For global online retailers, volatile exchange rates come with the territory. Historically, eCommerce retailers have kept a close eye on cost per transaction and gateway transaction fees.
However, the current perfect storm of inflation, supply chain bottlenecks and labour shortages, has made a shortage of ready cash reserves all the more real.
For some eCommerce businesses, careful FX planning is helping them to tightly manage inventory and expenses and remain globally competitive. For others, a lack of FX confidence and knowledge could leave their product pricing and overall profits at the mercy of shifting exchange rates.
Here are four tips and tricks to give your global eCommerce business greater pricing confidence in a competitive and volatile economic environment:
Prepare now for currency volatility ahead to stay globally competitive
Currency swings remain extremely volatile, and the global economic outlook will primarily influence movements in the Australian dollar over the coming months. In these circumstances, online sellers with a robust FX plan will have a competitive edge over sellers who take a more reactive approach.
An incremental shift in a currency’s performance can significantly impact any business paying and receiving large sums across borders and engaging in global trade. For example, the OFX Currency Risk Exposure calculator reveals that a US$100,000 invoice could have cost as much as AU$149,335 and as little as AU$140,315 in the last three months – a marked difference of AU$9,020.*
That’s thousands of dollars that could be better put towards offering your customers more competitive pricing.
We often hear from our online seller clients that planning FX costs well in advance has helped them to keep track of their inventory value and reduce the chances of passing on costs to their end customers – which for many small businesses is not an option. Consider creating FX reserves through hedging months ahead, so you don’t get caught out by the day’s exchange rate.
Create a natural hedge for more cash flow certainty
An easy way to streamline your cash flow and help protect your business from volatility is through natural hedging.
Natural hedging occurs when your overseas earnings and costs are in the same currency – often US dollars for global sellers. Earnings can be revenue collected from customers or partners, while costs can be different types of business expenses, like paying taxes, vendors or suppliers. The main benefit is more certainty over profit margins, as you aren’t converting revenue unnecessarily at an exchange rate you can’t control.
Natural hedging solutions such as an OFX Global Currency Account, which enables access to nine virtual currency accounts, allow eCommerce businesses to receive, hold and send payments in multiple currencies from a single platform. In essence, taking currency fluctuations out of the equation.
Familiarise yourself with FX tools to build up cash reserves
Visibility over currency reserves can give eCommerce businesses a confidence boost when pricing products and services and paying overseas suppliers, so costs stay within budget.
There are various FX hedging tools available that can offer more certainty when building up currency reserves. The most common, a Forward Contract, which allows businesses to fix an exchange rate for a future transaction for up to 12 months, and a Limit Order, where businesses can target an exchange rate that is then triggered automatically if reached.
These tools can help act as FX guardrails, minimising pressure on business margins when exchange rates move suddenly and help you top up cash reserves for future peace of mind when volatility swings in your favour.
Consider having FX specialists weigh in to help manage customer expectations
Watching and deciphering fluctuations across multiple currency markets can be time-consuming and overwhelming, time which could be better spent focusing on defending market share and your business growth. Having FX experts who can distill relevant insights and help you understand how your business could plan pricing around different exchange rates (for example, US$0.66 compared to US$0.74) can prove invaluable, so it is worth seeking specialist capabilities to help formulate a strategy.
Have a conversation with an FX specialist for expert support on identifying opportunities in the market to use these tools, help stay ahead of currency volatility and, if time allows, wait for better rates before you choose to lock in a transfer.
Steady FX planning can facilitate broader benefits for eCommerce businesses’ pricing strategy, competitive advantage, cashflow confidence and supplier and customer relationships. With these tips, online sellers will be well on their way to effectively managing the effects of the fluctuating strength (or lack of) of the Australian dollar on their business.
*Customer transfers use OFX’s Customer Rate, which, combined with other factors such as different currency exchange amounts, currency types, dates and times, will result in different actual costs. These results therefore may not be indicative of actual savings and should be used only as a guide.
Lucy Allen is global head of online sellers at OFX.