A newsletter email was sent out in advance of this post to inform everybody about our upcoming price increase. Starting the 3rd of March 2021, the following changes will take place:
Wooting two HE:
179.99 -> 184.99 USD/EUR
Wooting Wrist rest:
TKL: 27.99 -> 29.99 USD/EUR
FS: 29.99 -> 32.99 USD/EUR
The following is based on that email, but it goes into more detail about how we were affected by the increasing cost and devaluation of the USD.
If you have a pre-order, then your price is fixed. You don't need to make any additional payments. The prices go into effect for all (pre-)orders starting the 3rd of March.
These last 6 months the US dollar has dropped significantly in value, the raw materials costs have increased, and labor even more scarce. This volatility hasn’t gone unnoticed and under normal circumstances, we’d ride both the highs and the lows.
These are not normal circumstances.
Payment processors have already increased their base fees per transaction and do not return their fees on refunds anymore. This means every transaction we make with a customer costs us, not just a few cents, but dollars.
We make use of Shopify Payments, Stripe, and Paypal. Paypal being a good example when it just goes too far.
Ranting on Paypal
We had already turned off PayPal in the USA, since it was charging us ~5.5% per transaction for express payments. It stacked its base fee of 2.5% + 29c with the credit card fee of 2.9% and didn't return the base costs when we refunded the order. That's a cost of 8.8 USD on a Wooting two (160 USD), just for accepting an express payment.
Another issue we had with Paypal was their excessive exchange rate fees and actively blocking loopholes.
When we accepted Paypal payments in the USA in USD, it would transfer to our Paypal USD balance. Whenever we wanted to transfer from the USD balance to our company bank account, it wouldn't allow us to send it as USD. Regardless of the bank account for the sole reason of being an EU based company. Unlike other payment processors, like Stripe, which can transfer to our US-based virtual bank accounts.
This meant we had to exchange the USD to EUR with Paypal. Traditional banks charge at least 2% on the mid-market exchange rate. A specialized service like Transferwise or Ebury charges less than 1%. Paypal had the balls to charge 3.5%.
So that 8.8 USD? Add at least another 1.5% = 2.4 USD. That's 11.2 USD in Paypal fees before we can use the currency for anything else.
We will continue to stop supporting Paypal in the USA, in Europe we are monitoring it but will eventually remove it as well.
OR once we can support additional fees per payment method, we will add it back with a costly fee.
Why USD matter
We're a Dutch company that runs in EUR. However, if you look into our administration, you'd see that we run on USD. It's where 80% of our transactions take place and 60% of our revenue comes from.
This means that we are highly exposed to the USD. It's also why it's important for us to never exchange any sales in USD to EUR (looks at Paypal). Every time we exchange USD to EUR, we're paying a 1-2% direct exchange cost and expose ourselves to USD volatility.
All our manufacturing partners charge us in USD and add a % on top of their base cost to cover for USD volatility. China doesn't allow us to make local payments in RMB unless we have a local establishment and/or follow strict regulations.
Even though the RMB is pegged to the USD, the drop is so significant, that manufacturers had to adjust their USD costs.
Looking at the foreseeable future and basic economics, it's clear that the USD will not enjoy a quick recovery.
Trade wars and C19
The cost of labor and raw material has increased significantly over the year as a result of C19 and the US-China trade war. There's a mix of indirect and direct results. A great example is the cost of carton.
The cost of carton in China and Taiwan has significantly increased due to the scarcity of recycled paper. Recycled paper is low in supply because the US has discontinued shipping recycle-able paper to China as a result of the trade war.
We were already quoted higher costs on every new purchase. When we browsed around we even had a carton supplier that simply couldn't quote nor give a lead time as a reference.
Labor is getting scarcer by the year in China. Every year after Chinese New Year there's a huge wave of labor moving from one to the other factory or quitting entirely. Now with C19, the trend has accelerated, people demand higher payments and avoid taking any risks.
This results in higher assembly and material costs directly reflected on our bill of material (BOM). These costs are increased, on top of the USD devaluation of about 10%.
Long lead times
The lack of supply also affects the lead times. This is the time between placing a purchase order to a supplier and the moment it finishes the order. The more elaborate the BOM, the easier you're affected by lead times. You can have everything delivered within a month, but if one component, even as small as screws, can't be delivered for another 3 months, everything needs to wait.
A great current example is the semiconductor industry. There was already a lot more demand than supply due to the significant spike in electronic equipment sales causing lead times all across IC parts to bump up to 3-4 months. However, the recent weather conditions in Texas, one of the main semiconductor areas, it has caused lead times to increase to anywhere from 6 months to a year(!).
As a result, we have already started purchasing certain IC parts 6 months ahead of any planned production. The cash investment we make in these parts can't be utilized until its designated product is sold.
Not having cash available is costly. It means we can't purchase more or enough sellable stock that can give us a return and/or we'd need to pay interest over any additional cash we'd need.
The long lead times also result in lost opportunities. We need to predict our sales in the distant future and can't quickly respond to a spike in demand. Efforts to reduce the lead time, such as pre-purchasing raw stock or air freight shipments (that are still very expensive) result in increased cost.
Simplified pricing as a hedge
From the start of Wooting, we were in favor of keeping our pricing system simple. That's why all our USD/EUR prices have always had an equal number. We had always accepted lower profitability on our European sales (EUR) than our USA sales (USD).
What is often forgotten is that we don't earn the full revenue on our EUR prices, it includes 21% VAT. We do earn the full revenue on the USD prices. As the exchange stands now, the EUR/USD prices are in balance, as long as we keep them equal. Let me paint the picture here with the new Wooting two HE prices.
EUR - USD
185 EUR, incl. VAT
152.89 EUR, Excl. VAT = revenue
2021 equals about 185 USD
2020 equaled about 170 USD
I have contemplated often when we should split the pricing. But as long as EUR/USD revenue is close to 50/50 (now 40/60), we can hedge the currency to an extent. Again, for this hedge to be effective, we must keep the prices equal.
When the USD suffers, the EUR compensates, when the EUR suffers, the USD compensates. The reality at this moment however is that the EUR revenue is lacking and is not compensating for its exchange rate cost (1-2%) yet.
I hope you can understand our decision and can see that we have done our best to keep the change as minimal as possible.
Thank you <3
Co-founder & CEO