How to Properly Include Percentage-based Fees and Taxes to a Base Transaction When They are included in the Sale

Mike Woolsey Web Development and Marketing


Percentage-based Cost Calculator

Use Case

Below is a calculator I created to accurately calculate the desired "minimum net revenue" where additional fees and taxes are included in a transaction.

Your desired minimum net revenue per transaction:
$

The percentage cost of additional fees or taxes on each transaction that will be included:
%


This is what you should charge to acquire
the desired "minimum net revenue" on each transaction:
$________

Result of commonly calculated method (Simply charging the transaction cost x percentage of the additional fee, which is incorrect.):
$________

Amount below the desired "minimum net revenue" on each transaction:
$_______

Explanation

A vendor may choose to include fees or other costs through a customer's transaction (e.g. bank and on-line shopping cart fees, maybe taxes too). The common practice is to simply calculate the percentage of the fee times the "minimum net revenue" to arrive at the total amount to charge. HOWEVER, this is inaccurate if the percentage amount IS FIGURED IN BEFORE the transaction is completed. This is common for bank transaction fees. (Commonly omitted is the percentage deducted from THE PERCENTAGE ITSELF that IS added into the charge to the customer.)

Thus, the formula for maintaining the net revenue is:
Minimum Net Revenue / 1 - x% of fee = Total Charge to Customer


Conclusion

The differences in revenue and/or profit margins may be small for each item or transaction but can add up to significant loss after numerous transactions.

For a transaction of $800 with a 7% included transaction free, the common method for calculating how much of the cost to pass on to the customer would result in $4.22 under the minimum net revenue. After 20 transactions that is a loss of $84.40!