# GST and costs and profit margins

Discussion in 'Small Business' started by Simon Hampel, 22nd Jul, 2015.

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1. ### Simon HampelFounderStaff Member

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Trying to work out a formula for calculating my required sale price to ensure a fixed profit margin, when taking merchant costs and GST into account.

For example, I resell a product that costs me \$20 (inc GST) to purchase.

I want to sell the product with a \$15 profit margin after all my purchase costs are taken into account, including GST that I will owe the govt from the sale.

It costs me 3% (inc GST) merchant fee to process transactions - which is calculated on the final sale price inclusive of GST.

There are lots of products with different cost prices, but I want to make a flat \$15 (or whatever) profit on all of them, regardless of cost price (as opposed to a % of cost).

I'm not getting figures in my spreadsheet that seem correct when I do the calculations backwards - so I'm obviously adding the profit to the wrong figures.

Any suggestions on how you would come up with a spreadsheet formula to calculate the requires sales price?

Should I just be working on exGST figures and let GST take care of itself? I think that's where I'm over-complicating things ... trying to take my GST cost into account in the calculations.

2. ### BizWell-Known Member

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All I can say is good luck. Setting prices is about what the customer is willing to pay not your margins. Some items have better margins than others, just the way the cookie crumbles.

If you are working B2B setting a price ex GST is the norm. If it is B2C then you include GST.

3. ### PistonbrokeWell-Known Member

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Either work totally gst exclusive then add 10% or gst inclusive to deduct 1/11th. So it's either \$16.50 or \$15.00

4. ### Simon HampelFounderStaff Member

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Kind of missing the point. This is an existing business with established clients and products which are already selling at these margins. The question is about incorporating GST into the equation when none was previously charged.

5. ### tobeWell-Known Member

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Don't have the same margin for every product.
Customers need to be able to differentiate themselves. The analogy (from the naked economist book I think) is Starbucks. Coffee costs \$2, sells for \$3. If a customer wants extra milk, ice, flavored syrup, (that has almost no cost to Starbucks) they donate extra margin. That's just how it works. Some customers get peeved if they cant 'pay extra' and show the world how different they are to all those losers buying a small coffee....

Don't Microsoft etc build software that has all the bells and whistles and disables some of the features for 'home' users who don't want to pay the 'pro' cost? My understanding is it costs Microsoft to disable these features, but if they didn't do it, they would lose market share/sales.

6. ### Simon HampelFounderStaff Member

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7. ### tobeWell-Known Member

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boring

8. ### Simon HampelFounderStaff Member

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Okay - I'm pretty sure I worked out why I wasn't getting reasonable figures ... I was using the ex-GST merchant fee to work out the ex-GST sales price, where I should have been using the inc-GST merchant fee because the merchant fee is calculated on the total sales price inc-GST.

It still works when I calculate the inc-GST price first, so I think it is sorted now.

9. ### Mombius HibachiWell-Known Member

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Ah! The old using the ex-GST merchant fee to work out the ex-GST sales price, where I should have been using the inc-GST merchant fee trick.

Good thinking, 99.

10. ### Simon HampelFounderStaff Member

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Gets you every time

11. ### TMNTWell-Known Member

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assuming its a small operation that you dont have to collet gst, (<\$75k lat time I checked)

eg one man operation buys something for \$1, and sells it for \$1.50,

owner profits 50c in his pocket everytime , even though he pays 91c plus gst

however, if you do start collecting gst, then your cost doesnt change but your profit decreases

profit becomes (calculatedd simply)

50c profit
However, you have collected 13.6c gst, but paid 9.1c gst so there is a gst deficit of 4.5c