This Friday, January 1st, 1999, the euro becomes the currency of the Republic of Ireland and 10 other EU member-states. The Irish pound becomes a subdivision of the euro. Prices can be immediately converted to the new Irish domestic currency, the euro, and increasingly this will be a business necessity.

For retailers, distributors and manufacturers, this poses certain strategic pricing issues for a number of reasons which include conversion, rounding and price pointing effects and price transparency across the euro zone.

Pricing strategies of all Irish businesses will be affected to varying degrees with differing margin impacts. As a result, it is essential that companies prepare for and put in place plans to respond to potential short and longer term opportunities and threats - including the threat of profit margin erosion.

The first step in accurately converting existing prices to euro prices is to apply the official rounding rules set out in Article 235 to existing Irish pound prices. In the Republic this will be using a conversion rate to significant digits e.g. 1 = IR£0.794103. For items with a unit value of under IR£1, simply converting and rounding could affect the margins by a number of percentage points. Until December 31st, 1998, we will not know the precise euro-pound exchange rate and therefore which price points are affected most or by how much.

Assume a product retails for 99p. Converting this to euros at an illustrative rate of 0.794103 gives a euro price of 1.25.

This may seem straightforward enough. However, if you are selling items at low unit prices, then the rounding rules could prove costly.

At an illustrative IR£exchange rate of 0.794103 a 25p item may convert to 31 cents giving a margin loss of 1.56 per cent.

On conversion, certain unit prices may be particularly affected. A unit price of 13p, for example, may result in a margin loss of 2 per cent to 3 per cent.

A further complication arises where a company uses price pointing. Price pointing is a means of offering prices acceptable to the consumer in psychological terms. Should companies wish to maintain price points in the future, they will either have to raise or lower the euro price up to the nearest convenient price point.

For the 99p products, at 1.29 the profit margin increases by 4 per cent approximately; at 1.19 there is a 4 per cent - 5 per cent margin loss.

There are obvious advantages and disadvantages in taking price points up or down.

To price at 1.29 euro provides a margin gain of approximately 4 per cent, depending upon the final rate. However, this introduces the perception of taking advantage of consumer prices which may result in bad press, a loss of trust and damage to brand image, and potential loss of market share as a result.

Where the lower price point is chosen, margin erosion of 4 per cent to 5 per cent may result. The lower price point may be the outcome due to:

competitive pressures;

adverse consumer reaction - euro distrusted, retailers seen as price opportunists, consumers' fears of inflation based on the "decimalisation experience";

regulatory reaction - watching brief on prices from consumer watchdogs.

Dual pricing display of the old Irish pound price will allow consumers to determine how much prices have increased and also how much companies are seeking to gain the trust of consumers or use the euro to gain market share.

An alternative approach may be to reprice but at the same time change the composition, quality or cost structure of the product on offer. For example, potential responses could include:

pack size or product weight variation;

product content or quality changes;

strengthened branding;

improved delivery times;

improved after sales service;

passing back margin loss to suppliers - the euro could ripple all the way down the supply chain.

In making the overall decision, companies will need to consider factors such as timing. Retailers can only price point in one currency at any point in time. Selecting the optimum timing for the change for both company and its customers will be key.

They must also consider the impact on demand, particularly for goods with a high price elasticity and the impact on brand image. A price fall may undermine a brand image, while a price rise may challenge customers' price/value perceptions.

The effect of EMU on corporate pricing strategy is just one of the strategic issues posed by the introduction of the euro. This issue is more immediate than implied by the January 1st, 2002 date for the introduction of notes and coins. Changing prices - whether creating new prices or simply reconverting - will need to be carefully planned well in advance. The business need and consumer demand for euro pricing may also come sooner than is currently anticipated. This issue will have a significant bearing on companies' profitability, market share and brand image.

Paul O'Grady is a specialist EMU consultant with PricewaterhouseCoopers.