Service Price and the Exchange Rate: How to Account for Pricier Imported Materials

When an exchange rate rises, the materials you buy abroad get pricier. How much exactly needs to be added to the service price depends on two things: what share of the price such materials make up, and how much of the price the specialist takes. In the article's example, the rate rises by 10%, while the price needs to go up by only 5%.

Let's go through how to calculate the effect of the rate on profit, at what rate to count materials, and how often to review the price list.

In plain terms. Picture buying coffee from abroad every week for a café. If the rate went up by a tenth, a bag of coffee got a tenth pricier. But a cup's price also includes milk, the barista's work, and rent. So the price of a cup goes up only by the share that falls on the coffee.

How the rate gets into a service price

A foreign currency affects only the part of costs that's tied to it. For services, that's usually materials: preparations, dyes, and consumables bought in a foreign currency or in the local one at the exchange rate.

Rent, the specialist's pay, and subscriptions usually don't depend on the rate. So the smaller the share of imported materials in the price, the weaker the rate's effect on profit.

Calculating step by step

Picture a studio. A service costs $100. The specialist is paid 40% of the price, which is $40. The share of overall costs is $20. Materials cost $30: a service uses 25 euros' worth of materials at a rate of $1.20 per euro. Now the rate rises to $1.32, which is 10%.

Step one: profit before the rate change. $100 − $40 − $30 − $20 = $10, which is 10% of the price.

Step two: the new cost of materials. 25 × $1.32 = $33, which is $3 more.

Step three: profit after the rate change. $100 − $40 − $33 − $20 = $7, which is 7%. The rate rose 10%, while the profit from the service fell 30%.

Price increase needed = Rise in materials ÷ (1 − Specialist's share)

Step four: by how much to raise the price. $3 ÷ (1 − 0.4) = $3 ÷ 0.6 = $5. The new price is $105, which is 5% more. Let's check: the specialist gets 40% of $105, which is $42. $105 − $42 − $33 − $20 = $10. Profit is back to the earlier $10.

Why $5 when the rise is only $3? Because the specialist gets a percentage of every new dollar of the price. Of the $5 you added, $2 goes to the specialist, and only $3 covers the rise in materials.

In this example, the price needs to go up by roughly half the percentage the rate changed by. That depends on the share of materials in the price (30%) and the specialist's pay (40%). If materials are 10% of the price, the effect will be three times smaller, and if 50%, noticeably bigger.

At what rate to count materials

The package sitting on the shelf you bought at the old rate. The next one you'll have to buy at the new rate. So it's convenient to calculate the service price from the cost of the next purchase.

The explanation is this. If you calculate at the old cost, then when the next purchase comes, it turns out the service price doesn't cover the new costs, and profit has already shrunk. If you calculate from the cost of the next purchase, the price accounts for the rise in time.

How often to review prices

Changing the price list after every fluctuation of the rate is inconvenient both for you and for customers. It's more practical to combine two approaches.

On a schedule. Once a month, you can reconcile current purchase prices and see whether the margin of your services has shrunk.

On an event. If a purchase price has changed noticeably, as in the example with profit falling from $10 to $7, it's worth reviewing prices sooner. What counts as a noticeable change depends on your margin: the smaller it is, the more strongly the rate affects it.

Advice. Services with a larger share of imported materials feel a rate change more. It's convenient to check those first and raise the price selectively.

How to calculate this from your own data

In the “Materials” section of BizCalc, a material is entered with the package price, and the cost of a portion is calculated automatically. When the purchase price has changed, you enter the new package price, and the cost of all services that use this material updates.

Then in “Analytics: Calculation,” the “Efficiency Analysis” block with the ranking of services by margin shows which services have the lowest margin. The breakdown by service splits the cost into four parts, so you can see what share materials take up in it.

What's worth remembering

• The rate affects only imported materials. Rent and the specialist's pay usually don't depend on it.

• In the example, profit falls faster than the rate rises. A rate rise of 10% took away 30% of profit.

• In the example, the price rises less than the rate. A rate rise of 10% requires a price increase of 5%.

• Materials are counted at the cost of the next purchase. Then the price accounts for the rise in time.

• A review combines a schedule and an event. Once a month you can reconcile prices and react to noticeable changes.

Frequently asked questions

How does an exchange rate affect the price of a service?

Through imported materials. When the rate rises, they get pricier, and less profit is left from each service. How much depends on the share of such materials in the price.

By how much should you raise the price if the rate rose 10%?

It depends on the share of materials and the specialist's pay. In the article's example, materials cost $30, the specialist is paid 40%, and the price needs to go up by 5%.

Why does the price rise less than the rate?

Because only part of the costs depends on the rate. Rent, the specialist's pay, and subscriptions usually don't change with it.

At what rate should you count materials?

At the cost of the next purchase. Then the price accounts for the rise before the old stock runs out.

How often should you review prices?

Once a month you can reconcile purchase prices and react to noticeable rate changes. Changing the price list after every fluctuation is usually inconvenient.

Which services depend more on the rate?

Those with a larger share of imported materials in the price. They're visible if you break the service cost into components.