Selling your products into international markets can help your business grow more rapidly—and in an era of globalisation, your best customers might well be in another country. But while that makes exporting attractive, selling into overseas markets does mean you will have to deal with an issue that you may have never come across before: the need to manage exchange rate risk.
In some ways, selling internationally has never been easier. Not least, the RangeMe platform makes it far more straightforward to identify the right retailers for your products and to connect directly to them. Via RangeMe, any supplier in the world can negotiate to sell to retailers in the U.S., the U.K., Australia, and the Netherlands.
However, each of those countries has a different currency. And in practice, that can make it hard to be sure how much you will earn when selling your products in those countries. Your costs—for materials, staffing and so on—are likely to be fixed in the currency of the country in which you operate. And you’re used to selling at a level priced in your own currency too, so you can be confident in your profit margin on each sale. But exchange rates move—every day and every minute—so if you’re selling into a country with a different currency, you can’t be so sure of what you’ll receive. In the worst-case scenario, you could lose out quite badly.
How retailers operate
There are a lot of benefits that come with selling your products to a large retailer or wholesaler in an international market. Their scale and reach give you access to a large customer base; they will usually do most of the work in marketing your product to those customers; and they’ll manage distribution and fulfillment in their local market.
However, buyers’ size does also give them certain advantages over smaller suppliers, including more power to set terms and conditions that favour them. Most will want to buy from you at a price set in their local currency, so they avoid exchange rate risk. If you’re selling into the U.K., say, you will need to agree on a price in pounds sterling, even if you normally price in U.S. dollars or another currency.
Since exchange rates move up and down – sometimes with a great deal of volatility—that can leave you vulnerable. At the start of May this year, £1 was worth around $1.42. So if a retailer in the U.K. agreed to pay you £5 for each one of your products, you would have received $7.10. By mid-September, however, £1 was worth only $1.38. For exactly the same product, you would then be receiving $6.90. As you add that individual loss up from a single product to your entire sale, the impact could be pretty serious.
The problem is that there will inevitably be a delay between the moment you agree on a price with your overseas customer and the moment it pays. Very few buyers pay upfront. And during that period, there is always the possibility of exchange rates moving against you.
Moreover, this risk does not only apply each time you make a new sale. If you agree to a regular supply deal with a customer in an international market—a certain number of shipments over a year, say—that customer will want to agree to a price upfront for the duration of the contract. It may be another year, or even longer, before you have an opportunity to renegotiate prices. And that whole time, exchange rates could be moving against you. Your profit margin could disappear altogether.
How to mitigate currency risk
The good news is that there are several ways to mitigate the risk that exchange rates pose. Some of these options carry costs, which you’ll need to factor into your pricing decisions, but they can provide crucial peace of mind.
One possibility is to try to limit your vulnerability, by squeezing down the length of the periods during which you’re exposed to currency risk. That might mean rejecting agreements that lock you into a local currency price for an extended period, say, or negotiating better payment terms with buyers so that they settle your bills more quickly. Alternatively, some retailers may be prepared to build in foreign currency protections when agreeing on contracts with you—by agreeing to vary the price paid if, say, the exchange rate moves by more than a certain amount.
Another option is to open a local bank account in the countries where you’re making significant sales. You will then have the option of depositing sales proceeds locally, to be converted back into your domestic currency at a time of your choosing. This won’t eradicate exchange risk altogether, but will give you more control. If you bank with a large international institution, it may offer foreign currency accounts, which can be another way to achieve this goal.
It is also possible to use financial products to protect yourself from currency risk. Available from banks and specialists in the foreign exchange market, these products effectively lock you into fixed exchange rates for a period. However the real rate moves in the meantime, you’ll then know what rate is payable at the time when you’ll be booking your sales proceeds. Such products can provide important security, but providers do charge fees.
The most important thing here is to understand what currency risk you are exposed to, so you can make measured judgements about how to respond. If your export sales are, for now at least, only a small part of your total revenues, you may be less concerned about this issue. And if your margins allow plenty of room for exchange rate movements without causing you significant damage, you may feel more relaxed.
By contrast, if even a small exchange rate change could tip you into loss on your exports, you may want to take steps to protect yourself. And as your export sales rise, this will become more important.
If you need assistance with selling abroad, you can use RangeMe Services to find a qualified service provider who can help you get ready to work with international retailers and grow your business.