If your local currency loses value against the US dollar or the British pound, something strange takes place in the mindset of service providers in relation to their prices. The invoice will look huge in foreign currency, and an internal voice will whisper that you can actually lower your price and earn more. This seems both generous and clever. Neither one.
In this blog post, I will discuss the following things for professionals who are paid in foreign currency: virtual assistants, freelancers, consultants and outsourced workers. How the strength of your foreign currency affects your pricing psychology? How to speak of cost-efficiency without sounding cheap. How to protect your earnings regardless of exchange rates.
What a Strong Dollar Actually Means
When a currency appreciates against yours, that currency will buy more of yours than previously. When you get paid in dollars and the dollar appreciates, the same bill gives you more purchasing power locally. This is the mechanical aspect of the process, and there are things about the mechanical process that should be noted. Your process of doing business, your ability, and your client’s gain have nothing to do with the exchange rate. All that changed was a number on an exchange rate board.
The economic concept of purchasing power parity can be used to understand the significance of the exchange rate for the business transaction. Costs of goods and services vary across nations, and the exchange rate follows only loosely. What may seem like a good deal for one month becomes an average deal the next month. Exchange rates follow interest rates, inflation expectations, flow of trade and investment sentiments.
The volatility of the exchange rate is precisely the point that most business owners overlook. Setting the price to benefit from the volatile exchange rate makes your price dependent on something unpredictable and uncontrollable by you.
The Psychological Trap
It works as follows: Your rate is converted to local currency, which seems to be much higher in comparison with local salaries. You make comparisons with local market instead of comparing with the market of your client. In this case, lower rate appears to be a gift rather than a discount.
This psychological phenomenon is named “anchoring” by behavioural economists. Every decision that we make is influenced by the first number that we have seen. In case of your anchor being local salary scale, any foreign currency rate will seem to be high and you’ll start to find explanations for lowering rates. But in case of anchor being value of work in the market of your client, situation changes.
There is another psychological phenomenon. International clients are aware of the fact that a provider is located in country where life is cheaper. This doesn’t necessarily mean that they expect discounts from you. They hire internationally for such reasons as the need of skilled employees, extended work time or flexible capacity. It’s your projection and it costs money.
Cost-Efficient Is Not the Same as Cheap
Cost-effectiveness is an indicator of the ratio between the amount the client spends and the benefits they receive. The cheapness indicator reflects only the first part of this phrase. An expensive service may be extremely cost-effective if the value it brings is much greater than its cost. And a cheap service may be extremely ineffective if it requires constant correction, monitoring or correction.
If you use both terms interchangeably, you give the client a wrong framework for evaluation. Cost is what needs to be evaluated, and the discussion turns into the discussion of the lowest price compared to others. And you will never win such a discussion, as there will always be someone who offers lower prices.
The notion of cost efficiency, correctly defined, incorporates some features which can easily be overlooked. The list contains not only time-saving but also lack of additional costs like office, equipment, insurance, and payroll. Moreover, it is the reliability, communication, and the ability to operate without direct supervision. All of these do not imply that you have to be inexpensive. They imply only that you should be efficient and say about it openly.
The consequences of confusing these two terms become evident in the long run and are easily underestimated. The clients who were attracted by low prices remain at their prices and resist any increase. They compare you with other competitors and regard your services as commodities. Thus, your ceiling of earnings becomes the lowest price which you offered once.
Reframing the Currency Advantage as a Business Case
Currency issue is real and is understood by clients. The question is how to use it in your sales presentation. Use it as a focus point and put yourself in a position of a bargain. Put it into a context of several issues that make the cooperation with you a good business decision.
The formula that works is starting with benefits. Describe the problem, its solution and expected results from cooperation. When discussing the issue of cost, present it as a rational choice: a professional, defined scope and fair pricing. In case a client brings up the cost issue of international cooperation, confirm it openly without any apology or justification.
Take a look at the following examples: “I can offer you a cheaper rate due to the exchange rate” uses a market issue to make a concession. “My rate takes into account the scope of work, my professional expertise and the results I produce, offering a cost-efficient alternative to a local professional.” Both formulas have the same information, but different approach.
