International Pricing - Dollars Or Local Currency?

OK. So you are about to start selling your products into a new international market. You have already worked out your channel strategy and you've got your country distributor or your foreign based retailer lined up in your sights.All you need now is give them the prices and off you go.....

But wait a minute. You start thinking: "should I quote them prices in$US? It seems obvious that I should, all the rest of my business is in dollars, right? and they expect it don't they?"

Think again. While it may seem obvious to US companies that their prices should be quoted in $US, it is in fact not obvious at all. In some cases it might be the wrong decision. It is definitely worth giving serious thought to currency when giving your prices. So let's take a look at some of the issues involved in currency and also pros and cons of pricing your products in $US versus pricing your products in the local currency.

Pricing in $US Understand that if you are pricing a foreign customer in $US you are EXPECTING A LOT FROM THAT CUSTOMER. Firstly you are expecting them to manage the process of currency exchange to pay you. They have to work out how to do this with their bank if they have not done it before. Even if they have done it before, there are charges involved and they need to decide how to handle the variable nature of your products "cost of goods". Every time they buy from you it is likely to cost them something different. And this needs to be accounted for and tracked. In addition,you have made currency fluctuations their problem, not yours. To cope with this the customer may build in a 10-15% "adverse currency swing" factor: and when they do this, your price in that country just went up. If an international customer asked for a price and you said "well today it's 50 Euros but I let you know exactly how much when you come to pay me" you might think they would be a bit unhappy, but this is exactly what $US pricing means to an international customer.

Pricing in local currency The benefits of quoting in local currency for your international customers may not be totally obvious at first - but think about it. If I'm a retailer or distributor buying in my local currency I know exactly how much something will cost me. I don't have to build in any hedge factors for possible currency fluctuations, so my prices do not have to be so high. I don't have to have half an eye on the exchange rate all the time, I can spend more time on my business - selling product. I don't have to spend more money than I need on exchange charges from my bank. The biggest benefit is that I can create my price list for my customers secure in the margin I will make.

But of course, where there is Ying there is Yang. You, the supplier, have now assumed the currency fluctuation risk, uncertainty and the effort and costs associated with currency exchange

Situations where pricing in US Dollars is OK/desirable Some retailers and distributors that are already dealing with suppliers who quote them in $US should be quoted in $US. A lot of large Euro retailers for example are buying container loads of product direct from Chinese companies or companies that have Chinese manufacture. The majority of these large Euro retailers who receive "direct shipment from the Far East" are being quoted in $US anyway. As a result they are geared up for $US purchases and it poses no real issues for them to buy in $US from you.

Similarly some retailers may already be buying from the US in $US and are set up already to do business this way. You may come across companies that would like pricing from you in $US because they "like to play the currency markets". Be wary of these companies as they may lose focus on selling and become more interested in currency speculation but of course you may not have a choice! US in $US and are set up already to do business this way.

You may come across companies that would like pricing from you in $US because they "like to play the currency markets". Be wary of these companies as they may lose focus on selling and become more interested in currency speculation but of course you may not have a choice! China. The Chinese Yuan is not officially tied to the $US now but the Chinese government have been stabilizing the exchange rate for years. Quoting prices in $US in China is generally not a problem therefore and in many cases may be the preferred choice of Chinese customers.

If you are a small company, or possibly with limited human resources, you may have little choice but to quote prices in $US. You may not have the ability to assume the currency risk, the currency exchange costs and the effort needed to run pricing in local currency. If this is the case, so be it, but understand why you are doing it and always think about the alternative. Will making the effort to price in local currency pay off?

Situations where pricing in Local Currency is OK/desirable In one of my past assignments, I was helping a consumer electronics company develop their business with distribution partners in Europe. Pricing was in $US and the product was shipped directly from the company's Chinese based factory. It never ceased to irritate me how unnecessarily high my product's retail prices were in Europe and I could not figure out why. Careful analysis and research uncovered the fact that my distribution partners were adding a substantial factor for adverse currency fluctuations into their pricing. Plus a number of them were starting to enjoy the fruits and excitement of currency speculation! I decided to change the pricing structure to pricing in euros, not dollars. Over a period of 12 months I was able to change the focus back to "retail pricing to market" and able to agree a simple "formula" allowing pricing to be based on RRPs. On top of this, as a result of a bit of good luck, the currency went our way and we increased our average gross margins!

If your competition is selling in $US, local currency pricing can give you an edge. You are assuming currency risk, you are allowing the customer to focus on what they are good at, selling the product. You are taking away the stress of dealing with currency exchange.

Pricing in local currency can make ongoing price negotiation easy. With $US pricing, your customer can always use the vagaries of the currency market to start negotiating for a lower price. This is time consuming and often expensive. In these situations consider local currency pricing. You can for example agree a "formula' to set the price based on say, the retail price. I will be writing an short article on the mechanics of this, but in essence you sit down with the retailer or Distribution Partner and go through and agree their import "calculation". By doing this you agree the margin needed by them and their customers to survive. The end result is a factor from retail price to your local currency quoted price. So for example a factor of 3.5 would mean a €350 retail price product would have an cost from you of €100. Once established - no more arguments!

Overall the benefits of getting local currency pricing up and running are usually quite high, but as you can see there are risks and costs that you the supplier have to assume. But if you don't assume these risks and costs the customer has to assume them, and this will have an impact on your business.

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