Home – New Forums Starting your journey What’s the formula I should use when working out my selling price?

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  • #978670
    imTeresa
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    I’ve purchased materials that come to $990 GST inclusive. I plan to sell them with a 20% markup.
    Which is the correct way of doing it:
    a) $990 + 10% GST + 20% Mark up = $1306.80
    or
    b) $990 + 20% Mark up = $1188
    or
    c) ?

    I’ve always done it as A but I found out my husband’s been working out as B and now I’m all confused. Please help!

    :confused:

    #1108725
    Opulence
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    By the commutative laws of multiplication

    990 * 1.1 * 1.2 = 990 * 1.2 * 1.1

    So if plan on quoting your prices inc GST it doesn’t matter if you add the markup first or the GST. You’ll still get the same result.

    You can quote your price as anything you just need to be sure to advise with the pricing if its ex or inc GST.

    #1108726
    SmartBizBlog
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    There is no formula? It’s about what you can get away with selling it for and the type of sales volume you expect to have.

    If you have 1/1,000,000 people who might buy your product then increase your margin – if you have 1/100 people who might buy your product then decrease your margin and produce more.

    Pricing should be worked out on supply and demand. Or you can just do what Apple do, and say “F-U this is the price, and if you don’t want to be cool, then don’t buy it” – High demand, High price – very odd company that everyone seems to love…

    #1108727
    Opulence
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    Just realised that you said the $990 was inc GST.

    I could be totally wrong but I always thought that the GST you pay for your products can be claimed back.

    Page 4 of this document from the ATO gives a good example.

    ScreenShot2012-06-21at63335PM.png

    So you can claim back the GST that you paid on the inputs and offset it on the GST you’ll need to pay on the sale price.

    #1108728
    Steve_Minshall
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    imTeresa, post: 120756 wrote:
    I’ve purchased materials that come to $990 GST inclusive. I plan to sell them with a 20% markup.
    Which is the correct way of doing it:
    a) $990 + 10% GST + 20% Mark up = $1306.80
    or
    b) $990 + 20% Mark up = $1188
    or
    c) ?

    I’ve always done it as A but I found out my husband’s been working out as B and now I’m all confused. Please help!

    :confused:

    I never look at what I buy as including GST when it comes to costings so if you want a 20% mark up then it should be:

    $900 x 1.2 (mark up) x 1.1 (GST) = $1188 which is just one step before ‘b’ but the point is you should get used to thinking in terms of purchases and sales without GST for your own accounting.

    As far as your ‘profit and loss’ is concerned you buy for $900 you sell for $1080.

    The extra $108 the customer pays just gets sliced off your figures straight away and the GST you pay on purchases is ignored. None of it forms part of your ‘profit and loss’. It just needs to be part of your records so that you know how much to pay the ATO and how much you can offset it against for expenses.

    But ultimately (as SmartBizBlogs says) why pick a number for marking up. You mark goods up to whatever the market will bear and if that doesn’t give you the returns you want for the effort, do something else or work on the costs.

    #1108729
    imTeresa
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    Thankyou everyone. I think what I wanted to know do I need to go with A or B.
    Sounds like A to me :)

    #1108730
    Steve_Minshall
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    imTeresa, post: 120935 wrote:
    Thankyou everyone. I think what I wanted to know do I need to go with A or B.
    Sounds like A to me :)

    Er no. and yes.

    The correct answer on the exam for a 20% mark up is (B)
    900(buy) x 1.2(mark up) x 1.1(GST) = $1188

    But yes you should sell at (A) if you can get it. But that is a 32% mark up.
    900(buy) x 1.32(mark up) x 1.1(GST) = 1306.80

    Your actual (B) formula is incorrect for a 20% mark up because you are counting the GST twice as it is already included in the $990 x MU.

    #1108731
    Danielle84
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    Wow, isn’t it too complicated? I just browse the web to find all the businesses in the niche and then compare the prices and use a simple average as my pricing. Sorry for this noob comment :)

    #1108732
    MyGreatIdea
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    Danielle84, post: 120970 wrote:
    Wow, isn’t it too complicated? I just browse the web to find all the businesses in the niche and then compare the prices and use a simple average as my pricing. Sorry for this noob comment :)

    It’s a good comment ;) and it’s a much better way to do it, then work back to make sure your profit is there after all expenses.