Language to Use and Language to Avoid
Language precedes numbers when it comes to shaping perception. There are some phrases that convey subconsciously that you do not actually believe in your rates. Your clients will catch on to this right away.
Some of the phrases that must be avoided at all cost include: “I’m very affordable,” “I can make you a great offer,” “I’ll work with whatever budget you have” and “I’m cheaper than most.” Each of them sets up a bargain in advance and puts the cost before the quality. The same applies to apologetic hedging like “just,” “only,” “I hope you will find this okay” and “I understand this might look like a lot.”
Phrases that work include: “My rate for this project is X.” “This package includes Y and Z.” “This is what I will deliver in the first month.” “These are my metrics for measuring performance.”
Make sure that the client knows what is included in the rate. The specificity shows your confidence and also provides the client with a clear parameter other than the price. Vagueness in pricing leaves much room for bargaining because there is no clear thing to stick to.
When the client starts questioning your price, do not yield to the temptation of giving away discounts right away. First ask what goal the client wants to achieve. Frequently it is a question of making the budget more certain, not of price itself, and then you will be able to address this issue without reducing the rate.
Setting Pricing Floors That Survive Currency Swings
The pricing floor is the minimum price at which you will sell your services based on your costs and objectives instead of using the market rate of the day. A pricing floor can be established in three steps.
First, establish your real costs in your currency: costs of living, taxes, savings, and costs of being a self-employed professional, such as hardware, software, internet and power backup, and a buffer for times when you have less work. Many professionals fail to realize the cost of free time.
The second step is to calculate the minimum foreign currency rate to meet the requirements based on a prudent exchange rate. Select a lower rate than the prevailing rate, maybe the lowest of the last couple of years. Should the dollar fall again, your floor remains intact. But if it maintains its strength, then the difference will provide a cushion instead of an excuse to reduce prices.
Lastly, review the rates according to some schedule, such as bi-annual or annual, not just when the exchange rate fluctuates. This approach prevents you from falling into the trap of making two opposite errors: reducing your prices due to the favorable foreign currency rate and then getting stranded when the rate moves unfavorably. You might consider quoting your rates in the currency of the client, along with the review period.
The Long-Term Cost of Undersell
The dangers of underpricing are not obvious when first establishing a relationship with the client. They come gradually, one after another. The first is the client you attract as a result. The price signals your positioning and an undervalued rate will attract price-conscious clients that negotiate mercilessly and do not respect the limits and deadlines set.
The second problem is the risk of burnout. When the rate is too low, there are no other ways to make ends meet except working longer and taking more clients. The quality declines, the work becomes exhausting rather than satisfying and many burnouts happen not because of overloading but because people do not charge enough.
The third consequence is resentment. When you do demanding work for the rate that seems too low to you, you lose motivation. It manifests itself in lack of enthusiasm, inaction, and retreat from the business. Clients may not be aware what happens but they do feel it.
The last one is stagnation. Any price you have is going to be the starting point for the following price increase. And each step is going to be harder to make when you started your career with low prices.
From Bargain Option to Strategic Partner
This all suggests one move in terms of changing identities. The bargain solution competes based on cost and is replaced by something that is even more economical. The strategic partner, on the other hand, competes on reliability, judgement and results and is kept around as their replacement would cost a lot.
That change in turn changes one’s behaviour. When the strategic partner comes up with a price quote, he first tries to find out what the client aims at. He gives suggestions, identifies problems early on and evaluates results rather than spent hours. He talks about prices as investments into the result, not favours. In the end he gets the kind of clients he deserves.
It also changes the clientele who finds you. Referrals and long-term contracts are likely to go to people who are known to be reliable and competent, rather than economical. Your pricing strategy and professional identity are intertwined in either direction you have chosen.
Your Next Step
Prior to pitching your next project or getting your rate reviewed, just one step will do: find out your minimum price by using a conservative exchange rate, then write down the rate at which you will offer your primary service. You can now revise your existing proposal, putting emphasis on your outcomes and scope before cost-efficiency comes up.
A good currency is simply a favorable situation and not a factor that should reduce your price. Use this as an additional margin for future changes or development on your part. Professionals who continue to excel even during currency fluctuations are those who base their rates on the value of their services and not on the exchange rate figures.
