How to price in currencies for amazing growth in 2017

Takeaways:

• Don't expect customers to pay for your products in your working currency if it is different from their own. If you are planning to sell in new markets this year, ensure that you set prices in the local currency.

• By adapting prices and hedging accordingly, companies can both sell more aggressively and protect their profit margins; mitigating any unforeseen market risks

As 2016 quickly comes to a close, companies across the globe are busy preparing themselves for 2017. While processes such as reconciliation and budgeting are an essential part of starting the year with a clean slate, key corporate strategists such as the CEO, CFO and the Treasurer are turning their attention to keeping their businesses profitable and growing. Few parts of this process have more of an impact than a successful pricing strategy. After all, the price is the key driver in finding equilibrium in supply and demand. Finding the right balance between both profitability and competitiveness is a major component to success. Perhaps more critically, price helps buyers determine the relative value of your product compared to the competition. Of course, any marketer will happily tell you that methods used to set prices are far from a straightforward. When that entails pricing in a foreign currency, the process becomes even more difficult.

Local Price-Tag, Global Success

Finding the correct price can prove exceedingly difficult for firms selling across borders. The seller needs to set prices that are competitive in the target market while still covering costs and expected margins. Since costs are calculated in the working currency, they must be accounted for in the foreign price tag. Regardless of any cultural differences related to value-perception, almost all consumers around the globe prefer to shop in their local currency. Furthermore, online shoppers are increasingly turning to comparison shopping engines to make their purchasing decisions. Always operate under the assumption that shoppers compare your business to the local and established competition. By not converting your prices into the local currency and forcing shoppers to pay in your working one - and thus exposing them to the currency market - you are almost begging for potential customers to go elsewhere.Although there are many ways to increase conversion in a foreign market (providing a website and customer service in the local language, using a payment provider that integrates well with the local bank network), listing prices in the local currency is arguably the most potent. These guidelines are not limited C2C to e-commerce. Marketplaces and the travel industry are also facing increasing disruption from meta-searches. In the B2B sphere, firms must make their prices clear so that potential clients can easily compare and then purchase the product in their currency. If the product's pricing model is subscription-based, then listing prices in the local currency is all the more critical. Of course, selling in a foreign currency is not without its risks.

Turbocharging Competitiveness; Securing the Margins.

There is an inherent transaction risk each time a sale takes place in a foreign currency. Since we already know that firms should not force clients to pay in a currency other than their own, one or both of the two parties - the buyer or the seller - has to cover the risk. While tempting to shift this burden onto the buyer, doing so has two major flaws. First, the user experience will inevitably suffer. Whether an extra “transaction fee” or additional cost, the buyer’s overall experience will suffer, leading to the shopping cart abandonment mentioned above. Second - and more crucially - shifting the risk to the consumer increases the overall cost of the transaction and profoundly impacts competitiveness. Since these costs inevitably get absorbed into the price tag, the foreign firm will have much less room to adapt prices when local competitors apply pressure and ramp up sales. Rather than shifting the transaction risk onto the buyer, the seller needs to assume and manage the costs associated with selling in a foreign currency. In short, this means that the merchant must develop a risk management and currency hedging strategy that enhances both competitiveness and the overall user experience. Remember that currency markets are constantly in motion. Cash conversion cycles vary in length depending on the business ranging anywhere from a few days to well over a year. During that time, adverse movements in foreign exchange markets can easily erase any profitability from the sale. Moreover, while a positive shift could generate additional profitability, letting unsecured margins float on the FX market is about as prudent as playing roulette with the company credit card (pro-tip: don’t do this). Instead, companies selling in foreign currency hedging the proceeds at the time of sale. By doing so, treasurers and CFOs can rest assured that FX movements outside of their control will not spoil their success into new markets.International business expansion has the potential to power growth and boosts overall corporate profits. Companies that succeed in this field understand that the benefits of developing pricing policies that increase both conversion and user experience far outweigh the costs of managing currency and transaction risks. Master this crucial part of the pricing formula and 2017 has the potential to unlock previously unknown levels of success. Want to learn more about multi-currency pricing strategies? Check out our comprehensive guide here!