21
Dec

Currency Rate Havoc on Pricing and Profitability

Striving to increase sales eventually pushes your business and products into international markets. With eleven global Amazon marketplaces, your products have the chance to eventually reach billions of potential customers.  These global Amazon marketplaces sell your products in US dollars, Canadian Dollars, Mexican Pesos, Great British Pounds, Euros, Indian Rupees, Japanese Yen and Chinese Yuan.  While it may seem simple and easy to convert the price of your product from one currency to another and set your listing price, the less than simple problem is dealing with currency rates that are constantly fluctuating.

You may have heard of operating leverage or financial leverage, but a third leveraging factor to consider is what I am going to call currency leverage.  Basically, this is the leverage a currency rate has on your product margin.  Say we look at the product here to the side, the complete Calvin and Hobbes collection, and make some assumptions.  Let’s assume the book costs $50 and the other costs associated with selling it are about $15 leaving us with a margin of $21.45, when my price is $86.45.

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Now let’s say we want to sell in the UK.  If we take the current exchange rate (1.3320), we see that a direct translation of pricing would give a price in British Pounds of £64.90.

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Because our costs stay in US dollars, the only line item affected by exchange rate changes is the value of our revenue.   Now let’s look at what happens when the Pound weakens by 10%. As you can see from the chart below, the value of our Pound revenue has decreased from $86.46 to $77.81 and our margin has decreased from $21.45 to $12.81.  This 10% decrease in the value of the Pound has decreased our margin from 25% to 15%, which is also 10%, but when we compare the drop in margin from $21.45 to $12.81 we see our margin has almost been cut in half!  Our relatively small changes in exchange rates have the ability to drastically reduce profitability. If we look at how high and low the currencies have moved on the Amazon global marketplaces over the last 6 months we see that rates have moved significantly.  Here is a list of the rate volatility by percent for each currency over the last 6 months in relation to the US dollar.gps - 4

  • Canadian Dollars (CAD) – 9.63%
  • Mexican Pesos (MXN) – 11%
  • Great British Pounds (GBP) – 8.48%
  • Euros (EUR) – 8.75%
  • Indian Rupees (INR) – 3.66%
  • Japanese Yen (JPY) – 6.9%
  • Chinese Yuan (CNY) – 5.92%

Some products are more resilient to currency leverage than others.  When the margins on a product are low the product is more significantly impacted by rate fluctuations, but when margins are higher the affect is not as drastic.  Below you can see the effect of a 10% rate fluctuation on a product with a 60% margin.  When the rate changes, the margin is impacted by going from $51.45 to $42.81 but that is only a change in the margin of about 17%.

gps - 5Each company needs to assess how vulnerable they and their products are to currency leverage so they can understand how to deal with demand and product pricing as exchange rates change.

The Solution to Currency Leverage –

There is a simple solution to dealing with currency leverage and that comes in the form of an exchange rate lock.  There are many ways to lock exchanges rates and many different banks and business that can perform this task; the simplest way is to lock the exchange rate using a forward contract. This means you lock the rate on a specific amount of funds for a specific amount of time. But the most important step to take, is to do something! Don’t just ignore currency rates and currency leverage; if you simply choose to ignore currency leverage, you are gambling with how the rates are going to affect your company and products.  You can be a great business person making all the right business decisions: controlling product costs, executing the best marking, keeping logistics and packaging costs low; but one bad movement in currency rates can negate every correct decision that you make in the global marketplaces.  We have been helping companies for years to simply determine which currencies pose the most risk to them and then help them to choose the most effective method of locking the exchange rate. If this is done correctly, rate changes will not matter during the locked period.  Sales will happen, the foreign funds will be received and exchanged at the locked exchange rate and the expected amount of US dollars will be received protecting product margins.

If you are doing business or considering doing business in one of the Amazon global marketplaces please get in touch with me and let me know what issues and in which currencies you will be doing business. I am happy to help anyone who is preparing to deal with these issues.  GPS Capital Markets has been helping companies deal with currency issues for over 15 years.  With our headquarters in the US and global offices in Australia, Canada, and Europe we are able to help lock currency rates in the markets where you want to be doing business.

Jared Van Orden; 801.984.1080 ext 160; www.gpsfx.com

 

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