August 31, 2011

The U.S. dollar has taken a beating lately. Since July, it has fallen significantly in value against the Yen, Euro, Pound, Canadian Dollar and Gold among other currencies and commodities. This downward trend may be accelerating, but it isn’t something new. Back in August 2000, a single U.S. dollar could be exchanged for 108 Yen, 1.1 Euros, 0.67 Pounds 1.47 Canadian Dollars or .0036 ounces of gold. How things have changed.

This decline in the value of the dollar causes important problems for U.S. companies at various levels.

For companies that buy from foreign suppliers, the cost of goods sold increases

Foreign suppliers that price in dollars are raising their dollar-denominated prices to compensate for the decline in the dollar relative to their local currency. Foreign suppliers that price in their local currency leave U.S. buyers fully exposed to fluctuations in the value of the dollar. For the foreseeable future, this makes foreign purchases more expensive as the value of the dollar trends downwards.

Given the current state of the economy, it’s very difficult for a U.S. company to raise prices. Therefore, companies that buy from foreign suppliers will have to absorb the losses due to currency fluctuations or run the risk of alienating customers through price increases during a quasi-recession. Neither option is attractive.

For companies that export and set price in dollars, money is being left on the table

By maintaining prices in dollars at a time when our currency is declining, companies are giving an automatic discount to their foreign buyers. Over the past year, for example, the dollar has declined 11 percent relative to the Euro. This means that a company selling a product for the equivalent of $880 could have generated $1,000 in revenue per unit by simply pricing in Euros.

Strategies for dealing with a declining dollar

One solution to these problems is to develop a pricing list in multiple currencies (for exporters) and to peg U.S. dollar prices to supplier currencies (for importers). To make this happen, business owners need to address the following:

1. Strategy

As a business owner, it’s a matter of calibrating your assumptions about the different effects of pricing vs. not pricing in foreign currencies and determining if the anticipated net benefit is worth the effort.

2. Policy

You need to make decisions regarding when to adjust for currency, how to communicate this change to customers, how to address customer concerns and complaints, and how to train employees on the changes.

3. Technology

This is actually the simplest issue to address. Multi-currency online shopping carts and accounting software are widely available. Many consulting firms and developers are available to asset you in managing the issues associated with tracking and accounting for multi-currency sales.

Benefits to a declining dollar

A declining dollar isn’t bad news for everyone—it can help boost unit sales. As the dollar falls relative to other currencies, the relative cost to a foreign consumer of buying an imported U.S. product or service goes down. As those sales are generated abroad and saved in local currency bank accounts, they automatically appreciate in value when measured in dollar terms. So when you repatriate that capital by transferring it to your domestic bank account, you will see a boost in the value of the revenues generated.

For many companies, addressing the decline of the dollar by pricing in foreign currencies or pegging prices will be a profitable solution.

Does this impact your business? Have you considered pricing in foreign currencies? What challenges have you faced in the process? Share your comments below.

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• Money

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Mike Periu, Article, international business, currency, business strategy, economy, financial management