Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Pricing Objectives and
Policies
Text © The McGraw−Hill
Companies, 2002496 Chapter 17
We’ve been talking about the price level of a firm’s product. But a nation’s money
also has a price level—what it is worth in some other currency. For example, on
April 16, 2001, one U.S. dollar was worth 0.70 British pounds. In other words, the
exchange rate for the British pound against the U.S. dollar was 0.70. Exhibit 17-6
lists exchange rates for money from several countries over a number of years. From
this exhibit you can see that exchange rates change over time—and sometimes the
changes are significant. For example, during 1995, a U.S. dollar was worth, on aver-
age, 24.92 Thai bhat; in April 2001 it was worth 45.65 Thai bhat. That exchange
rate moved up rapidly starting in 1997 because of economic problems that hit Thai-
land and the rest of Asia.
Exchange rate changes can have a significant effect on international trade. From
a manager’s viewpoint, they also affect whether or not a price level has the expected
result. As the following example shows, this can be an important factor even for a
small firm that sells only in its own local market.
In 1995 the marketing manager for EControl, Inc.—a small firm that produces
electronic controllers for producers of satellite TV receiving dishes—set a meeting-
competition wholesale price of about $100 for a carton of the controllers. The profit
margin on the controllers at that price was about $10 per carton. The wholesalers
who distribute the controllers also carried a product by a British firm. Its wholesale
price was also $100, which means that the British firm got about 67 British pounds
($100 0.67 pounds per dollar) per carton. Prices were stable for some time. How-
ever, when the exchange rate for the pound against the dollar fell from 0.67 to 0.61,
the British producer got 6 fewer pounds for each $100 carton of controllers
(67 pounds61 pounds6 pounds).
Because EControl’s marketing manager was only selling controllers in the
domestic market, she didn’t pay any attention to the drop in the exchange rate at
first. However, she did pay attention when the British producer decided to raise its
wholesale price to $110 a carton. At the $110 price, the British firm got about
67.1 pounds per carton ($1100.61 pounds per dollar)—about the same as it was
getting before the exchange rate change. EControl’s market share and sales
increased substantially—at the British competitor’s expense—because EControl’s
price was $10 lower than its British competitor. EControl’s marketing manager con-
cluded that it would probably take a while for the British firm to lower its price,
even if the exchange rate went up again. So she decided that she could safely raise
her price level by 5 percent—up to $105—and still have a solid price advantage
over the British supplier. At a price of $105 per carton, EControl’s profit per carton
jumped from $10 to $15, a 50 percent increase in profit.The price of money
may affect the price
level
Exhibit 17-6 Exchange Rates for Various Currencies against the U.S. Dollar over Time
Number of Units of Base Currency per U.S. Dollar*
Base Currency 1987 1989 1991 1993 1995 1997 1999 2001British pound 0.61 0.62 0.57 0.67 0.67 0.61 0.62 0.70
Thai bhat 25.76 25.72 25.53 25.33 24.92 31.07 37.40 45.65
Japanese yen 144.60 138.07 134.59 111.08 94.11 121.09 117.86 124.58
Australian dollar 1.43 1.26 1.32 1.47 1.35 1.34 1.55 1.96
Canadian dollar 1.33 1.18 1.15 1.29 1.37 1.38 1.49 1.56
German mark 1.80 1.88 1.66 1.65 1.43 1.73
Euro 1.07 1.13
*Units shown are the average for each year 1987–1997. For 1999 and 2001, units shown are for April 16, 1999 and April 16, 2001.