The Euro is at 1.11 USD$. No, it’s at 1.23. No, it’s at 1.21. This is how it’s been going for the last year. In fact, over the last twelve months, the Euro has gained about 10% against the US Dollar. I can think of a year, not that long ago, where the Euro lost 25% of its value versus the USD$. We all know that currencies swing from time to time - but swings of this magnitude over a relatively short time are rare and a very real headache to companies manufacturing in one currency region and having to quote in another currency to give customers some stability in their financial planning.
Companies selling B2B instrumentation technologies around the globe have decisions to make! Many smaller organisations (especially those based in the US) have opted over the years to maintain pricing in only one currency, usually the US Dollar. While this strategy is clearly very safe, it can be problematic. Especially in some countries where prospective customers want certainty over what they will end up paying for a product. This can be particularly true where customers have to apply for funding from public bodies locally and currency fluctuations can mean that when local currency funding is released it is no longer sufficient to purchase the product in its quoted foreign currency.
The emergence of the Euro fifteen years ago changed the landscape considerably. In global financial terms, the Euro became an alternative “reserve” currency to the US Dollar. Nineteen countries with a combined population of over 330 million people have now adopted the Euro as their currency. Companies and institutions in this single, highly-developed and wealthy trading zone have now become accustomed to doing most of their business in Euro. The consequence is that companies only quoting in USD$ are likely to be missing out on some deals, meaning there is pressure on manufacturers to
quote in Euro to Europeans. If they don’t then they will almost certainly be losing out.
Sadly, there is no magic bullet that will solve this issue whilst fully protecting the manufacturer from the vagaries of exchange rate fluctuations. However, there are some strategies that can help.
1. Frequent Price List Adjustments
Vigilance is the order of the day here. If you decide to maintain multiple price lists in different currencies, then you need to check regularly and adjust those price lists so you aren’t being walloped by large rate fluctuations. You don’t need to change your pricing every week or day, but you should have a rule that says if the rate changes by more than X% you will adjust pricing. Many manufacturers worry about customer sensitivity to pricing changes. Don’t! Most customers of high value B2B technology will only be aware of your pricing the day they get a quotation from you i.e. they won’t compare it to a price from last year. For those that do, your salespeople will have to do the work they are paid to do i.e. explain and justify the pricing.
2. Protect Quotes, If Possible!
If you need to adjust foreign currency prices then endeavor to protect existing prospects. For large value sales you may need to gobble up some of the pain even if a quotation is just out of date. In such cases the wise thing is often to honor the older pricing. Of course, if the currency swing is so large that you will lose money on the deal then you can just say no and offer the new pricing. You may lose the order but that is usually better than losing cash…...
3. Export Currency Price Surcharges
Running a price list in a foreign currency is a benefit to your customers. This benefit has costs to you and these need to be covered. The two main costs are currency conversion and the exchange rate fluctuation risk. The former is simple to calculate.
Check with your bank and you will probably find that converting payments received in a foreign currency to your home currency will cost you the median exchange rate plus about 0.5 to 2.0 percent. Tip: If you are paying at the higher end of these percentages then your bank is ripping you off and you should agree to a special rate with them.
Hedging is a way of de-risking the future. Typically, you would set pricing at a conversion rate that makes sense now and then do a deal with your bank such that they agree to convert a certain amount of that currency at any time in say the following six months or a year at the rate that applies now. Of course they charge a fee for this service. Essentially, you are betting against the bank on how exchange rates will change and by agreeing to fix at least some of your predicted exchange needs you are “hedging” your bets.
5. Internal or Pseudo-Hedging
The hedging described above is a formal contract with the bank but many companies don’t realise that they may be able to do some or all of their hedging internally. If you are in the US and selling to the Eurozone in Euros and, if you also have expenses (purchasing parts or paying for marketing activities) in Europe, then opening a Euro account with your US bank is a great idea. Euros received from customers can be stored and used to pay for expenses that are also denominated in Euro. Exchange rate fluctuations won’t affect you except when you decide to draw from your Euro account back to your USD$ one.
Deciding what pricing strategy is right for you is never easy. Deciding on whether to offer your products in another currency is even more difficult. If your export market is stable, large and wealthy like the USA or Europe then it makes sense to offer local customers pricing in USD$ or EUR€ but do so with a plan for dealing with change.
Thinking about the strategies above will help.
June 16th, 2021
Keep up to date, subscribe to our newsletter now!
Photo credits: Pixabay.com
Why not take two minutes to watch the video on how Red Box Direct can help you expand into new markets.