    Wendy :)

    #1108733
    Opulence
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    Well unless your product is easily recognisable as being better than the cheaper ones out there but not as good as the best ones out there, average pricing is not something I’d recommend.

    Business strategy will always tend to push you in one direction of either striving to be premium and charging a justifiably higher price or you could compete on price and strive to be the cheapest.

    Being average puts you in vague territory for the buyer and makes it hard for them to make a decision to purchase.

    There’s some really cool stuff about decision theory but the only article I can think of at this hour is this one.

    #1108734
    Steve_Minshall
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    Danielle84, post: 120970 wrote:
    Wow, isn’t it too complicated? I just browse the web to find all the businesses in the niche and then compare the prices and use a simple average as my pricing. Sorry for this noob comment :)

    You are correct in that your pricing should be determined by the market and adjusted to give the profit you want and the volumes you wants.

    However, it is important to understand things like ‘mark-up’. It is vital that you understand all the financials of a business because there is no single financial indicator that can give you the health of a business. I get frustrated when I hear company ‘x’ increased revenues by 50% (but did it increase profit?). Company ‘y’ increased its profits by 50% (but did it do it by gutting its skill base and stopping R&D and therefore risk future profits?). So if you want anything more than a hobby business learn the financials.

    Off the top of my head the retail price should be determined by:

    • The price of the same product or comparable alternative from somewhere else
    • The scarcity of the product
    • Any perceived brand desirability
    • The utility value of the product
    • The volumes you want to move
    • Any perceived expertise you can bring to the transaction as a retailer

    Your own costs, mark up, margin, etc. should not decide the price they indicate the viability.

    Many businesses (even large ones) do you use cost x mark-up to calculate their pricing which is why it persists. It doesn’t make it right. Ultimately it is just lazy averaging that will result in pricing yourself out of the market or giving away profit. Although ironically this often does decide the price across a market as business’s using comparison pricing match businesses that have set their prices by mark-up.

    As a final note for those who think pricing calculations are difficult. Be thankful that GST is 10% and not 17.5% like the UK. Now that makes for trickier calculations:)

    #1108735
    CateDS
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    Couple It, post: 120971 wrote:
    It’s a good comment ;) and it’s a much better way to do it, then work back to make sure your profit is there after all expenses.

    Just careful you don’t do it (at least openly) in an American marketplace … they have strong “collusion” laws there, and won’t even discuss “how do you price this” on open forums as it apparently leaves them open to that attack :S

    Cate

    #1108736
    The Hobbit
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    How you calculate adding the mark up is not that important, it’s far far more important to establish the correct mark-up and 20% seems very low.
    Having established a mark-up I would apply it pre GST so that your better understand what you gross profit is.
    Setting an arbitrary mark-up just doesn’t seem right, the market should determine your price. Are you sure you’ve got the price/mark-up right? People may be willing to pay a lot more than they say or you imagine. Try test marketing in different circumstances at different price levels, but you have to put aside your preconceived ideas and market hard for the higher prices. You may find some segments of the market will buy more readily at a much higher price than at a lower price (perceived value).

    #1108737
    chixfashionz
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    imTeresa, post: 120756 wrote:
    I’ve purchased materials that come to $990 GST inclusive. I plan to sell them with a 20% markup.
    Which is the correct way of doing it:
    a) $990 + 10% GST + 20% Mark up = $1306.80
    or
    b) $990 + 20% Mark up = $1188
    or
    c) ?

    I’ve always done it as A but I found out my husband’s been working out as B and now I’m all confused. Please help!

    :confused:

    When you quote a price to customers, always try to be GST inclusive so that they don’t feel like you deliberately left it out to lower your price quotation!

    I would do the costing as $900 x 1.2 (20% mark-up) = $1,080.00 x 1.1 (GST) = $1,188 quoted price for materials.

    Don’t forget in your costings you need to work out labour and overheads as well. I’m not sure about your business, but costing overheads for many SME’s can be a daunting task to get right!

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