Measuring Pricing Impact across Changing Currencies
The impact of pricing decisions on corporate performance can be hard to detect. More so when a company is operating globally, and currency exchange rates fluctuate. Enter the Price-Volume-Cost-Mix-Currency Analysis.
Price capture at the global level can rise or fall currency fluctuations at the local level. And currency exchange rates can go up or down and fluctuate wildly or predictably. For instance, between November 27, 2020, and November 26, 2020, the Turkish Lira has fallen against the US Dollar 32%, the Argentine Peso has fallen against the US Dollar 16%, and the Canadian Dollar has risen against the US Dollar 1.6%.
How should the price of a canister of Pringles or a box of Barilla respond to these currency changes? Or, more importantly to investors, how did the price respond?
The Price-Volume-Cost-Mix-Currency Analysis provides an approach to discern the impact of changes in price, volume, variable costs, mix, and currency on a global company’s profitability. It does so in a manner which provides mirror symmetry in time of the measured impacts of these marketing variables, ensures that the sum of individual measurements equal the overall change in profitability, and provides sufficient clarity to discern the impact of decisions on firm performance.
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In “Profit bridges that disambiguate impacts of currency fluctuations from other marketing variables”, a new practice article in the Journal of Revenue and Pricing Management, a Price-Volume-Cost-Mix-Currency Analysis is conducted at the corporate and business unit levels. An example measurement shows the impact of changes in volume (IQG), prices (IPG), variable costs (IVG), mix (IMG), and exchange rates (IEG). See the opening image.
Prior researchers have provided a competing approach to conducting these calculations. However, these earlier equations failed to deliver mirror symmetry in time. As such, they provide measurements akin to that of measuring the change in temperature between two days of +2C with the same humidity and windspeed as being due to +4C change due to sunshine and -2C change due to humidity and windspeed, but a -2C change with the same humidity and windspeed as being due to a -1C change in sunshine and a -1C change due to humidity and windspeed. That would be absurd. This more recent set of equations correct that error.
Now you can systematically and reliable distinguish pricing actions from currency fluctuations on profit performance.
Certified Pricing Professional (CPP) and Senior Manager, Price Strategy
1ySad to be missing this one!
Pricing Leader - North America at Philips| Pricing & Value Management Strategist| Chemical Industry| Healthcare Pricing| Financial Risk Management
1yCool stuff Tim. Summations and complex equations in the paper are super neat and fun for few. One other way we took out exchange rate variability was essentially through partnering with Tresury group of our company. Where essentially take the exchange rate exposure (i.e. revenue/price) and hedge the currency exposure through zero cost collars or zero cost Forwards. This way we were able to decouple pricing from exchange rate. Just sharing to see if you see any down side with this approach.
Pricing Excellence Manager at TE Connectivity
1yThank you Tim J Smith. This is a good topic of which to be reminded.