Companies that make even minor mistakes in their pricing policies could find their profits wiped out by the introduction of the euro, US database and enterprise resource planning vendor Oracle has warned.
Oracle’s decision support team in Reading reached this worrying conclusion after building a pan-European pricing model in Oracle’s Financial Analyzer program.
Oracle decision support specialist Tony Martin, FCA, said the company’s marketing strategy was built around tackling real business issues faced by potential users. The single currency would bring price transparency across Europe, but companies in ‘out’ countries could find their profit margins squeezed by exchange rate shifts that would impact prices of both raw materials and end products.
Former chancellor Kenneth Clarke and Arthur Andersen treasury services partner Charles Barlow inspired the euro pricing model at a seminar early this year, said Martin.
‘It immediately occurred to us that companies were facing a multidimensional analysis problem. We set about building a model in OFA to tackle these issues.’
To simplify the exercise, Oracle’s analysts assumed they were looking at just one product. In the real world, companies will have multiple product pricing issues to examine.
The other variable dimensions in the model include currency, four separate company divisions in different countries, a time scale and several different profit and inflation scenarios to let customers understand the impact of different circumstances on the profits or losses of a long-term item.
In a situation where price transparency across Europe contributes to a 10% drop in prices, while the pound strengthens by 5% against the euro, profits from the sample product could drop by 50% within a year, the model showed.
Such analyses are vital, warned Martin, since recent research from KPMG showed that only around 12% of major European organisations had made pricing policies part of their euro strategy.
Another feature – not entirely accidental – of the Financial Analyzer model is that it demonstrates the inability of traditional spreadsheets to handle such complex issues.
‘When you get into a large corporate environment with different companies involved and different products, trying to control all the spreadsheet models becomes a nightmare,’ said Martin.
‘You can do it, but you cannot distribute the structures out to the nether regions for data to be input and bring them back together to understand the whole model.
That’s where Financial Analyzer comes in handy; it can cope with the whole architecture.’
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