A few months ago I was talking with the leaders of a small, innovative Canadian manufacturing firm. The company had grown from its successes in design, production, customer service and marketing? and now they were looking at how to proactively expand into their largest potential market: their neighbor to the south.
When I researched the company, I noted that they kept their prices in Canadian dollars for both sides of the border. I assumed that they wanted the simplicity of a single-currency business. As many of you know – currently Canadian companies have a foreign exchange advantage by charging in U.S. dollars because the Loonie is historically low to the American Buck.
But what the company leaders told me left me at a loss for words. (Those who know me understand that this is a rare occurrence.) They said that they would not charge a different price to the American market because it would be unethical.
Now there are indeed pricing methods that are unethical and oftentimes illegal ? collusion, predatory pricing, kickbacks, etc. But international trade is actually built on the assumption that prices of materials and labor inputs, as well as final products are dissimilar in different markets. If all prices were the same, there would be no real reason to trade at all. Vietnam has a large supply of inexpensive labor that lends well to textile production. Saudi Arabian women put a higher value on beauty products (particularly perfume) than most other markets. And we all know that real estate value for the same building is radically different if it is located in downtown Tokyo vs. Omaha, Nebraska.
Currencies all fluctuate on world markets. What started as a profitable market can quickly turn to a loss as the Euro or Yen loses value. So how can a company take this risk and turn it into profits?
Understand that the pendulum swings both ways
Currency exchanges can fluctuate widely. That?s why it is important not to base business performance projections on today?s exchange rate only. I normally give a range of possible projections, knowing that over time the exchange rate will sometimes be favorable to sell product in a market and sometimes less or not at all.
This is why it is important for the Canadian manufacturer to sell their products in American dollars in the American market. Customers would pay the full price because of the value received. And the additional profits from producing products with Canadian materials and labor mean that when the American Buck drops to the Canadian Loonie, there will be some padding to cushion the profit squeeze.
Use the Lean Times to Build Operational Efficiencies
When your currency is too strong in international markets, profit margins will get pinched. This is an excellent opportunity to look closely at internal operations. Are there ways to gain efficiencies in production? Are all marketing channels delivering a strong return on investment? We do the same during an economic downturn. Periods when our currency is strong relative to our international markets can drive efficiencies that improve profits even more when the currency weakens again.
Consider Supply Chain Costs Too
A strong currency means that your company can buy materials at a lower price from weaker currency markets. It may make sense to keep several suppliers and increase the order size to those suppliers whose currency is currently weaker. This works best for materials that are similar quality between suppliers.
I hope you found this article helpful. For more advice and tips on international trade, please sign up here.