

"Unlike other countries, China is made up of different cities in which people have very different lifestyles, thoughts, shopping habits and even languages," said Sinha. "You have to use different strategies in different regions."

According to Sinha, young Chinese people have been the main target markets, but now he is studying the market for older people. There are over 140 million people over 60 years old in China currently and they are estimated to consume about 1.4 trillion yuan in the market, according to Xinhua, the government news agency.

"Those people, around 60-year-old, used to work hard, got paid and now they are retired but still get good benefits from the government, so they want to keep their good lives," he said.

According to him, this is another big potential market for companies like financial service companies and travel agencies. But whether it is the young or the old doing the spending, a greater proportion of them will be from central China.