International Pricing – Dollars Or Local Currency?
OK. Now you’re planning to launch your products in an international market. You’ve already figured out your strategy for channel sales and have found your distributor in your country or foreign-based retailer in the sights. All you have to do now is to provide them with the price and then off you start…
But, wait a moment. Then 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?”
Don’t be fooled. Although it might seem intuitive to US businesses that their prices must be displayed in USD, it’s in fact not clear to anyone. In some instances, it might be a bad idea. It’s important to think about the currency used when you are determining prices. Let’s review some problems related to currency and the pros and advantages of pricing your products in dollars instead of pricing your goods in locally-based currency.
Pricing in $US
Be aware that if you’re pricing a foreign client in dollars, you’re expecting A LOT of that client. In the first place, you’re expecting that they manage the process of converting currency for them to pay you. They must figure out the best way to accomplish this through their bank, even if they’ve never previously done this. Even if they’ve previously done it there will be charges and they have to figure out how they will handle the variable nature of your product “cost of goods”. Each time they purchase from you, it’s likely to cost them something else. It is important to keep this monitored and accounted for. Furthermore, you’ve caused currency fluctuations to be their issue, not yours. To deal with this, the customer could build in an additional 10-15percent “adverse currency swing” factor and, when they do this, your cost in the particular country is going up. If a foreign customer inquired about a price, and you replied “well today it’s 50 Euros but I let you know exactly how much when you come to pay me” it’s possible that they’d be quite unhappy and this is what the US pricing is to an international client.
Prices in local currency
The advantages of providing quotes in local currencies for international clients might not seem immediately apparent but take a moment to think about it. If I’m a distributor or distributor who purchases in my country’s currency, I know precisely how much it will cost me. I don’t need to factor in any hedge factors to account for potential currency fluctuations, which means my prices don’t need to be excessively exorbitant. I don’t need to keep a close focus on exchange rates constantly I can focus my time working on my business, which is selling products. I don’t have to invest more than I’ll have to on charges for exchange that are imposed by my bank. The most important advantage is that I am able to design my price list to keep my clients and be confident in the margin I’ll earn.
Of course, when there is Ying there will be Yang. You, the provider have taken on the risk of currency fluctuations and uncertainty, as well as the effort and expenses related to the exchange of currency.
Situations in which pricing in dollars is acceptable/desirable
Certain distributors and retailers that are already working with suppliers who provide them in dollars must be provided with quotes in the US currency. Many of the largest Euro retailers, for instance, purchase container loads of goods directly from Chinese companies or from companies that have Chinese manufacturing facilities. A majority of these big Euro retailers that receive “direct shipment from the Far East” are described in the US dollar in all likelihood. Therefore, they’re prepared to purchase in $US and there are no problems for them to purchase in the US from you.
Additionally, some retailers may purchase directly from the US in dollars and have established to conduct business in this manner. There are companies who want to purchase from you in dollars due to the fact that they “like to play the currency markets”. Be wary of these firms because they could get distracted from selling and instead become interested in speculation about currency, however, you might not have the option of choosing! US in USD and have already been established to operate in this way.
You might come across businesses who would prefer pricing from you in USD due to the fact that they “like to play the currency markets”. Beware of these companies since they might be less focused on selling and instead become interested in the speculation of currency however, you might not have the option of choosing! China. The Chinese Yuan isn’t legally tied to the dollar at present, but the Chinese government has stabilized the exchange rate for a long time. The ability to quote prices in dollars in China is not usually an issue, and in certain instances, it is the preferred option for Chinese customers.
If you’re a smaller firm, or possibly one having a small staff You may be left with no other choice than to present costs in dollars. It is possible that you don’t have the capacity to take on the risk of currency fluctuations, costs of currency exchange, as well as the work required to calculate the price in your local currency. If that’s the case, then you should be aware of why you’re doing this and always consider alternatives. Does the effort required to calculate the price in the local money pay off?
Situations in which price in local Currency is acceptable or desirable
In one of my previous assignments, I helped a consumer electronics firm to establish its business through distributors in Europe. The price was in US dollars while the merchandise was delivered directly from its Chinese manufacturing facility in China. It never stopped bothering me at how excessively expensive my price was in Europe which I was unable to find out the reason. A careful analysis and investigation revealed the possibility that my distributors were adding significant factors for adverse changes in the currency to their pricing. Additionally, a few of them were beginning to take advantage of the rewards and thrills of speculation on currency! I decided to alter the pricing structure, allowing pricing in euros and not dollars. Over the course of 12 months, I was able to change the primary focus on “retail pricing to market” and we were able to reach an easy “formula” allowing pricing to be determined by RRPs. Additionally, due to an element of fortune, our currency shifted our way and we also increased our gross margins by an average of 5!
If your competitor is selling in the US dollar local currency, local currency pricing may provide you with an advantage. In taking on risk for currency and permitting the buyer to focus on what they’re good at, which is selling the product. You’re removing the hassle of handling the exchange of currency.
Price in local currency makes an ongoing price negotiation simple. If you are pricing in dollars customers can take advantage of the fluctuations of the exchange market to begin negotiating the lowest cost. This can be time-consuming and usually expensive. When this happens, you should take into consideration the local currency price. For instance, you can agree on a “formula that will determine the price on the basis of something like your retail prices. I’ll write an article that will briefly explain the process however, in the main, you sit down together with your retailer the Distribution Partner, and review and approve their import “calculation”. In this way, you are able to agree on the margin they need and their customers in order to be able to sustain. The result is a percentage from the retail price to your local price in the currency you are quoted. For example, a factor of 3.5 means that a 350 retail price item would have an expense from the customer of 100. Once established – no more arguments!
Overall, the advantages of getting local currency pricing in place and running can be rather high, but as you can see, there are costs and risks that the supplier has to bear. If you do not take on these risks and expenses, the client is expected to assume them and this can affect your business.
