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International Pricing Among Current Currency Fluctuations

May 2015 Corporate, Pricing

Growth in North America and Europe is low to non-existent. The euro is down against the dollar.  China has wage inflation.  Half of the BRIC countries are now investment pariahs.  And the N-11 countries still offer high uncertainty against a backdrop of high potential growth.

Given the current currency fluctuations and country specific economic situations, what problems do they create for firms and how are prices supposed to be managed across boarders today?  These are the pertinent questions facing many of today’s executives.

From looking at case studies from H&M, Unilever, Procter & Gamble, Colgate-Palmolive, Johnson & Johnson, Harley Davidson, Yamaha, Honda, we find two challenges to pricing have increased their importance in today’s environment.  These are (1) competitive price position changes and (2) product diversion.

Competitive Price Position Challenges

The rising wages in China and cheapening euro are driving changes in what were once considered stable sources of competitive advantage.

Euro-to-Dollar

For example, H&M was counting on low-cost production in China to compete in Europe but is suddenly finding their variable costs rising in comparison to Zara and some other European clothing manufacturers.  What should H&M do about this?

Or, Proctor and Gamble and Colgate-Palmolive are finding European Unilever and Henkel competitors are able to lower their prices through favorable exchange rates which tend to point towards a continued decrease in euro to dollar conversions.  How should American household product producers react?

In both cases, firms are asking how they should they should manage prices in the face of new competitive threats: absorb the cost increase or pass it on to consumers, lower prices to remain competitive or maintain them under the threat of losing sales and market share.

To answer both of these questions and others, executives are encouraged to re-evaluate their position against the Strategic Price Reaction Matrix. This calls executives to consider if their source of competitive advantage has been devalued, if their pricing power has eroded, and how this fairs on a country by country basis.  Given the answers to these underlying questions, they can determine if they can (1) ignore the rising competitive threat or use the situation as an opportunity to attack, (2) mitigate increased price competition through sales and marketing communication, (3) defend their market share through managed price reductions, or (4) accommodate competitors with unavoidable share losses.

Granted, not all outcomes are desirable, but it is generally better to survive a battle to fight another day than to lose the war in bankruptcy.

Product Diversion Challenges

Product diversion, also known as parallel importing or price arbitrage, can arise when products are sold in one country at a low price and in another country at a higher price.  In this situation, third parties may buy the product in the low priced countries and resell them in the higher priced countries.  The result is that third parties profit from the price disparities between the countries and the producing firm finds its own products competing against it in the higher-priced counties.  This drives the producer’s margins to shrink.

Product diversion is a constant challenge in many industries.  In a time of high currency fluctuations, many executives are finding new patterns or increased quantities of product diversions.  This is especially true of high-value and highly-fungible products like contact lenses, tobacco, and consumer electronics.

To address product diversions, executives are being driven to re-evaluate their country specific segmentation hedges.  Can they be increased?  Do prices need to be harmonized between countries to reduce the price arbitrage incentives? How much product diversion is acceptable?  What would be the anticipated profit impact if prices increased in the low-priced country? What would be the anticipated profit impact if prices decreased in the high-priced country?  Where is the new tradeoff between price segmentation hedges, price harmonization, and anticipated product diversion?

Granted, these are not easy questions, but it is better to proactively make tradeoffs than to either be a waif in the wind or a stick in the mud.

Rethinking Strategy

The rapid changes in currency valuations and shifting outlooks between economies do present real challenges in pricing, especially for multi-national corporations.  Yet they can be addressed strategically.

While no blanket solution exists because the prescription for one company will not be the same as that found for another, the route to finding the right solution for individual companies can be mapped.  In all cases, the solution isn’t simply a mathematical exercise of price adjustment based upon costs.  It is a strategic solution based upon the firm’s unique competitive position, resources, and customer base.

Pricing isn’t just about plots and spreadsheets nor is it just a job for managers and analysts. It spans to include firm specific strategy and executive engagement.  Are you ready to address the pricing in your strategy?

 



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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