July, 21st 2017 | 4 min read

How to calculate acquisition costs

When working in a global industry (which affiliate marketing certainly is), there is a lot of sending, receiving and withdrawing funds in a variety of currencies. An affiliate needs to go through a simple, yet often costly procedure of converting from the paid currency to the local currency. That’s the simple part, the often costly part is using high currency conversion rates to convert the given amount.

However, there is more than meets the eye here than the general idea described above. Beneath the hood, there are some finer elements of currency conversion that affect the entire process, things that affiliates would benefit from knowing. As always, we’re onto uncovering the hows, the whys and the wheres of currency conversion rates.

Basing the Conversion Rate

The conversion rate is the numerical representation of the latest market valuations of the world's currencies. This allows a comparison of the value of one currency against the other. Those very same values you see in currency calculators, exchanges or bank displays don’t just pop up. They are determined on the basis of the age-old principle of supply and demand of dealing prices between international banks.

Now here is where things get interesting. As you know, the conversion rate is a pre-set rate to calculate one currency’s worth in another. However, companies set their own rates differently. For instance, some set their own, internal rates which usually bear a high markup. Now, a markup is inevitable as companies need to make a profit on the exchange but that certainly doesn’t mean you have to play by their rules. Their rates - their choice.

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Your choice should be companies that base their conversion rates on the official mid-market rates. A mid-market rate is the middle point derived between the currency’s official “buy” and “sell” rate. This is widely considered to be one of the best conversion rates around as they are most transparent and most accurate so the markup isn’t quite as high. Mid-market rates also indicate the value of a currency that is not weighted towards buying or selling, and they make it easier to compare to potentially unfavorable rates. Estimating a mid-market rate is rather simple as there are many online tools that do the work.

conversion rates

An example of a mid-market rate vs. non mid-market rate

The Fee Factor

In addition to the conversion rate it’s using, a business that processes the conversion applies a currency conversion commission. The fee, as expected, varies from company to company, but never goes beyond a few percents. Setting the commission is a strictly internal thing and presents the second, more obvious way a business profits on currency conversion (the first one being the exchange rate, of course).

A simple, yet very true division of companies relating to their currency commissions would be favorable and expensive. No brainer, right? When you look at the differences, it makes sense. Extremely favorable companies are those that slap a one percent commission or slightly above or below it, while expensive companies usually charge anywhere from 2.5 percent to 3 percent (if you find a 3+ percent commission, do your civil duty and report that to the police - that’s a genuine crime). There are also those that fall between those two groups. Looking at the difference, it might look like a one percent difference is neglectable. As affiliates deal with a wide spectrum of money transferring, it’s clear to see how wrong that is and where they could profit or lose money, depending on their choice of a payment processor.

What is the Best Choice?

Those extremely favorable solutions are typically non-bank providers. There are some exceptions, like specialist currency exchange companies that do this for a living, and popular, mass-accepted money processing companies like PayPal who have the numbers to back up their high charges. On the other hand, banks and banking institutions are the main offenders here. The issue with banks is that the rates will depend on various factors. These can include the amount an affiliate wants to exchange, the currencies involved, is the process online or in person and others.

For the reasons mentioned above, shopping around for tailored options on the market like MoneyNetint can pay off handsomely. As an affiliate with a scalable operation, you want a cheaper solution than banks and mass-pleasing payment processors. Affiliates are always on the lookout for best commission and currency conversion shouldn’t be any different.

Ideally, that solution should be a company that profits on the exchange rate spread (the difference between the buy and sell rate), not on an inflated rate that doesn’t reflect the actual market rates. Such companies are able to charge much smaller margins on the exchange rate and deliver competitive rates, which is only one part of the equation. The second part is the currency conversion commission, which obviously should be as low as possible, but should also be the only commission there is, without any additional fees or charges.

Small Numbers, Big Differences

Even the smallest differences between currency conversion rates can have a big impact on the affiliate’s bottom line. This is a rather delicate, if seemingly simple process that requires a good deal of attention due to the constantly changing nature of exchange rates. The way an affiliate manages its money has a lot to do with its profit margins. Currency conversion is one of the factors that directly impact it and the end results matter too much to have your money converted without understanding the process.

The solution is a mix of reasonable rates and low fees that ultimately don’t put a dent in your wallet. Just because a commission is a common fee that service providers charge for exchanging one currency to another, it doesn’t mean you have to be content with it. Don’t get caught paying high fees and exchange rates when there are better deals around. You’ve worked hard for your money, now be smart about it.

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