Managing Your Local Pricing Strategy, Currency Risk, and Costs

Managing Your Local Pricing Strategy, Currency Risk, and Costs

As domestic spending decreases, businesses will cater to their cross-border customers in order to increase revenue and protect their bottom lines. As such, it’s no surprise that international selling is quickly defining the growth strategy of many online organizations.

With promising opportunities to sell globally, businesses are still left with critical questions. What is the best way to eliminate the complexities and friction points when converting traffic? And how to do it while remaining profitable?

The first pain point and common problem to address is your pricing strategy. There is no debate that consumers prefer to purchase in their local currency, since over 75% of global shoppers prefer sites that dynamically price products

Consider the following retail-focused example:

Imagine if a US-based retailer suddenly changed the pricing on their website from USD to JPY. What would happen to their conversion rate for their US-based customers?

The customers would lose trust in your business and wonder if you sell to US customers. It would also create extra steps for them to understand what price they would actually pay in their local currency. Even if the customer decides to purchase the product in another currency they will be hit with extra fees from their bank. 

Many would agree that this would be frustrating. Unfortunately, the same friction points are happening with your global customers.

Offering customers the ability to pay in their local currency is typically the first step businesses take when optimizing their global checkout. On a technical level, it should be fairly easy to start accepting local currencies on your website, since the ability to process in multiple currencies is a standard feature that all payment providers support. 

Unfortunately this issue is not a technical challenge. There are many operational considerations and factors a business must consider before they start offering local currencies.

The key factors to offering local currencies that your business must consider are your pricing strategies, how you will manage your currency risk, and your costs. 

 

Pricing Strategy: 

The first step is to decide if your pricing strategy will just be a straight conversion from your domestic based pricing, or will it be market specific based on demand and competition. Consider the following:

  • If using a set conversion rate to price locally, how do you determine this rate? 
  • How often are you monitoring and adjusting the conversion rate in each currency to make sure you are not over or underpriced? 
  • If you are using a fixed pricing strategy based on local demand, how do you protect yourself against losing net profit if the currency moves against you over time? 
  • Consider the local expectations; does a specific market prefer to see pricing rounded to the nearest dollar, to the nearest 0.95, or include the tax? 

Regardless of the strategy you choose, there is a significant amount of additional work and overhead than simply flipping a switch to set and maintain a viable pricing strategy.

 

Managing Currency Risk: 

Once the pricing strategy is set, the real work starts in managing risk. Currencies fluctuate every second of the day. If you set your local pricing based on market demand, then you have to be very conscious of market movements that will negatively affect your profit margin. 

For example, a US-based business sets local pricing in the UK based on market demand, with an acceptable profit margin of 30%. What happens if over the first few months of setting the strategy, the US dollar goes up 4% vs the British Pound? Is a 4% loss in margin acceptable, or will the pricing need to be adjusted? This is something your team will have to closely monitor.

If you are basing the local pricing strategy on the daily exchange, you still have to factor in risk from the time the transaction is created to the time the funds are converted. For example, you may be expecting to be remitted $98.00 for an order, but because of currency fluctuations, you only receive $97.22. This may not seem like a big difference, but when you span this across several currencies and thousands of transactions, the fluctuations pile up.

Additionally, your business must factor in refunds. Say a customer in the EU purchases something for 100 EUR, and your US-based company receives $97. If the buyer requests to return the product 30 days later, they are going to expect a full return of their 100 EUR. However, the conversion rate from USD to EUR can change drastically in 30 days. In order to refund the customer their original purchase of 100 EUR, your business may be required to refund more than the $97 USD you were paid, just so the customer receives their full 100 EUR.


Cost:

On top of managing currency risks, your business also has to deal with high FX fees that are applied to each conversion by your payment providers. Every time an FX transaction occurs, a fee is charged. Due to the way the FX fees are applied, many businesses are unaware of the large fees they are paying on top of the processing fee, ranging anywhere from an extra 2% – 5%.

This upcharge occurs because FX fees are applied to exchange rates. For example, if the current market exchange rate for 1 GBP to USD is 1.334, that would mean for a 100 GBP transaction, the business should be remitted $133.40 USD. 

But because the payment provider applies a mark up to the exchange rate (ex: 1.294), the business is remitted $129.40 USD. The FX fee on the conversion is $4.05 USD, which equals an additional fee of 3%. This fee is often not presented as a line item, but is reported on the settlement statement that the exchange rate of GBP to USD was 1.294 on X day.

To make matters more complex, most payment methods will have different fees and methodologies. The FX rate charged by your credit card provider vs. PayPal is usually very different. The different FX fees along with the currency risk, makes reporting and reconciliation very difficult.

Luckily, Reach was built to help companies to easily accept over 130 currencies, increase conversions, streamline reporting, and eliminate risk through the lifecycle of the payment, helping our partners remain profitable.