International pricing - USD or foreign dollars?

Dear CFO/Controller:

Rule of thumb and best practice is that the currency of your cost should be your currency of price. So if your cost basis is USD then price USD. 1 caveat, how dominant are you in your market? If the product is strong, your position dominant you can get away with a lot. At $30 a pop I do not believe you should have a problem in that the desire for your product might offset local adversion to paying in USD.

If you get to the point that you need to price in local to move the product you can always hedge the forecasted bulk volume. Tricky with no experience in selling the product but it can be done. In another place during another time my company had a USD cost basis for a product that we were selling on line in 15 currencies. We hedged all the way the forcasted revenue.

Best wishes...............................

David L. O'Brien, CTP
Consultant in Treasury

There are two transaction points that matter: the sale into the channel and the sale to the end-user/consumer. The closer you get to the actual consumer, the greater the requirement to price in local currency. Most folks around the world expect local pricing for all goods when they go to the local market. If you are selling directly to small, local stores, they will almost certainly also expect to be billed in local currency. It's not until you are selling to distributors/importers that you can expect to find parties willing and expecting to pay in your home currency.

Someone must always carry the foreign exchange transaction risk. Importers accept that as part of the cost of doing business and tend to have banking arrangements in place to mitigate the risk. Thus, it is common practice to price in your home currency and let the importer set the local pricing. The closer you get to the consumer, the more difficult it is to defer that issue to your customer.

You state that your product is being delivered electronically. It sounds like a B2B product purchased over the internet. If sold through Amazon or ebay, currency is less of problem since such sites typically allow buyers to choose the payment currency. You set your price in your home currency and the buyer uses either the exchange rate offered by the site or the rate offered by the buyer's bank when settling the foreign exchange transaction. If you are running the product through your own e-store, your e-store software provider may well have the capability to allow purchasers currency options.

One consideration that you should investigate: when selling into countries that have value added tax regimes, make sure that your side of any transaction is not subject to regulatory oversight. While sales over the internet in the US are not generally subject to local sales tax, that is not the norm in countries with VAT regimes. If you haven't yet, you should think about talking to a local tax expert to make sure you haven't inadvertently opened up a tax liability.

Our experience (with ValuationUP.com) is that we price in USD for all customers. There are several reasons for this (a) our costs are largely is USD so we carry not risk matching exchange rates between revenues and costs, (b) most of our customers buy online and since so many products are USD priced this allows them to easily get a picture of relative value, and (c) we use PayPal for our billing which ends up charging clients credit cards in their local credit cards anyhow. In future we'll probably migrate to local currency billing (or at least 'major' currency billing), but that's not a priority for now.

I would not be concerned about selling in Canadian dollars. However, other countries are a much different story.

From my own experience, McAfee charges in US$ and I have no problem with that. As mentioned above, the exposure to you on many small currency exposures is more significant than one single exposure for your customer. I think most Canadians are okay with US$ purchases especially since the currencies are on par: the majority of us live near the border and always price -check against the US on big items. Just make sure it's absolutely clear on all your pricing (but especially at checkout) what currency you're using.

We advise our clients that if you are in a dominant position and your customer is an importer, then you probably could bill in USD and still achieve your sales and profit targets. If your client is a mom and pop retailer and used to buying in their local currency then they will have little experience and resources in pricing and managing FX risk. Studies show that they will add 3-10% to your $30 pricing to cover this risk. Now your services/products cost them $30.90-$33.00 (local currency equivalent). Will your customer still buy from you or will they buy from a local competitor?

We feel that the better way to maximize sales and profits would be to bill in their local currency and hedge part of your exposure with a forward contract. Forward contracts are simple hedging instruments that many times have little or no deposits. Holding bank accounts in Canada and all major/minor currency countries can cost zero to maintain with the right provider. Net costs to your company would be 0.40-1.5% for Canada/Europe, and your customer would know exactly what your services/products would cost: $30 (local currency equivalent). Your transaction/invoice size is fairly small so you would be at the top of this range.

In our opinion, Paypal/credit cards are the worst option. Not only do you pay 2.9% in interchange fees, your customers get billed Paypal/credit card company's spot foreign exchange rate which is an undefined rate that will again inflate your costs in your customers mind.

Btw, this logic works the opposite way as well. If you are paying your vendors in USD, then studies show that you are probably paying 3-10% more than you would if you paid them in their local currency.

Michael King
Western Union Business Solutions