Magazine article European Business Forum

Pricing Strategies and the Euro: Transnational Companies in Europe Will Have to Think Very Carefully about the Implications of Greater Transparency as the Single Currency Comes into Effect

Magazine article European Business Forum

Pricing Strategies and the Euro: Transnational Companies in Europe Will Have to Think Very Carefully about the Implications of Greater Transparency as the Single Currency Comes into Effect

Article excerpt

With the advent of the euro a 'Horror Scenario' threatens many businesses operating in different territories across Europe. The grim prospect for company profits is that the greater transparency accompanying the arrival of the common currency (particularly after the introduction of notes and coins on January 2nd, 2002) will cause prices of goods and services to fall towards the lowest level currently prevailing in a national territory (typically those in 'low-price' countries such as Portugal, Spain, Italy or Greece). The full introduction of the euro following the recent period of fixed parities will magnify the two existing problems of euro pricing for manufacturers: pressure from 'grey' or parallel imports across borders on the one hand, and pressure from increasingly powerful centralised purchasers (wholesalers and retailers, for example) for the lowest possible price all over the European Union on the other.

Our contention is that there is not a single way to establish prices in this new marketing environment. Each case should be approached individually. A so-called 'price corridor' allowing limited flexibility between different countries is often put forward as the answer--but in our view this is not always the right solution. Standardised prices as well as larger international price differences can in certain circumstances be better alternatives. In this article we will consider various aspects of a European pricing strategy which are summed up in the concluding table of ten lessons.

A mixed picture

Pricing pressures, it should be stressed, are certainly not inevitable. Kodak is one well publicised example of a company which has already been forced to adapt its different national policies. In the 1990s, for example, the large European retail chain Metro implemented a programme to standardise its prices throughout the continent--something the film company had to accept if it did not want to cut off the retail chain's business. The effect was a 20 per cent European price reduction and the first huge profit loss in its European operations. But not everyone is necessarily adversely affected. Perrier, the French mineral water, costs three times more in Austria than it does in France, and Nivea, the French cosmetics company, sells 50 per cent cheaper in France than it does in Germany.

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The strategic challenge

In future, though, the euro will increasingly influence cost structures and the level of competition for companies in the member states of the European Union. Governments will no longer be able to make macro-economic corrections to hide different levels of productivity or to increase competitiveness through currency depreciation. This will lead to a clear advantage for the countries with 'hard' currencies, such as Germany and France. The changes will not only affect European pricing at the product--or micro--level but will also influence companies' decisions to invest in certain regions. Since it will no longer be possible for countries with 'soft' currencies to devalue in order to become more competitive, the 'hard' currency countries will become more attractive for production and distribution. Germany, a traditionally high-cost country, should especially benefit from these changes.

Many companies will use the introduction of the euro as an opportunity to rethink their marketing strategies. They will need to look at the European market as a whole--bearing in mind customers as well as competitors--and remember that foreign rivals (notably North American businesses) are likely to be more attracted to invest in the region.

Price optimisation--an overview

Even managers aware of the importance of pricing within the marketing mix are not always very sophisticated. Cost-plus pricing and competition-based pricing are the tools most frequently used. Customer expectations and willingness to pay are often unknown or ignored when pricing policies are discussed. …

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