Are you an Importer?
The other night I saw an article on TV, which mentioned that anyone that is contemplating the purchase of an imported good should do it now, because prices will rise because of the depreciation of the Australian Dollar.
This got me thinking, so I thought I would run some numbers to look at the effect of the currency depreciation that has occurred to date:
Throughout 2014, the average A$/ US$ exchange rate was 1.1151 (lets assume 1.11)
The A$/US$ exchange rate today (29 July) is 0.7327
Based on the above numbers, the A$/ US$ has already reduced by 34% - which is significant.
So what does this mean for your pricing decisions?
There are different answers to this question, depending on your Gross Profit Margin and also depending on whether you want to maintain a Gross Profit Margin, or Amount.
We’ve put together a table that outlines an importer that imports goods with a value of US$1M per annum. Based on the average 2014 exchange rate, the A$ cost of these goods would have been $900,901. We have then calculated a range of sale prices, depending on the desired Gross Profit Margin (ranging between 30 & 50%).
We’ve then looked at today’s exchange rate. Because of the depreciation of the A$, the Cost of the Goods Sold has increased to $1,364,815 – which is actually a 51% increase (based on the initial cost).
Assuming you wanted to maintain your Gross Profit Margin, you should have already increased prices by 51% across the board. Or in this example, the dollar value of the increase ranges between $662K - $927K
Alternatively, you might decide to reduce your Gross Profit Percentage and simply maintain the Dollar value of your Gross Profit. In these circumstances, the amount of your price increase depends on your starting Gross Profit Margin. The actual price increase ranges between 36% down to 26% (the higher the starting gross profit margin, the lower percentage of the increase sale price).
Clearly there are complexities involved and pricing needs to be carefully considered. The hypothetical example is included on the following page for more information.
We’ve also put a Gross Profit Calculator on the Proteger Consulting website. This calculator assesses the change in Sales that is required to compensate for a change in Gross Profit. Feel free to have a look & if you have any specific queries, please contact us.