How to Properly Include Percentage-based Fees or Costs to a Base Transaction

Mike Woolsey Web Development and Marketing


Percentage-based Cost Calculator

Use Case

Below is a calculator I created to accurately calculate what I call the
"minimum desired revenue."

Your minimum desired revenue per transaction:
$

The percentage cost on each transaction:
%

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

Result of commonly calculated method ("transaction cost x percentage of fee"):
$________

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

Explanation

A vendor will regularly pass on fees or other costs through a customer's transaction (e.g. bank and online shopping cart fees). The common practice is to simply calculate the percentage of the fee times the "minimum desired revenue" for the transaction. This is inaccurate if the percentage amount is figured in before the transaction is completed. (Omitted is the percentage deducted from the percentage itself that was added in the charge to the customer.)

The formula for maintaining the desired revenue is:
Minimum Desired Revenue / 1 - x% of fee = Total Charge to Customer


Conclusion

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

For a transaction of $800 with a 7% pass through 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 desired revenue. After 20 transactions that is a loss of $84.40!