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It’s not easy being an exporter from a country with a relatively strong currency. The foreign exchange rate makes these goods or services more expensive at a time when recession-weary consumers are already looking to spend less money.
The situation is especially rough for those small businesses that don’t have the volume or the margins to absorb the hit. However, there are ways to mitigate the impact of a stronger currency.
Customer retention is key to remaining a competitive exporter when currency fluctuations are working against a business. But how can a business keep its customers from fleeing when its prices seemingly rise overnight?
— Guy Champagne, senior partner, consulting at the Business Development Bank of Canada
For starters, business owners should consider absorbing the cost of currency fluctuations rather than raising their prices, says Guy Champagne, senior partner, consulting at the Business Development Bank of Canada headquartered in Montreal, Quebec. “I would opt for potentially taking a lower margin in the short-term to achieve longer-term profits with the customer,” Champagne says. “Maintaining a long-term relationship with a customer is key to the long-term success of the business.”
In fact, cultivating strong relationships is one of the most important ways to insulate an export business from the effects of a strong domestic currency. “You develop that relationship so when your currency goes up a point or two, it isn’t going to kill that relationship,” says Doug Taylor, managing director at Pacific Business Intelligence, an international trade consultancy in British Columbia.
Taylor says the key to developing better relationships is staying in constant touch with customers to ensure that the customer always feels like they’re receiving value from the exporter.
“If you have a really good client in the States, phone up your customer and say ‘I will give you a 5 percent or 10 percent discount,” Taylor says. “You don’t even have to mention the currency. The guy in the U.S. will know the dollar has gone down, but what he hears is the guy on the other end of the line offering him a good deal.”
Price is always a top consideration for customers. Yet, long-term business relationships are often sustained because customers come to depend on an exporter’s quality, dependability and customer service.
But when currency value works in an exporter’s favor, it can be tempting to use a low competitive price as a crutch — winning business solely by outbidding competitors. For example, some export businesses in Canada relied on a price advantage when their value of currency was weaker. When currency value and money exchange rates began to work against them, these exporters suddenly realized their products or services weren’t providing enough value to customers. “It was good enough when it was a 20 percent discount,” Taylor says, “but not if the customer has to pay full price now.”
Currency appreciation doesn’t have to be a death knell. It can actually present an opportunity for an international business to focus on bettering its product, whether that’s fostering innovation or increasing quality.
Champagne recommends investing in productivity improvements, such as technology upgrades, equipment purchases or other capital investments from foreign suppliers. These will be more cost effective now since imports are cheaper with a stronger currency.
The result is a reduction in operating costs with the added benefit of offsetting the impact of the stronger currency. With the savings from productivity gains, “the exporter might be able to pass on lower prices in the face of a rising currency in order to remain competitive,” Champagne says.
Companies may also consider looking for new markets that are a better fit with current economic circumstances. “One of the things I’m encouraging my clients to do is look at other markets,” Taylor says. For example, “Americans aren’t buying as much as they used to. But there are markets that are growing fairly rapidly, like Eastern Europe, Asia and South America.”
It’s possible to see the past performance of a domestic currency by reading old articles, looking at historical data and using online calculators. However, there is no way to predict a currency’s future value with certainty. Planning for uncertainty can give business owners a measure of control over their circumstances. “The reality is the landscape from a currency standpoint is unpredictable and it will continue to be unpredictable,” Champagne says. “Micromanaging currency fluctuations is probably more harmful to a business owner than taking a long-term view and fostering resiliency in a business to cope with those uncertainties.”
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